In order to understand the current performance and make a consistent prediction on the future of Islamic finance mergers & acquisitions (M&A) transactions, it is vital to analyze the consolidation moves of Islamic banks and financial institutions. Therefore, a consistent preview of the following year’s M&A deals requires an accurate review and assessment of the consolidation strategies of Islamic banks and financial institutions in the market.
Slow economic growth, low oil prices and low-profit margins are the main indicators that push Islamic banks to consider M&A transactions. Consolidation of Islamic lenders establishes more competitive financial institutions and consequently eases the introduction of Islamic finance tools to their customers. However, the primary motivation for M&A has changed due to the COVID-19 pandemic and the developments on the treatment and vaccine of the illness will be decisive as with everything else in the world.
Review of 2020
As the world went through the pandemic in 2020, GCC governments announced several measures in response to the harsh financial situation to aid corporations and retailers as the pandemic changed the economic and financial environment and created more challenging market conditions for most industries. These measures varied from reducing taxes and levies to asking banks to extend additional subsidized loans to affected clients to maintain employment and avoid production capacity destruction during what is expected to be a short-term event.
In such a situation, where governments have requested banks to make sacrifices for the good of the whole economy, banks require greater support from the governments. Additionally, while Islamic banks were using consolidation as a method to strengthen their market position and increase their competitiveness, M&A became a more significant tool to consider.
In October 2020, a report released by Moody’s Investors Service titled ‘GCC banks to accelerate consolidation in wake of pandemic and low oil prices’ stated that smaller banks in the Gulf region were likely to merge or to be acquired. Banks in the region were required to increase their M&A activities to gain scale to offset the effects of lower oil prices and pandemic-driven economic slowdown on profit margins.
M&A deals in the Gulf region led to the establishment of some of the strongest financial institutions and banks in the market. First Abu Dhabi Bank, the UAE’s largest lender, was formed through the merger of the National Bank of Abu Dhabi and First Gulf Bank in 2017. Abu Dhabi Commercial Bank also completed a three-way merger with Union National Bank and Al Hilal Bank in 2019, and Dubai Islamic Bank completed its acquisition of its competitor Noor Bank to create a lender with total assets of more than AED275 billion (US$74.86 billion) in 2020.
Notable deals in 2020 include Saudi Arabia’s National Commercial Bank’s purchase of its rival lender Samba Financial Group for US$14.8 billion and the acquisition by a group of international investors of Abu Dhabi National Oil Company’s 49% stake in its gas pipeline assets for US$10.1 billion. Deals in the financial sector accounted for 41% of the MENA target M&A activity during the first half of 2020 while Saudi Arabia was the most targeted nation, followed by the UAE (25%) and Egypt (11%).
Taking the pandemic and current financial situation of the market into consideration, it is expected that the consolidation trend will be more popular among Islamic financial institutions and banks in the following years.
Preview of 2021
A report by S&P Global Ratings also supports the opinion that a pandemic-led economy is expected to push the banking sector toward making consolidation moves. However, the situation differs slightly for Islamic banks, compared with their conventional counterparts. Having looked at the credit fundamentals of the 16 largest Islamic banks and 30 largest conventional banks in the GCC, Islamic banks might prove less resilient to a protracted downturn than their conventional peers.
Since carrying out M&A deals may be a necessity for GCC banks after the pandemic, it will make it easier for bank management to convince their boards and shareholders to carry out the transaction. As is known, obtaining approval from boards and shareholders is one of the most important steps in completing an M&A deal.
Shareholders may be unwilling to go for the transaction since such a move will result in a dilution of their shares and control of the bank. However, as recapitalization may become a must after the pandemic, M&A deals would be a significant option that cannot be ignored.
2020 was an unusual year for the whole world and almost everything had to be decided according to the course of the pandemic. Unless a definitive treatment or vaccine is found, it is not realistic to expect that 2021 will be any different from the previous year. However, in terms of Islamic M&A transactions, this may mean that there will be more M&A deals, particularly among Islamic banks and financial institutions.