Recent merger and acquisition activity among GCC banks is beneficial for the sector as it will ease overcapacity and boost profitability through synergies and increased pricing power, Moody's Investors Service said in a new report.
The overcrowded banking sector in the GCC has seen a wave of mergers and acquisitions announcements in the last year, as falling oil prices hit government budgets, slowing economic growth, added the report titled "Banking - Gulf Cooperation Council: Consolidation among GCC banks will boost profitability”.
"Slow growth and subdued credit demand in the region is one of the biggest drivers of consolidation," said Ashraf Madani, a vice president and senior analyst at Moody's. "This has intensified competition for depositors and borrowers, dampening profits at GCC banks.
The GCC banking sector has many banks serving small populations, driving intense competition and aggressive pricing policies.
For example, in Oman, where two potential mergers have been announced, there are 20 licensed banks serving a population of 4.6 million people. This compares with Saudi Arabia where only 27 banks serve a population close to 33 million.
Consolidation will help stem rising funding costs and improve profitability in the long run. Despite integration challenges in the early stages, merged banks will gain market share, have better pricing power and cost synergies, the report said.
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