GCC Banks: InvestBank Bail Out (Sharjah, UAE) driven by real estate and construction pressures.

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1. RATI NGS | MARK ETS | SUK UK March 01 2019 | NOTES RI SK GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout implications for M&A and Government Support QUICK NOTES ❖ Invest Bank PSC, UAE NPLs hit 18%+ at YE2017, driven primarily by realestate and construction lending. Acreditus notes that the recent bailout of Invest Bank ❖ New IFRS9 accounting helped drive of Sharjah, UAE was a relatively discreet and provisions of AED 1.16Bn and losses of AED 0.35Bn in the 18mths to H1’18. undramatic affair. Capital and liquidity support were ❖ Further YE’18 provisions of AED 2.2Bn – requested by CBUAE - ‘wiped out’ the residual 12.8% of Tier 1 capital. ❖ The reported 2 and 3-way mergers with Bank of Sharjah and United Arab Bank – to create a more viable Sharjah ‘champion’ - did not appear. ❖ At YE’18 Sharjah Gov’t committed AED 1.9Bn to recapitalise the bank, with liquidity support from CBUAE. ❖ These events follow a consistent GCC trend for stressed banks to merge or receive gov’t support. ❖ No bondholders / depositors have suffered losses in over two decades at any GCC retail bank. Still a stable credit theme for senior and junior bank debt in stronger GCC countries. provided by the Sharjah Government and the Central Bank respectively after real-estate and construction asset quality pressures drove severe losses. Economic patriotism, as well as sector challenges around asset quality, growth, technology, regulatory and compliance costs are already driving consolidation and - like the Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank deal – are made easier by common state shareholdings. For Invest Bank however, the reported merger failed to materialise and as per historical norms, the government stepped in – a theme incongruent with the Basel 3 themes of debt bail-ins. This note provides insights into ongoing M&A drivers, credit events and GCC government support dynamics. GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout Implications for M&A and Government Support 1
2. Mergers & Acquisitions Will Remain Key in a Challenging and Rapidly Changing Operating Environment Globally the banking sector is structurally and fundamentally changing with the challenges of the new regulatory, technology and compliance (KYC, AML) environment compounded by both the speed of change and uncertain economic conditions. Invest Bank – Real Estate & Construction Sector Drive Bank Failure Invest Bank of Sharjah was established in 1975 and - at around US$4.6Bn in assets - was a modest ~0.60% of the UAE banking system (as of H1’18). Like some other smaller banks, it has a relatively limited franchise and has recently announced the appointment of a new CEO to take the bank forward. These demands are pressuring smaller banks who lack economies of scale and often the human capital to effectively manage the tactical and strategic demands of such rapid developments. Credit pressures in the real estate and construction sector crystallised over 2017, driven by the ongoing speculative and uncoordinated oversupply pressures in residential, retail, commercial and hospitality that continue to depress prices. In addition to these ongoing industry costs, the generally lucrative GCC operating environment is also facing pressures from multiple sources; volatile oil prices and associated liquidity, lower/maturing growth trends amidst increased regional market fragmentation. This is creating additional business and investment uncertainties. Aggregate banking system exposure is estimated at ~20% (AED305Bn) although given the amount of personal and business loans secured by real estate the ultimate exposure will be higher. On the retail side an estimated 20% of purchases are financed with mortgages, which makes the sector AED100Bn or ~30% of the retail book. The above is then further magnified by the relatively overbanked nature of these undiversified and lightly populated economies, especially in the UAE with over 50 banks serving ~9mm people. The sector (and associated loans) remain under stress with residential prices down by 30% since 2014 and another 5-15% drop possible for 20191. With the larger and mid-size banks discountpricing government-related and ‘family name’ credits, the smaller market players are typically left with a fewer such names and the weaker borrowers. As such pressures are mounting at the bottom end of the sector and only the best-run banks will survive alone. Size is also a key