The latest acquisitions deals by Gulf country banks in the Middle East and North Africa (MENA) region were the subject of a report issued by rating agency Standard and Poor’s (S&P).
The report says European banks are shedding assets outside of the MENA region to rebuild their balance sheets affected by the financial and sovereign crisis. European banks have been replaced mainly by banks from the oil-rich countries of the Gulf who have capital to spare, healthy liquidity, and supportive shareholders enabling them to pursue acquisitions in emerging MENA countries, where opportunities for long-term growth exist.
The study expects the trend to continue in the next few years, amplified by lower prices caused by the financial assets, as well as the tendency of European banks to sell assets outside their home markets, which will allow the Gulf Cooperation Council (GCC) banks to expand in relatively unbanked and young markets like Turkey, Egypt and Indonesia. The study also expects solid capitalisation, traditionally a key strength for Gulf banks, to remain so over the medium term.
The report says the bankable population in the Gulf is structurally limited with a total population of less than 50 million including a large population of foreign workers who tend to have limited bank assets, which gives an incentive for banks in this region to look for business in emerging markets, which are home to young and large populations able to support long-term growth.
Mergers and acquisitions (M&A) in 2012 in MENA were the highest since 2008; the financial sector had 30.5% of transactions. Egypt and Turkey held the lion’s share of activity; 142 deals were announced or closed in Turkey for a total value of $10.1bn, and in Egypt transaction volume reached $9.8bn from 38 deals, according to the report.
The authors of the report show concern over the limited operational experience of Gulf banks outside their region. Their lending operations are mostly limited to their home countries and they have limited cross-country exposures even within the Gulf region. The authors question whether GCC banks would be able to generate risk-adjusted returns comparable with those at home where they have limited competition, high margins, low labour costs and no taxation.
The report gives special attention to credit rating acquisition by major Gulf financial institutions in higher risk countries, which although positive in terms of business diversification, may be credit-negative. However, the strong shareholders and the healthy capital-raising ability these institutions possess will help mitigate the risk.
There are more transactions in the pipeline for 2013, says the report. Qatar National Bank (QNB) announced it will continue to look for acquisition opportunities in Turkey and elsewhere; Emirates NBD publicly advertised its intention to boost contribution of revenues from overseas over the next few years.
As the rate of acquisitions increases, management of sizeable exposures abroad will require changes in the corporate and risk governance and underwriting culture to enable banks to make adequately decentralised and country-specific business development decisions, while maintaining firm control of the risk process.