Arab Gulf financial firms are on the brink of a long-overdue wave of consolidation as global financial turmoil brakes a regional economic boom, forcing banks and investment companies to cut costs and improve scale. Mergers and acquisitions in the world's biggest oil-exporting region have long been sidelined because the region's comparatively small-sized banks were able to grow rapidly as economies surged on six years of high crude prices. But the tables are turning on Gulf banks and investment firms as tight lending conditions eat into their profits and render them more vulnerable to an economic downturn, industry players told the Reuters Middle East Investment Summit. “There is no more room for small players,” said Mansour Al-Mubarak, managing director and chief executive of Aayan Capital, a Kuwaiti investment company that wants to double its asset base through a merger in the next year. “It is a time to consolidate and create bigger animals to face a recession or a slowdown.” Markets have been rife with rumors of mergers in the United Arab Emirates, Kuwait and Saudi Arabia as banks face the fallout of a crisis that has forced governments, including those in the Gulf, to take emergency steps to unthaw credit markets. Kuwait was forced to rescue Gulf Bank from collapse last month after the bank reported steep losses related to derivatives trading, and media reports suggest at least one local bank is looking to buy the distressed asset at a bargain. But most regional financial mergers will stem from a need to create banks able to shoulder a greater proportion of the financing needs of $2 trillion projects under construction by state and private investors, industry players said. Even the region's biggest bank by assets, Emirates NBD, commands only $77.67 billion of assets, paling in comparison with global players such as HSBC and BNP Paribas, each with more than $2 trillion in assets. “To go and call a merger now, it's a call of necessity and probably not one of luxury,” said Mohammed Ali Yasin, head of Dubai-based Shuaa Securities brokerage. “You don't see them coming and screaming but I believe that toward the end of this year - early next, first quarter - you'll see major consolidation in the sector.” Dubai's government cited the need to create a bank big enough to meet the demands of its booming economy as the impetus behind its decision to force Emirates Bank International and National Bank of Dubai to merge last year into Emirates NBD. Similar deals could follow since the Gulf's autocratic rulers hold major stakes in most big banks, including National Bank of Abu Dhabi and Abu Dhabi Commercial Bank, the latest targets of a swirl of takeover talk. “You will see more of those government mergers, probably in Abu Dhabi,” said Yann Pavie, chief executive of Kuwait's Gulf Merger, which advises companies on mid-sized acquisitions. “Mergers in the past were more difficult to do very often just because of egos. You don't have the luxury anymore for egos.” Since the Emirates NBD merger was ordered in early 2007, the only attempt at a major Gulf takeover was International Bank of Qatar's up to $6.1 billion offer for Bahrain's Ahli United Bank - which in the end was rejected by shareholders. Even the Emirates NBD merger faltered only a few years before because the banks on their own failed to reach a deal. But bank owners, including wealthy Gulf families, are now more inclined to accept cheaper valuations as they seek to inject fresh capital into a financial sector struggling to keep up with financing demands, executives told the summit. Financial shares have borne the brunt of a regional market slump since the summer; National Bank of Abu Dhabi has tumbled almost 40 percent from a 2008 high in January. “You may get to the stage where the returns of the founding shareholders may not be as attractive, so the price they are willing to sell is more reasonable,” said Richard Webster, head of investment at Kuwait's Burgan Bank. The Gulf is particularly ripe for acquisitions because it is over-banked. The UAE hosts some 51 banks operating more than 700 branches, and its population is only 4.5 million. “We are ready to consider the right targets at the right prices,” said Sanjay Uppal, chief financial officer of Emirates NBD. The bank is ready to acquire any troubled rivals, he said. Regional banks seeking to enter the second-largest Arab economy were already targeting small lenders before the crisis. In August, Qatar National Bank bought 24 percent of Dubai's Commercial Bank International and Global Investment House of Kuwait said it would buy 20 percent of National Bank of Umm al-Quwain. “We are interested in looking at opportunities that are suffering because of market turmoil,” said Adnan Al-Bahar, chairman of Kuwaiti Islamic investment firm The International Investor, which is seeking stakes in banks. Commercial Bank of Kuwait Chairman Abdulmajid Al-Shatti added that Gulf investors, including himself, were ready and willing to fork out cash for rock-bottom deals. “There is a lot of cash on the sidelines ... the wealth will be used.”
