Rising Mergers and Acquisitions in the GCC Banking Sector

Doha: Amid the COVID-19 pandemic and volatile oil prices, GCC banks will continue to consolidate to strengthen their balance sheets, global consultancy firm KPMG said.

2020 has been a difficult year for banks around the world. For the region’s economies, the pandemic and volatile oil prices have caused credit and equity markets to contract. Despite the strength of the banking sector, which in the GCC has considerably cushioned the drop in oil prices since 2014, liquidity conditions have started to tighten due to the recent double shock.

The current unprecedented period of the pandemic has resulted in moderate business activity, especially for small and medium-sized enterprises (SMEs), which account for nearly 85-90% of registered businesses in the region. This resulted in an increase in nonperforming loans or credit losses for banks, which further impacted net margins. In GCC, overall net profit declined 34.7% to $ 12.3 billion in the first half of 2020, from $ 18.8 billion in the first half of 2019.

Venkat Krishnaswamy (photo), Partner and Head of Consulting at KPMG Qatar, said: “The impact of COVID-19, coupled with volatile oil prices and low interest rates, has a significant effect on profitability base of banks in the region. The increase in Nonperforming Loans (NPLs) due to increased strains on corporate and personal cash flow has further impacted shareholder returns. As a result of the combination of these factors, bank profits are expected to be strained, raising concerns about the operating models of some financial institutions ”.

The five largest banks in the region account for around 70 percent of total assets. Qatar’s top five banks have a market share (based on total assets as of December 31, 2020) of around 86%, making it extremely difficult for the remaining small players to maintain their profits, especially in the scenario current.
Many small banks in the region can be seen turning to consolidation as a means of overcoming the negative effects of economic fallout. Mainly, a stronger bank will better respond to stakeholder concerns about stability, solvency and liquidity.

Himanshu Bhatla, Associate Director at KPMG Qatar and responsible for the merger transaction between Masraf Al Rayan and Al Khaliji Commercial Bank, added: Witnessing an upward trend in M&A activity in the banking sector, the latest dated being Masraf Al Rayan who entered into a merger agreement with Al Khaliji Commercial Bank ”.

Karthik Jagadeesan, director at KPMG Qatar and co-head of the merger between Masraf Al Rayan and Al Khaliji Commercial Bank, added: The resilience demonstrated by a number of large banks through the strength of their balance sheets has acted as a catalyst for absorb shocks and led to a recovery in valuations of bank stocks in the region ”.

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