advantage when investing in critical new technology (digital banking, blockchain, cyber security) and compliance functions. Such bank concentration also paradoxically desirable for local regulators who face their own supervisory challenges in providing the increased oversight needed at the smaller end of the market. Lastly, a key local M&A driver is the economic patriotism to create ‘national champions’. These international flag-bearers will compete more effectively in global markets as the local banking systems becomes saturated. All the above are driving widespread consolidation activity, although discussions have often stalled and failed based on the valuation and asset quality assessments as well as the difficult rationalisation and conflict management required when combining two separate boards and management teams. By H1’18 Invest Bank was suffering from: (i) IFRS9 accounting impact – under the ‘expected loss’ approach, more prudence was required, likely leading to more impairments, especially regarding some large restructured exposures. (ii) NPLs of 18%+ (YE’17) - most in real estate and construction which was 35%+ of the loan book. (iii) Provisions of AED872mm for YE’17 and AED290mm at H1’18 which drove net losses of AED278mm and 72mm respectively2. In Q3’18 it was reported 3 that the Sharjah government was ‘supportive’ of a possible two-way and then three-way merger between Bank of Sharjah, Invest Bank and United Arab Bank. This would have created a more substantive Sharjah ‘champion’ bank with about US$18Bn of assets. In our view this would create a more viable entity, however, the bank denied these reports. At YE’18 Invest Bank then saw: (iv) Further Provisions, at YE’18, the Central Bank of the UAE (‘CBUAE’) requested4 provisions of AED2.2Bn versus the AED2.5Bn (estimated) of equity that wiped out the bank’s capital base from what was ordinarily a pretty robust Tier 1 ratio of 12.8%. GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout Implications for M&A and Government Support 2
3. (v) A Capital Injection of AED1.9Bn (reported to be 30% of the last traded price of AED0.70 vs AED2.40) was ‘offered’ by the government. This would make it a new majority 50.1% shareholder. Credit & Commerce International of Pakistan is the most notable and was the precursor to Union National Bank) any break in this precedent would trigger a substantive revaluation of credit risk and spread premiums. Although it is not clear if there have been any deposit outflows or funding pressures to date, Invest Bank benefitted from high levels of ‘sticky’ retail deposits on the liability side and hence possessed lower levels of confidence-sensitive market funding when compared to global peers. Thus, in the absence of a M&A saviour, government support remains a likely backstop, particularly in the stronger four countries of Kuwait (AA/Aa2), Abu Dhabi/UAE (AA/Aa2), Qatar (AA-/Aa3) and Saudi Arabia (A-/A1). ‘ Indeed, at H1’17 this was a very low ~3% as a proportion of tangible banking assets and liquid assets stood at 17%. In addition, the CBUAE has advised it would provide liquidity as necessary. This means the GCC still remains a broadly secure spot in emerging markets given the turmoil suffered in other key markets, especially if investors are comfortable with the strong qualitative drivers around systemic support described below. Irrespective, in the case of Invest Bank, as noted above, no stabilising M&A materialised to prevent what would be a bank failure or Point-of-NonViability in Basel 3, Bail-in jargon. Why Support GCC Banks? This credit event also highlights why capital buffers in the GCC need to be substantially higher on average than more mature jurisdictions given a systemic issue of loan concentration reflecting the relatively undiversified economy and hence an unhealthy dependence on real estate assets. Although regional events like the Expo 2020 in the UAE and World Cup 2022 in Qatar will to provide a short-term boost to regional confidence and growth, the prospect for post-event economic ‘hangovers’ or stress and hence loan impairments remain high. Thus, while capital and liquidity levels appear solid throughout most of the GCC banks, the need for consolidation is still pressing for smaller banks. GCC Creditors and Depositors [Still] Remain Safe in a Basel 3, Bail-In World While other mature jurisdictions are actively trying to move away from the moral hazard of government bailouts, bond / sukuk holders in GCC retail banks even the subordinated & AT1 debt - still face relatively low risk with no losses in over 20+ years (see appendix A1). We propose this proactive support preference is driven by the frequent and material position of the government in junior parts of the capital structure and the possible market and social instability that could be caused by a bank failure. Indeed, having supported even failed foreign bank branches (the 1991 collapse of UAE branch Bank of 1 – A Key Policy ‘Pillar’ of Regional Economic Development and Stability Despite ongoing efforts to increase private sector activity and diversification, GCC governments still dominate local economic activity given their unique ability to channel oil and gas related revenues directly into various strategic sectors through a varied group of Government Related Entities (‘GRE’s). As a complement to these ‘national champions’ and different to the advanced economies – banks are crucial to recycle hydrocarbon wealth into the private sector in what is (or should be) a financially disciplined and risk adjusted fashion. Government cash balances ranging from ~15%-35% of deposits. It is also worth noting that Global Financial Crisis (‘GFC’) region saw the collapse of many overleveraged GREs and private-sector entities. However, with the government holding most of the proverbial chairs at the local creditor restructuring table, (i.e. often the largest shareholder, depositor, borrower in the banks and well as the regulator) the banks were key to providing restructuring terms on a non-commercial basis in the face of sizable distressed debt refinancing against the backdrop of prohibitively expensive (if available) liquidity. This ‘alignment’ of stakeholder interests actually prevented a widespread banking sector meltdown of the sort seen in other more mature economies with [supposedly] better and more mature systems of regulation and governance. GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout Implications for M&A and Government Support 3
4. 2 – Sizable Government Stakes in GCC Banks Remain Stable In mature markets the presence of the government as a shareholder is typically a temporary ‘crisis’ measure with the eventual goal of offloading such stakes when equity prices recover. Where holdings are kept longer term, the government is typically delayed awaiting a solid market opening to recover taxpayer’s funds. In the GCC while such stakes may also have been accumulated in the same ‘crisis’ driven fashion there seems to be no intention to offload these profitable stakes into public or private markets. State owned pension and wealth funds are often stable and major shareholders. 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Sizable government and GRE bank shareholdings remain relatively stable UAE KSA Qatar Kuwait Oman Bahrain Top 50 banks est. govt equity share $US mm – Refinitiv. 2018 Indeed, in the merger case of Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank (‘AHB’) the Abu Dhabi Investment Council (‘ADIC’) currently holds pre-merger stakes of 63%, 50% and 100% respectively. AHB too was a small bank (1.6% of the banking system by assets) that had heavily invested unsuccessfully in building a new franchise in a saturated market. Despite some great technology, chasing growth ultimately drove losses from asset quality and governance pressures. The standalone failure of this business given the resources available shows how difficult the market is. A consolidation into ~$115Bn giant was the only way forward and places it just behind market leaders of First Abu Dhabi Bank (‘FAB’) with ~$190Bn of assets and Emirates NBD (‘ENBD’’) with ~$130Bn. Both leaders themselves were a creation of various banks – a distress resolution mix for ENBD and for FAB, the common ADIC shareholdings of National Bank of Abu Dhabi and First Gulf Bank were also a key reason behind the overall speed and success of the merger decision and subsequent execution in the creation of a new national champion. With state-related shareholdings appearing in 40+ of the top 50 banks with an average stake of 25% the economic incentive to support a troubled bank with new capital and hence support the value of the government equity is quite high. As such, the improved governance incentives created by Basel 3 compliant loss-absorbing debt and contingent capital securities seem at odds with the presence of the government in junior parts of the capital structure and the amounts of the junior debt issued (~US$30Bn) relative and the equity shareholdings (~US$100Bn). Finally, the lack of tax-payers is also a material support driver as the capital injected ‘belongs’ to the government and not the citizenry. 