UAE: Proposed NBAD-FGB merger would create regional banking giant

Published June 20th, 2016 - 05:00 GMT
A potential combination of NBAD-FGB is expected to create the second largest bank in the Middle East after Qatar National Bank. (File photo)
A potential combination of NBAD-FGB is expected to create the second largest bank in the Middle East after Qatar National Bank. (File photo)

Following confirmation of talks between National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) on Sunday, the bankers and banking sector analysts say the potential merger could result in benefits from economies of scale and cost savings while creating a regional banking giant.

A potential combination of NBAD-FGB is expected to create the second largest bank in the Middle East after Qatar National Bank with a combined domestic market share of 21.5 per cent compared to the current 8.4 per cent share of FGB 13.2 per cent share of and NBAD. Post-merger, the new entity is expected to have a combined market capitalisation of Dh95 billion ($26 billion) compared of $31 billion of QNB.

Banking analysts see strong gains for both parties from this transaction. “FGB would benefit from much stronger wholesale banking proposition, after cutting back on ambitious plans this year by letting go a few hundred bankers; improved access to wholesale markets. NBAD is underrepresented in retail even though assets in global retail and commercial are Dh86 billion compared to Dh55 billion for FGB’s more narrowly defined consumer banking group,” Jaap Meijer, head of Research at Arqaam Capital said in a note. 

Armed with strong credit ratings, the combination of the two banks are expected to bring down funding costs. Currently NBAD has AA3 rating with a Negative outlook Moody’s, AA- Stable by S&P and AA- Stable by Fitch while FGB has A2, A, A+ respectively.

The combined strength of balance sheet would mean both banks will gain in terms of maximum allowable single party exposure limits, proving the combination a strong competitive edge to increase its market share. However, analysts do not expect to see major cost advantages for both banks a potential merger.

“We see limited scope for synergies, with a maximum potential cost reduction of 10 per cent equal to 7.7 per cent boost to earnings per share of NBAD and 3.6 per cent boost to FGB,” said Janani Vamadeva, an analyst with Arqaam Capital Research Offshore.

The first quarter results of both banks showed stress from the economic challenges following the sustained decline in oil prices for the past two years. FGB reported first quarter 2016 group net profit of Dh1.33 billion, down 6 per cent compared to Dh1.42 billion in the first quarter of 2015.

Despite increased pressures, the bank’s provisions against impaired loans at Dh376 million was up 1 per cent year on year and down 26 per cent quarter on quarter. The bank maintained strong credit quality with non-performing loans (NPL) ratio at 2.6 per cent and provision coverage ratio at109.8 per cent.

“The fact that global operating conditions are expected to remain challenging is a market reality, however we have the right strategy and fundamentals in place to continue navigating current headwinds and turning challenges into opportunities, until the economic cycle reverses,” André Sayegh, CEO of FGB said at the time of announcing the Q1 results.

Higher provisions

NBAD reported net profits of Dh1.27 billion for the first quarter of 2016, down 11 per cent compared to the first quarter of 2015, reflecting lower investment gains and higher provisions, despite growth in strategic businesses and stronger net interest income.

On quarter on quarter basis profits were up 23 per cent, largely as a result of improvements in underlying fee income and forex gains combined with a reduction in provisions. NBAD’s total assets were at Dh400 billion at the end of the first quarter of 2016, posting flat growth compared to the same quarter last year. Net impairment charges in the first quarter of 2016 were Dh295 million, up 73 per cent compared to the same quarter last year and down 32 per cent quarter on quarter. As of 31 March 2016, NPL ratio stood at 2.81 per cent of the gross loan book. Total provisions were Dh6.361 billion and represented 110 per cent of non-performing loans.

“Given the local and international economic volatility, NBAD is prudent and conservative, prioritising the long-term health of the bank over any short-term gains. Owing to its deep capital buffer and healthy liquidity position, NBAD is in a strong position,” said Alex Thursby, Group Chief Executive of NBAD.

By Babu Das Augustine

 


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