Fitch Ratings: GCC Bank Consolidation Might Accelerate Amid Weaker Oil

Consolidation among GCC banks may gather pace if lower oil prices increase competitive pressure in the region, according to Fitch Ratings.

Fitch said that persistently low oil prices and subdued global demand may place strain on the operating environments of GCC banks, potentially leading to weaker profitability and acting as a catalyst for mergers and acquisitions (M&A), as institutions look to diversify revenues and achieve greater scale.

‘Smaller banks may become targets due to their weaker franchises, and often higher funding costs and thinner capital buffers,’ Fitch stated in a note.

The rating agency observed that most banking sectors in the GCC are ‘overbanked’-characterised by a high number of banks relative to the population size, with over 150 institutions operating across the region, including 75 domestic commercial banks.

‘Many GCC banks have shareholders in common, which could help to bring about M&A in some cases. However, many of the common shareholders are not sufficiently large to wield significant influence,’ Fitch said.

It said Bahrain appears to be the market most ripe for consolidation, according to the agency, as it is particularly overbanked and has generally weaker profitability and growth prospects in its banking sector. ‘Oman and Kuwait are also overbanked, with modest banking sector profitability. However, consolidation pressures in Kuwait may ease if economic reforms result in stronger growth and improved profitability prospects, and Oman’s banking sector could expand given its relatively low ratio of banking sector assets to GDP.’

In the UAE, Fitch said that some smaller banks with weaker franchises and limited revenue generation may require strategic mergers to remain viable, particularly if profitability is squeezed over an extended period. Nevertheless, robust growth prospects may reduce the need for such action in the near term.

Fitch believes consolidation is likely to be less pronounced in Qatar and Saudi Arabia. Qatar does have a large number of banks relative to its population, but strong profitability lessens the pressure to merge in order to diversify revenues. Saudi Arabia, meanwhile, is the only GCC country that does not appear overbanked, thanks to its significantly larger population, lower banking system assets-to-GDP ratio and solid growth outlook.

Banking sector M&A in the GCC has primarily been driven by a desire to enhance shareholder value by strengthening market positions and achieving economies of scale. This trend has resulted in the formation of dominant players such as First Abu Dhabi Bank and Saudi National Bank, according to Fitch.

‘We expect digital banking and new digital entrants to be an increasingly significant driver of consolidation in the region, with banks seeking technological partnerships to improve competitiveness. The expansion of open banking is also likely to influence M&A strategies, fostering joint ventures between tech companies, telecoms firms and banks,’ Fitch added.

The agency also noted that Islamic banks based in the GCC have become more active in M&A in a bid to strengthen their positions, as seen in Dubai Islamic Bank’s acquisition of Noor.

‘The UAE’s ambitious domestic Islamic finance strategy may lead to further M&A involving Islamic banks. Emirates NBD and Abu Dhabi Commercial Bank have acquired domestic Islamic subsidiaries, which should support growth in financing and deposits. In Oman, banks such as Oman Arab Bank and Sohar International Bank have completed or are pursuing acquisitions of Islamic banks to cement their market presence,’ Fitch said.