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Paving the way—Roadblocks remain in financial M&A in the Gulf

Paving the way—Roadblocks remain in financial M&A in the Gulf

Ownership restrictions and valuation issues are holding up bank mergers in the GCC, even as consolidation is seen as advantageous. The Bahrain Islamic, Al Salam merger just might break barriers.

August 17, 2011 1:45 by

The planned merger of two Bahraini banks, intended to create the largest Islamic lender in the Gulf Arab kingdom, could pave the way for more consolidation in a regional industry frozen in its tracks by unrealistic valuations and ownership limits.

The proposed tie-up between Bahrain Islamic Bank and smaller rival Al Salam Bank to create a $4.5 billion entity, unveiled this month, is a litmus test for the region after the last attempted merger, between two Qatari banks, failed.

The two Bahraini lenders said late on Tuesday that they had received approval from the central bank for their planned merger and have hired KPMG Fakhro as advisor.

If successful, the merger would be a first for two Gulf-based Islamic banks but bankers say that its greater significance could lie in helping break down psychological blocks to dealmaking in the region.

“The Bahrain merger would probably lower the barriers and get people thinking about the need to consolidate,” said Sameer Abdi, M&A and financial services partner at Ernst & Young in Doha. “If that goes ahead, there’s a possibility we could even see one or two mergers by the end of the year.”


There have long been calls for consolidation in the Gulf Arab banking sector — lenders, particularly Islamic ones need to build scale and profitability. But strict ownership restrictions, stark valuation disparities and an unwillingness to lose control hamper bankers’ ability to execute any deals.

“A lot of these banking mergers in the region makes sense on paper but reality is often harsh when you try to get the deals done,” said a Dubai-based banker advising on financial deals, who asked not to be identified.

“People have put on a mental block against bank mergers and as a firm, we have stopped pitching these ideas unless we see some clear light at the end of the tunnel.”

Markets such as the United Arab Emirates are significantly overbanked with 51 financial institutions — 23 local and 28 foreign lenders — in a country of five million people. The tiny Gulf state of Qatar has 18 banks despite the largest player having a more than 20 percent market share.

Adding to woes of smaller local players, foreign banks have beefed up their presence in the region and taken away lucrative investment banking business.

Abdi said Islamic banks in particular are struggling for growth and will need to create larger institutions in order to compete with conventional banks.


The UAE’s last successful bank merger was the 2007 union of National Bank of Dubai and Emirates Bank to form Emirates NBD . Qatar’s Al Khaliji Commercial Bank and International Bank of Qatar (IBQ) called off a planned merger in June after failing to reach an agreement on terms.

“Politics and economics have held up consolidation in the sector,” said Waleed El-Amir, Middle East North Africa (MENA) investment banking head at Bank of America-Merrill Lynch.

“National ownership rules in certain Gulf countries restrict foreign ownership to 49 percent or below, making it difficult for foreign acquirers to seek control.”

UAE’s Noor Islamic Bank, which once predicted it would expand through aggressive acquisitions, has changed its model since the financial crisis and political turmoil hit the region.

“The market for M&A is very difficult in this region right now,” said Hussein al Qemzi, Noor’s chief executive. “People are just not interested in M&A.”

Bankers also blame a lack of transparency related to the quality of corporate assets for the drop-off in activity.

“What you see is not necessarily what you get,” said BofA Merrill’s El-Amir.

Total value of completed deals in the Middle East stood at $14.18 billion in the first half, a 65 percent slump versus…

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