Qatar Banks See Lesser Pressure for M&A in Gulf, Says Fitch

Qatar’s banking sector has less pressure for consolidation in the Gulf region, which otherwise is prone to see stronger momentum for mergers and acquisitions (M&A) owing to lower oil revenues, according to Fitch, an international credit rating agency.

“Qatar has many banks for its small population, but profitability is strong, so there is less pressure for M&A to diversify revenues,” Fitch said in its latest report.

Consolidation among the Gulf Co-operation Council (GCC) banks may gain momentum if lower oil prices add to competitive pressure in the region, it however said.

Sustained lower oil prices and weaker global demand may put pressure on the 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, the rating agency said.

Smaller banks may become targets due to their weaker franchises, and often higher funding costs and thinner capital buffers, according to Fitch.

Lower oil prices and weaker global demand are the main risks for the GCC bank operating environments. Government spending strongly affects bank operating conditions in most GCC countries, and a further drop in oil prices could weaken Fitch’s lending growth forecasts

“Consolidation is likely to be less widespread in Qatar and Saudi Arabia,” it said, adding Saudi Arabia stands out as the one GCC market that does not appear overbanked given its much larger population; lower banking system assets/GDP (gross domestic product) ratio and strong growth prospects.

Highlighting that bank sector M&A in the GCC has been focused on enhancing shareholder value through strengthened market positions and economies of scale; it said this has led to the creation of dominant entities, such as First Abu Dhabi Bank and Saudi National Bank.

The recent merger between Kuwait Finance House and Bahrain’s Ahli United Bank, creating a regional Islamic banking powerhouse, exemplifies the trend.

Nevertheless, smaller banks with weaker franchises, pricing power and capital buffers are increasingly likely to feature in M&A, it said.

“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, telecom firms and banks,” Fitch said.

Islamic banks have increasingly been involved in M&A to consolidate their franchises, as with 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 financing and deposit growth. In Oman, banks such as Oman Arab Bank and Sohar International Bank have completed or are pursuing Islamic bank acquisitions to cement their positions in the market.

Most GCC bank M&A has been domestic, but “we expect a gradual shift towards regional transactions”, such as Kuwait Finance House’s takeover of Ahli United Bank, Fitch said.