3 – Banking Sector Concentration is High and Increasing The above two factors are further compounded by the fact that the top three or four banks often have an aggregate share of 50-75% of banking assets and deposits. In the UAE the top 4 banks; FAB, ENBD, ADCB and DIB account for sizable 63% of UAE of system assets at YE2018. Thus (especially for the largest) we would propose support for depositors is all but assured given the social unrest and instability that could be triggered by a retail bank default in a region already facing substantive economic and possible social upheaval. 4 – Local Debt/Sukuk Capital Markets Remain Thin vs Bank Lending Aside from Saudi Arabia the local debt/sukuk markets remain relatively thin and are lacking a deep local institutional investor based in fixed income and offer limited alternatives to bank funding. Indeed, while the US dollar currency pegs in the region have allowed a fast-tracked access to international debt markets and key bond index inclusion (JPM, FTSE), the risk-premiums required by international investors are significantly higher than those funding levels offered by local banks. These banks remain relatively liquid and still comfortable with name and collateral-based lending, suppressing the borrower demand for public market access. GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout Implications for M&A and Government Support 4
5. Government Support - How to Systematically Assess ? Despite volatile oil prices, Kuwait, UAE, KSA & Qatar still have high bank support capacity Some unique features of the GCC (and some other Emerging Markets) mean a much higher propensity of the government to support banks. Simplistically this propensity can be reduced to two factors: • The willingness to support • The capacity to support These considerations are comprehensively incorporated into the support analysis of the Credit Rating Agencies (Moody’s, Fitch and S&P are the most active in the region). Unlike most mature markets, where (in line with regulatory policy trends) CRA government support assumptions have been sizably reduced, the regional banks still enjoy rating support uplift ranging from 2-5 notches in most cases where there is material size and/or government ownership. Government Support Willingness While most governments are keen to avoid distresses and disruption in the local economy, indiscriminately supporting banks and corporates can create severe and undesirable distortions in capital and risk allocation. Basel 3 has tried to harness market forces to create disciplined bank bail-out capital that is provided and priced by capital markets investors versus voting tax-payers. In the GCC, it is clear that despite the above, the willingness to support remains high – primarily driven by the four factors above. In addition, as monarchies in a sometimes economically challenging and dynamic region, the need for social stability is perhaps higher than those of more mature systems of government. Government Support Capacity The credit profiles of the GCC countries have evolved considerably over the last five years, with fiscal profiles weakened by the low and then highly volatile oil-prices compounded high levels of public and social spending. This has created a much wider dispersion in credit profiles ranging from the ‘AA’ countries at the top Kuwait, UAE & Qatar, then the Saudi Arabian ‘A’ in the middle ground. These four still benefit from vast fiscal buffers in the shape sovereign wealth funds and reserves. SWF + FX Reserves $US Bn - Source: Institute of Int’l Finance With higher fiscal break-evens and lower reserves we have Oman at the ‘BBB/BB’ crossover space and fiscally pressured Bahrain in the ‘BB/B’ space. Thus, while willingness remains table, the capacity has – for the lower rated countries - substantially deteriorated, increasing the uncertainty around bank support. This is highly visible in the regions’ credit ratings with rating uplift levels in the weaker countries now significantly reduced or removed. Although the GCC is fragmented, the willingness of the stronger countries to support the weaker ones should not be overlooked. Again, the extraordinary capacity of the top four means that the amounts to cash needed would be relatively modest compared the contagion risk of nearby bank or sovereign instability. To Merge, or Not to Merge – That is the Question? The case of Invest Bank highlights the challenges faced by smaller banks against a softening economic backdrop and an increasingly costly and competitive financial sector. We would propose that the