The Arabian Gulf region is primed for a new wave of bank M&A following the 2020 mega-merger of Saudi Arabia’s National Commercial Bank and Samba Financial Group, a new report showed on Tuesday.
Banks in the Gulf Cooperation Council (GCC) have recorded higher profits owing to a prolonged high interest rate environment. But with rate cuts taking effect, Gulf lenders have started switching their strategy to tap into growth in different markets and reduce operating costs, banking risk analysts at S&P Global Market Intelligence wrote in a report.
The region’s banks, notably those in Kuwait, are exploring opportunities to merge, divest foreign subsidiaries, or acquire new ones. Of the seven banking and asset management transactions so far this year, five involve Kuwaiti operators, data from Market Intelligence shows.
The analysts expect GCC banks to explore M&A opportunities in the UAE, Saudi Arabia and Bahrain in the remainder of 2024.
With the exception of Kuwait, which ties its dinar against a basket of currencies, Gulf countries have pegged theirs to the US dollar and typically follow US interest rate changes. As such, the region’s largest banks have enjoyed sharp lending income growth in recent quarters.
Kuwaiti banks, meanwhile, are bogged down by limited organic growth opportunities, frequent political gridlock and institutional constraints, and as such are increasingly turning to M&A as a strategic response, Fitch Ratings said in a recent report.
The recent increase in Kuwaiti bank mergers and acquisitions (M&A) is credit positive for the sector, particularly as the market is overbanked, Fitch Ratings says. Banks have been increasingly turning to M&A as a strategic response to the limited organic growth opportunities, so as to diversify their business models and to strengthen their financial profiles.
Despite Kuwait’s (AA-/Stable) robust fiscal and external balance sheets, the banking sector’s growth potential is impeded by frequent political gridlock and institutional constraints. Delayed reforms, such as the new Public Debt Law, which requires parliamentary ratification to allow government borrowing, and the mortgage law, which would enable banks to provide residential mortgages, further exacerbate these challenges.
There are ten banks in the Kuwaiti banking sector, all rated by Fitch. Fitch projects modest credit growth of 3-4 per cent for the sector in 2024 (2023: 2.3 per cent; H12024: 3.7 per cent) due to high interest rates (the reference rate for lending is 4.25 per cent), modest real GDP growth (-2.1 per cent in 2024; 2.9 per cent in 2025) and political divisions. However, the banks have adequate capital, good funding and liquidity, and strong risk-management practices, which could support faster credit growth if political and institutional hurdles are overcome.