Banks in the GCC are turning to consolidation and financial technology (fintech) to help overcome the economic fallout from Covid-19 and the drop in global oil prices. With economies in the region still highly reliant on oil revenue, the Gulf banking sector has been forced to manage the twin economic challenges of the pandemic and oil price crash. Banking profits in the region are set to decline significantly this year, raising questions over the investment strategies and operating models of some institutions, according to the Oxford Business Group (OBG) assessment. Second wave of mergers One potential by-product of the twin crises could be a second wave of mergers and acquisitions (M&A) in the region. Following the 2014 oil price crash, a number of GCC banks turned to M&A to enhance resilience. This process has been most prominent in the UAE, which saw the MENA region's largest merger last year between Abu Dhabi Commercial Bank — the emirate's second-largest lender by assets — Dubai's Union National Bank and the Abu Dhabi-headquartered Islamic finance institution Al Hilal bank. The deal, which was formalized in May 2019, resulted in the merged entity becoming the UAE's third-largest bank, with an estimated Dh420bn (114.4bn) in assets. Elsewhere in 2019, Saudi Arabia saw its first bank merger in two decades between Saudi British Bank and Alawwal Bank, to create the country's third-largest financial institution, while Qatar experienced its first ever tie-up with the merger of Barwa Bank and the International Bank of Qatar. While this rate of M&As may be difficult to maintain, industry officials suggest that the ongoing economic downturn could spur further M&A activity in some markets. "When it comes to further consolidation of the banking sector it is still too early to tell for sure, but it is possible that we will see some movement here in Qatar in 2021," Raghavan Seetharaman, CEO of Doha Bank, told OBG. "What is certain is that many aspects of the industry will have to be re-aligned when it comes to restructuring debt and digitization." Notwithstanding the recent run of mergers in the UAE, with 48 banks operating in the country — made up of 27 foreign and 21 domestic institutions — the country is still overbanked, and is likely to see further consolidation. Meanwhile, smaller countries like Oman and Bahrain are also experiencing post-COVID-19 tie-ups. In mid-April the Central Bank of Oman signed off on the regulatory approval of a merger between Oman Arab Bank (OAB) and Alizz Islamic Bank. The development comes after the two institutions agreed on a share-swap deal that will see OAB take an 81% stake in the entity. Analysts also predict further consolidation in Bahrain as the country implements its fiscal reform program. To this end, in January Bahrain Islamic Bank accepted an offer from the National Bank of Bahrain that will see the latter's shareholding in the shariah-compliant institution increase from 29% to 78.8%, to take advantage of the growing demand for Islamic finance services. Cross-border M&A While there has been a flurry of M&A activity in recent years, most of it has been between domestic institutions. Banks looking to merge at a national level have benefitted from having the same laws and requirements — and often the same shareholders – as prospective partners, while international deals have been seen as risky and complicated. One exception to this rule is the proposed acquisition of Bahraini Islamic bank Ahli United Bank (AUB) by Kuwait Finance House (KFH). After the central banks of both countries gave the deal the green light last year, KFH's shareholders approved the $8.8bn purchase in January 2020, which would see the bank acquire AUB's shareholdings in Bahrain, Egypt, Libya, Iraq, Kuwait and Oman, as well as the company's office in the Dubai International Financial Centre. However, in May, KFH released a statement saying that, in light of the economic situation brought on by COVID-19, its board had taken the decision to re-assess the deal and postpone the acquisition until December. While most analysts do not expect too much cross-border activity in the near term, some institutions could consider such mergers as a way of pooling resources and improving efficiency. Fintech: the next frontier Aside from M&A, increased fintech uptake stands as another potential legacy of the coronavirus pandemic. With all states in the Gulf introducing some form of lockdown and social distancing measures, the pandemic has proven to be the catalyst for a spike in digital banking activity. In Bahrain, BenefitPay, the national electronic wallet, experienced a 1257% year-on-year increase in the value of remittances sent through its Fawri+ service during March, which totaled BD103m ($274m). This builds on Bahrain's attempts to develop its digital financial services. February 2018 saw the opening of Bahrain FinTech Bay, a center dedicated to developing the segment through advisory services, workspaces and a regulatory sandbox. Meanwhile, in Saudi Arabia online retailer BinDawood Holding reported in late March that its average sales on a 10-day basis had increased by 200%, with the spike almost entirely attributable to social distancing measures. To encourage the use of cashless payments during the pandemic, the Saudi Arabian Monetary Authority (SAMA) raised the monthly transfer limit for e-wallets from SR10,000 ($2670) to SR20,000 ($5330), while in recent months the central bank has issued licenses for new digital wallets HalalaH and BayanPay. As demand for fintech and digital payments services rises, it is expected that the number of products and services will also diversify throughout the region, while governments will look to update regulations and legislation. "The way we work has changed and so have customer attitudes," Seetharaman told OBG. "These new realities are here to stay and as a result, legislators will now have to redefine the game in terms of e- commerce legislation and transaction-based processing. We will also increasingly see the implementation and harnessing of tools such as AI, big data and blockchain across the industry moving forward." — OBG