rationalisation of players will continue to create stronger banks and those that remain solo, will continue to face more pressures, particularly at the smaller end. As such it is likely we will see more mergers or stresses or in the segment. However, high government support is still a stable credit theme for senior and junior bank debt. As such, the likelihood of any destabilising retail defaults remains near zero in the stronger countries and still remains 'low' in the weaker ones. SOURCES 1 - Standard & Poor’s, Dubai Real Estate Downturn To Continue 2 - Various public media, Gulf News & Moodys Invest Bank PR 3 - Reuters, Bank of Sharjah, Invest Bank, UAB in merger plan 4 - The National, Govt of Sharjah to acquire stake in Invest Bank GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout Implications for M&A and Government Support 5
6. INDEX DATE Q COUNTRY BANK NAME BANK TYPE EVENT TYPE CAPITAL LIQUIDITY M &A A1: SELECTED GCC BANK STRESS, SYSTEMIC & GENERAL SUPPORT EVENTS 1 2018 Q4 UAE INVEST BANK RETAIL SPECIFIC STRESS Y ? - CBUAE is closely monitoring financial developments at Invest Bank after the Sharjah Gov't said it would take a majority stake after capital pressures from high real estate and construction NPLs. 4 2017 Qatar ALL BANKS RETAIL SYSTEMIC STRESS - Y - GCC diplomatic rift triggered foreign financing and resident private sector deposits outflows of ~US$40 billion. This decline was moderated by CBQ liquidity injections, QIA, public-sector and GRE deposits that climbed 46% to QAR304 billion($83 bn) in the one year to April 2018. 5 2016 Q1 KSA ALL BANKS RETAIL GENERAL SUPPORT Y Y - KSA MoF Jumbo debt/sukuk programme drove drawdown on GRE-related deposits creating upward pressure on market rates. SAMA relaxed the loan-to-deposit ratio from 85 percent to 90 percent, intervened through deposit placements and and long-term repos to ease funding pressures. 6 2016 Q2 KSA ALL BANKS RETAIL GENERAL Y Y - Offered provision of SAR 15 billion to banks as short-term deposits and loans to a number of banks. 7 2016 Q3 KSA ALL BANKS RETAIL GENERAL SUPPORT Y Y - 8 2015 KSA SPECIALISED CREDIT INSTITUTIONS POLICY GENERAL SUPPORT Y - - DESCRIPTION SAMA announced that it would provide Saudi banks with about SR20 billion ($5.3 billion) of time deposits on behalf of Gov't agencies, and introduce seven-day and 28-day repurchase agreements. The Saudi Gov't established five SCIs to complement bank lending, and provide medium- to long-term loans to the industry, SMEs, and the real estate and agriculture sectors. The SCIs accounted for about 14.0 percent of total financial system assets, and their outstanding loan portfolios represented around 26.0 percent of bank credit to the private sector in 2014. The Gov't continued to support SCIs credit operations as it injected SAR 10 billion in one of the SCIs in 2010 and, more recently, announced another hefty injection of SAR 70 billion. RETAIL SPECIFIC STRESS Y Y Y Emirates NBD, 55.6-percent state owned through the Investment Corporation of Dubai, was ordered by Dubai’s ruler in October 2011 to take over loss-making Dubai Bank, which had been rescued by the CBUAE & Dubai Gov't earlier in May 2011 after a combination of highly concentrated and related-party impairments drove capital and the funding pressures. Emirates NBD received a AED2.8 billion deposit from the ministry of finance. The Gov't of Dubai has provided a guarantee—with a fair value of AED768 million—for any losses relating to existing assets for seven years. ALL BANKS RETAIL SYSTEMIC STRESS Y - - QIA provides ~US$1.5 billion equity injection, equal to ~10% of equity capital. Third Tranche. Qatar ALL BANKS RETAIL SYSTEMIC STRESS Y - - QIA purchases ~US$4.2 billion real estate loans. Following speculative market collapse banks took opportunity to offload both NPLs and PLs. Q1 Qatar ALL BANKS RETAIL SYSTEMIC STRESS Y - - QIA provides ~US$0.7 billion equity injection, equal to ~5% of equity capital. Second Tranche. 2009 Q2 Bahrain THE INTL BANKING CORP. INVESTMENT DEFAULT N N N Liquidity pressures triggered defaults at TBIC - wholly owned subs. of Algosaibi Group (AHAB) and AWAL - wholly owned subs. of Saad Group. Saudi Arabian Monetary Agency (SAMA) froze assets of the respective Saudi shareholders. 14 2009 Q2 Bahrain AWAL BANK INVESTMENT DEFAULT N N N The CBB ultimately put the two banks under administration and investigated financial irregularities. No retail deposits were held a\lthough Bahraini banks had exposure to the failed entities. 