GULF expansion push buoys Middle East banking M&As

For years, Dubai’s top bank Emirates NBD (ENBD) relied on its home base and cosy relationship with leading government-related entities in the emirate to drive profit growth.

That strategy underwent an abrupt shift late in 2012 when the bank agreed to buy the Egyptian operations of French lender BNP Paribas for $500mn, securing a foothold in Egypt and diversifying a business hit hard by debt problems at the Dubai state-linked firms it banked heavily.

“If you want to be a truly regional bank, you need to be in Saudi Arabia, Egypt and the UAE,” said chief executive Rick Pudner on a recent results call, adding that the bank’s plans to grow by acquisitions would continue even after his departure at the end of this year.

ENBD is among a growing list of banks in the Gulf Arab region which, flush with liquidity and backed by sound capital bases, are reviving mergers and acquisitions in the financial sector – an industry which until last year had seen little action since the 2008 credit crisis.

Deals worth nearly $6bn were agreed by finance firms in 2012, a substantial jump from $800mn in 2011 and accounting for 27% of overall activity in the Middle East last year, according to Thomson Reuters data. The sector was only slightly behind telecommunications, which led the way with 30% of activity.

The resurgence of financial M&A looks set to continue this year as eager buyers are met by willing sellers.

“Pressure to reduce risky portfolio assets and deleveraging requirements of Western banks have been key factors for the increased activity we have seen in the financial sector,” said Wadih Boueiz, a managing director at Bank of America Merrill Lynch and co-head of the US lender’s corporate and investment banking for the Middle East and North Africa (Mena).

“That’s a theme which is likely to continue, especially if the European situation does not improve.”

Heightened deal activity has been driven by disposals from Western financial institutions under pressure to raise capital levels in the post-credit crunch regulatory clampdown.

Political turmoil triggered by Arab Spring uprisings has accentuated the desire to exit such non-core assets, reducing valuations and creating rare opportunities for well-capitalised Gulf names to expand into neighbouring countries at good prices.

“Egypt has historically been a very difficult market to enter due to a lack of new licences issued and the prohibitively high valuations,” said Nabil Lahham, partner at Perella Weinberg Partners, which advised ENBD on its Egyptian acquisition.

Egyptian deals in the past were often done between four and six times book value but valuations were now closer to the levels normally seen in the Middle East, he said.

QNB’s $2bn purchase of Societe Generale’s Egyptian unit, one of the largest financial deals in Mena in 2012, came at two times book value.

Bankers expect more deals to follow, in Egypt and elsewhere.

Top of the list are Credit Agricole’s 61% stake in Credit Agricole Egypt and Italian bank Intesa Sanpaolo’s 70% stake in Bank of Alexandria . No formal process has begun for either sale.

“The larger the country, particularly in terms of population, the greater the attraction for retail banks to be present. So Egypt, for example, with a population of around 80mn, is a compelling opportunity for some banks,” said Klaus Froehlich, Morgan Stanley’s Mena investment banking head.

In Turkey, a 75% stake in small lender Tekstilbank has been put on the block by parent GSD Holding with interest seen mainly from Gulf Arab lenders.

Bankers are also awaiting the announcement of a mandate for the sale of National Bank of Greece’s Turkish arm Finansbank, one of the best-run banks in the country, despite the Greek lender saying it was in no rush to sell.

Turkey’s growth prospects and cultural affinity with the region has made it one of the top destinations for Gulf banks to expand. Net interest margins at Turkish lenders are above the 4% level, higher than 2.8%-2.9% for Gulf-based banks, according to BofA’s Boueiz.

“Banks in the region are keen to deploy capital in markets that have higher returns and growth prospects,” he said.

This makes Europe and the US much less attractive for Gulf banks.

“You aren’t going to see the rescue deals of 2007-08, where you saw Gulf money go into the likes of Citi,” said Richard Rollinshaw, partner at PwC, pointing to the big losses suffered by Abu Dhabi Investment Authority on its capital injection into the US lender.

“When everything cleans itself out in places like Spain, they may look at it but only when there’s clarity on the downside risk.”

QNB is probably the most acquisitive Gulf Arab lender. After securing stakes in banks in Egypt, Libya, the UAE and Iraq, it is scouting for a majority stake buy in a top 10 Turkish bank.

Commercial Bank of Qatar agreed to buy a 70.8% stake in Turkish lender Alternatifbank in March, while Kuwait’s Burgan Bank, which bought the Turkish arm of Greece’s EFG Eurobank last year, is looking for more assets in Egypt.

Other regional banks, such as National Bank of Abu Dhabi, National Bank of Kuwait, Dubai’s Mashreq, Abu Dhabi’s First Gulf Bank, Morocco’s Attijariwafabank and Lebanon’s Audi Bank are all keen on expanding through acquisitions, bankers said.

However, while cross-border M&A will be the target of bigger players, bankers said there was plenty of scope, and need, for smaller lenders to consolidate within their home markets.

Most of the Gulf is significantly overbanked – the UAE has 51 banks in a nation of 5mn people, and Qatar has 18 despite the largest player having over 20% market share.

Bahrain’s central bank has been pushing tie-ups for Islamic banks badly hit by a real estate bubble. The largest so far was the purchase by National Bank of Bahrain and a local fund of a 51.6% stake in Bahrain Islamic Bank in March.

Mergers in the Gulf are complex though as powerful local families who are majority shareholders are typically reluctant to give up control.

“The market certainly welcomes more banking consolidation locally. But, some combinations, which potentially would have made good sense, haven’t happened because of a lack of willingness to lose control,” said Froehlich.

Source: Caye Global News


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