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Smaller UAE lenders feel M&A pinch, future deals will be more expansive

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Smaller UAE lenders feel M&A pinch, future deals will be more expansive

Pressure is mounting on the United Arab Emirates' smaller lenders as they face tough competition from larger banks that have gained scale in the recent wave of mergers. But future consolidation will be driven by a different set of factors and could result in a broader set of cross-country or cross-emirate combinations, analysts said.

The UAE is the Gulf Cooperation Council's largest banking system in terms of assets, while the country's three largest banks — First Abu Dhabi Bank PJSC, Emirates NBD Bank PJSC and Abu Dhabi Commercial Bank PJSC — were all created through mergers. Talks are also continuing between Dubai Islamic Bank (PJSC) and Noor Bank PJSC, respectively the fourth and 10th largest banks in the country by assets.

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Smaller banks feel the pinch

With larger banks able to invest to more effectively compete nationally, regionally and internationally, "This appears to be adding increased pressure on smaller local banks to remain competitive and attractive to [an] increasingly discerning client base," said Emilio Pera, head of audit and financial services at KPMG Lower Gulf.

The professional services firm is forecasting further consolidation in the UAE financial services sector, mainly among banks up until 2023.

Since April 2017 there have been four completed mergers in the Gulf, and a few more combinations are currently under consideration. This flurry of M&A activity has largely focused on the UAE and has been facilitated by joint shareholders rather than economic factors.

"In most of the mergers in the GCC you had the government on both sides of the table," Mohamed Damak, a credit analyst with S&P Global Ratings in Dubai, said in an interview.

These operations should be seen as "akin to shareholders reorganizing their assets rather than genuine mergers," S&P Global Ratings said in a May 17 report titled "The GCC's Current Wave Of Bank Mergers Is Almost Over."

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Economic factors

A new set of M&A driven more by economic factors would require more aggressive moves by management than those seen in the past.

Mergers motivated by purely economic reasons could also result in a broader set of combinations, such as cross-emirate or cross-country mergers, said Damak. "Do we see that happening in the next 12 to 24 months? The answer is no," he said.

One advantage for mergers facilitated by common shareholding has been speed of execution, said Pera.

"The added hurdles of convincing boards and shareholders, who face the possibility of seeing their assets diluted or losing control, means the next wave of deals may take longer to build than the current one," S&P Global Ratings said in its report.

Other regional specific factors that also make mergers less likely include the presence of conventional and Islamic lenders, with mergers between the two seen as more challenging because of operational differences and the need to match the banks' businesses, and only two of the recent GCC mergers to date have involved both kinds of lenders, said S&P Global Ratings.

Yet S&P Global Ratings said that the UAE market still presents some opportunities for mergers.

"We still see a few M&A opportunities in the UAE particularly in Sharjah, Dubai, and Abu Dhabi. However, we believe the ownership structures of the remaining banks, particularly in countries that we consider overbanked, mean there are limited opportunities for similar mergers to those seen in the past 24 months," S&P Global Ratings said.