According to a report by the global rating agency Moody’s, it is predicted that there will be an increase in merger and acquisition activity in banks located in the Gulf Cooperation Council (GCC) region, leading to future synergies and divergences in oil revenue within the region. In this article, we explore the expected hike in M&A activity in GCC and the latest trends that could affect this hike.
Moody’s noted that the existing alliances among GCC banks will play a pivotal role in enabling the expansion of banking on a larger scale within the region during the upcoming decade, increasing the merger and acquisition activity among banks in the GCC region. This will create opportunities for synergies and diversification of oil revenues in the future.
Francesca Paolino, an analyst at Moody’s, stated that the consolidation of banks in the GCC region will provide the necessary scale to support the diversification of Gulf economies away from oil, resulting in revenue and cost synergies. Despite the region’s strong bank financial fundamentals and low levels of over-banking, the ratings agency predicts that this development will occur. The concentration of GCC banks’ shareholder structure in a pool of state-linked entities and groups will facilitate tie-ups between lenders, and mergers and acquisitions are expected to continue, according to Paolino.
Mergers and acquisitions allow big banks to expand their control over substantial projects in the GCC region, which in turn enhances their ability to compete on the global stage. As of June 2022, the five biggest banks in each GCC economy collectively hold a market share of 60-90% of sector loans, up from 50-80% in 2010.
According to Moody’s, the consolidation of banks through mergers and acquisitions will provide them with pricing power, thereby improving their capacity to attract deposits and increasing net interest income. The agency further noted that the growth in M&A activity in GCC will help mitigate the impact of rising operating expenses, thereby leading to improved cost-efficiency.
Moreover, Moody’s noted that Islamic banks have been the primary participants in most mergers over the last five years, and the growth in M&A activity in GCC will further promote the expansion of Islamic banking in the region. Given that large-scale economic diversification programs, particularly in Saudi Arabia, are entering the construction phase, the region’s banks will need to expand their operations to support these initiatives.
On the other hand, other reports stated that the recent losses incurred by Credit Suisse could result in Middle East banks becoming more hesitant towards engaging in mergers and acquisitions. This comes after the recent announcement that First Abu Dhabi Bank is interested in acquiring Standard Chartered, and the unsuccessful investment by Saudi National Bank in Credit Suisse, both of which have drawn attention to Middle East banks as potential acquirers of international firms.
Saudi National Bank (SNB) lost over 80% of its investment value in Credit Suisse following the forced weekend merger with UBS on March 19. This experience is likely to dissuade the Jeddah-based lender from pursuing an M&A-based growth strategy in the near future, which may not necessarily be a negative development.
However, despite suffering a loss of $1.2B on its investment in Credit Suisse, the situation is not catastrophic for SNB, given that it recorded a net income of approximately $5B in 2022. The rating agencies have declared the losses as having a neutral impact on the bank’s credit rating, and SNB has stated that it will not affect its growth plans or 2023 outlook.
It’s worth noting that SNB’s strategy has not been reliant on M&A. Although the bank’s shares experienced a steady decline in value from their high of SAR 79 in April 2022, reaching around SAR 50 by year-end, they experienced a sudden drop to a more than two-year low of SAR 41.50 during the Credit Suisse crisis on March 16 before rising following the UBS deal announcement.
Overall, Moody’s predicts more mergers and acquisitions among banks in the GCC region, leading to opportunities for synergies and oil revenue diversification. Large banks can control major projects and compete globally through M&A. Islamic banks have been leading in most mergers in the last five years. On the other hand, recent losses at Credit Suisse may make Middle East banks more hesitant to pursue M&A. However, the losses incurred by Saudi National Bank won’t affect its growth plans or 2023 outlook.
