For oil-rich Persian Gulf states, 2016 has been all about consolidation.
Oil’s more than 50 percent plunge over the past two years is forcing countries such as the United Arab Emirates, Qatar and Saudi Arabia to cut state spending, tap reserves and combine some of their largest banks to reduce costs and duplication.
In Qatar, Masraf Al Rayan QSC, Barwa Bank QSC and International Bank of Qatar QSC said this week they are in talks to create the country’s largest sharia-compliant bank and the third-largest such lender in the Middle East, with assets worth more than 160 billion riyals ($44 billion). Talks are at an early stage, according to the banks, which didn’t give details on the structure of the possible deal.
Those plans follow a similar move earlier this year by Abu Dhabi lenders National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC to create one of the largest bank’s in the Middle East with $175 billion of assets. The combinations come as the industry battles falling profits because of lower government spending, slower economic growth and a decline in asset quality.
Regional consolidation is an “easy first step to stemming government spending,” said Allison Wood, a Dubai-based consultant at Control Risks Group Ltd. “It’s not a complete solution to the fiscal problems that these states face. They need a much broader reform package.”
The planned merger of Masraf — with a market value of about $7.3 billion — with privately held Barwa and IBQ is intended to “strengthen the banks rather than acquire new market share,” said Talal Samhouri, head of asset management at Doha-based Amwal LLC.
The combination will “strengthen the balance sheets of these banks, and also cut costs by consolidating back office, services, and other areas to unify operations,” he said. “They have a small retail network with limited exposure outside Qatar, so will complement each other.”
The shortage of liquidity in Qatar became more serious this year than during the financial crisis in 2008, Doha Bank QSC Chief Executive Officer Raghavan Seetharaman said in May, the same month that the government sold $9 billion of Eurobonds.