PRESSR: GCC bank consolidation may accelerate due to lower oil prices

About this update from Kuwait Finance House K.s.c.

Fitch Ratings-London: Consolidation among GCC banks may gain momentum if lower oil prices add to competitive pressure in the region, Fitch Ratings says. Sustained lower oil prices and weaker global demand may put pressure on GCC bank operating environments, leading to weaker profitability and acting as a catalyst for M&A as banks seek to diversify their revenues and increase scale. Smaller banks may become targets due to their weaker franchises, and often higher funding costs and thinner capital buffers.Most GCC banking sectors are ‘overbanked’: characterised by a large number of banks relative to population size, with over 150 banks 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.Bahrain appears the most likely market for consolidation as it is highly overbanked, with generally weaker banking sector profitability and growth prospects. The Bahraini authorities seem supportive of consolidation, but relatively few banks have common shareholders, which could hinder deals.Oman and Kuwait are also overbanked with modest banking sector profitability. However, consolidation pressures in Kuwait may ease if economic reforms lead to stronger growth and better profitability prospects, and Oman’s banking sector could expand given its relatively low banking sector assets/GDP ratio.In the UAE, some smaller banks with weaker franchises and revenue generation may need strategic mergers to sustain their operations, especially if profitability comes under pressure for a sustained period. Again, strong growth prospects may limit this need in the short term.Consolidation is likely to be less widespread in Qatar and Saudi Arabia. Qatar has many banks for its small population, but profitability is strong, so there is less pressure for M&A to diversify revenues. Saudi Arabia stands out as the one GCC market that does not appear overbanked given its much larger population, lower banking system assets/GDP ratio and strong growth prospects.Bank sector M&A in the GCC has been focused on enhancing shareholder value through strengthened market positions and economies of scale. This has led to the creation of dominant entities, such as First Abu Dhabi Bank and Saudi Nationa...

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