National Bank of Abu Dhabi and First Gulf Bank, the two largest banks in the oil-rich emirate of Abu Dhabi, said on Sunday that they’re in early stage merger talks. A combination would create a regional powerhouse with assets of about $170bn and a larger market valuation than Deutsche Bank and Credit Suisse Group.


What’s happened so far?
People with knowledge of the matter said last Thursday that the banks were considering a potential merger. On Sunday, in a brief statement to the Abu Dhabi stock exchange, the lenders said they’d formed working groups composed of senior executives to explore a potential combination. NBAD surged by the maximum daily limit on Sunday on speculation that the deal would effectively be a takeover of NBAD by FGB. Other bank stocks rallied.


How would the new bank compare with global peers?
The combined entity would vie with QNB for title of largest bank in the Middle East. The new bank - it’s still too early to say whether a deal will be completed or what it would be called - would have a market value near to $30bn. That would make it more valuable than Credit Suisse Group, Standard Chartered or Deutsche Bank. It would also be more profitable: NBAD had a return on equity of 14% in the first quarter and FGB 21%. That compares with 5.3% for Goldman Sachs Group.


What’s the regional context for the proposed deal?
Gulf banks are weathering a period of low oil prices and slowing economic growth, prompting governments to withdraw deposits to shore up their finances. Many banks are curtailing expansion plans, cutting costs and restructuring assets to increase efficiency as the slump in crude cuts revenue.


What’s the rationale for a combination?
Depends on who you talk to. EFG-Hermes, a regional investment bank, spoke with some local institutional investors and said one of the key points raised was that a “clear rationale for the merger is missing.” NBAD would fit better with Abu Dhabi Commercial Bank because they have a common shareholder (Abu Dhabi Investment Council), according to the feedback.
That said, investors on the whole welcomed the move. NBAD surged 15% on Sunday and FGB 11.5%.
Arqaam Capital sees “strong merits for a potential transaction for both parties,” including diversification, funding advantages and cost optimisation. FGB - which has the larger market value of the two - would benefit from a stronger wholesale banking operation and better funding costs while NBAD is under-represented in retail. Credit Suisse analyst Fahd Iqbal also pointed out similar advantages on funding and retail banking.
A potential merger of NBAD and FGB could yield revenue synergies of 6% to 12% and cost synergies in the region of 15 to 28%, Sanjay Uppal, a former CFO of Emirates NBD who helped oversee that banks’ merger in 2007, told Bloomberg TV yesterday.


How might the transaction be structured?
HSBC sets out potential scenarios on how the merger might be structured:
n Scenario 1 - Merger of Unequals: This would entail NBAD, with a larger balance sheet, absorbing a more profitable and better-capitalised FGB;  the bank sees this as positive for NBAD, negative for FGB.
n Scenario 2 - Cash payment: HSBC estimates that NBAD has enough surplus cash (the equivalent of about $38bn) to acquire FGB, including a control premium. The reverse would be a stretch for FGB.
n Scenarios 3 - Share swap: Sees FGB acquiring NBAD through a share swap better than the other way around as would produce a new entity with a return on equity of 13.1% vs 11%.


Would a deal trigger more bank M&A?
The UAE needs more tie-ups because too many banks are serving a relatively small population of 9mn and growth prospects are limited, according to EFG- Hermes Holding and Emirates NBD. About 50 local and international lenders face declining government spending, slowing economies and falling asset quality. More consolidation would also be positive for UAE banks from a return generation perspective, Goldman Sachs said, given the fragmented market.


Which other UAE banks could be candidates for M&A?
Union National Bank, also based in Abu Dhabi, is also a very attractive M&A target and could be next after NBAD/FGB, according to Arqaam Capital. It could be acquired by Abu Dhabi Commercial Bank, which, it said, could offer a substantial premium. 


Who is advising and what happens next?
Credit Suisse is advising NBAD, while UBS is working with FGB, according to people with knowledge of the matter. Working groups from both banks will look at the commercial, structural and legal aspects of the deal in the coming months. Due diligence for a merger could take six months and full integration a further 12 to 18 months, EFG Hermes said.


How likely is the merger to happen?
Difficult to say; the last large banking deal in the UAE took place almost a decade ago, when National Bank of Dubai and Emirates Bank International combined in 2007. Given both NBAD and FGB’s ties to the government - NBAD is 69% owned by sovereign wealth fund Abu Dhabi Investment Council - political will is paramount to the deal’s successful conclusion. The creation of a new regional banking powerhouse would also coincide with Abu Dhabi’s ambitions to boost its status as a finance hub.