15 2009 Q1 Qatar ALL BANKS RETAIL SYSTEMIC STRESS Y N N 23 2009 Q1 Qatar ALL BANKS RETAIL SYSTEMIC STRESS Y N N 16 2008 Q4 Kuwait ALL BANKS RETAIL SYSTEMIC STRESS Y Y N Kuwait Govt indescriminately guarantees ALL deposits in system through public legislation to maintain confidence. No explicit withdrawal observed to date. 17 2008 Q4 Kuwait GULF BANK RETAIL SYSTEMIC STRESS N Y N OTM Euro FX Derivative counterparty default triggers massive losses. When combined with asset write-downs ~US$1.4 billion of losses incurred. CBK provides supervision and emergency liquidity to close all open derivative positions and the bank deposits are guaranteed to prevent bank run. KIA underwrites capital boosting rights issue taking shareholding to ~16%. 18 2008 Q4 UAE TAMWEEL PJSC HOME FINANCE SPECIFIC STRESS N Y Y Wholesale funded property lender faces severe liquidity pressure. Amlak would have gone insolvent if not for creditor standstill directed by CBUAE. Resolved via CBUAE/Gov't endorsed takeover by key shareholder Dubai Islamic Bank (retail bank). Access to cheap islamic retail deposits provides stable long-term funding source. 19 2008 Q4 UAE AMLAK PJSC HOME FINANCE SPECIFIC STRESS N Y Y Wholesale funded property lender faces severe liquidity pressure. Tamweel would have gone insolvent if not for creditor standstill directed by CBUAE. No buyer found. Initially supervised by CBUAE and UAE Federal steering committee. No buyer found to date, standalone viability pressured. Financing renegoatiated in 2017. Severe losses recorded in 2018. 20 2008 Q4 UAE ALL DUBAI BANKS RETAIL SYSTEMIC STRESS Y N N AED16 billion of Tier 1 injected into Abu Dhabi Banks to boost confidence and in anticipation of weakening asset quality. 21 2008 Q4 UAE ALL AD BANKS RETAIL SYSTEMIC STRESS Y N N AED4billion of Tier 1 injected into to Dubai Banks to boost confidence and in anticipation of weakening asset quality. 22 2008 Oman ALL BANKS RETAIL SYSTEMIC STRESS N Y N Central Bank of Oman provides US$2 billion foreign-currency funding facility to provide local banks with access to US dollar liquidity. 23 2003 Bahrain ALL BANKS RETAIL SPECIFIC STRESS Y Y N 25 2002 Bahrain DEFAULT N N N 24 2003 Bahrain BAHRAINI SAUDI BANK N Y N 27 1990 KSA BANK OF CREDIT COMMERCE INT'L RETAIL SPECIFIC STRESS N Y N 28 1998 KSA ALL BANKS RETAIL SYSTEMIC STRESS ? Y N 29 1985 UAE BANK AL JAZIRA RETAIL SPECIFIC STRESS Y ? Y 30 1985 UAE ECB, FCB & KCB RETAIL SPECIFIC STRESS Y ? Y RETAIL SPECIFIC STRESS Y ? N RETAIL SPECIFIC STRESS Y ? N DUBAI BANK 10 2011 Q4 UAE 11 2011 Q1 Qatar 12 2011 9 2010 13 Q3 31 1985 UAE 31 1985 KSA (ACQUIRED BY EMIRATES NBD) BMB INVES'T BANK INVESTMENT DUBAI & EMIRATES NATIONAL BANK NATIONAL COMMERCIAL BANK INVESTMENT SPECIFIC STRESS QIA purchases ~US$1.8 billion of equity investment portfolios. Following stockmarket collapse banks took opportunity to offload volatile stocks. Qatar Investment Authority (QIA) provides ~US$0.7 billion equity injection into all banks, equal to ~5% of equity capital. First Tranche. Universally applied to preclude market descrimination between 'weak' and 'strong' banks. BSB had granted a loan of BHD17.0 million to a single borrower, which exceeded the internal and regulatory limits for a single-party exposure resulting from internal control failures. The exposure was equivalent to 46% of capital, well above the 1S% regulatory maximum. Offshore bank: Confidence driven refinancing issues triggered default. CBB supported post-default negotiations. Concentrated (46% capital) default of the loan (breaching regulatory limits) triggers Central Bank of Bahrain (CBB) control. Deposits provided for liquidity. UK Financial Services Authority liquidated the bank in 1991 due to fraud. Locally BCCI had liabilities of US$600 million to private investors amd US$1.4 billion to Abu Dhabi entities. BCCI (UAE) was recapitalised into Union National Bank and HQ'd in AD. Gulf War I: Customer deposit withdrawals reached 11% of total deposits and moved abroad. Saudi regulator (SAMA) provided foreign currency liquidity. The bank faced solvency problems during the late 1980s and early 1990s, but the authorities (through regulatory forbearance) allowed the bank sufficient time to strengthen its capital base (though a rights issue) and build up its loan loss provision Three distressed banks, Emirates Commercial Bank, the Federal Commercial Bank, Khalij Commercial Bank merged into Abu Dhabi Commercial Bank (ADCB) Two distressed banks, Dubai Bank, Emirates National Bank merged with Union Bank of the Middle East and all rebranded Emirates Bank International in 1988 (now part of ENBD) Asset quality problems pressured bank capital. Regulatory authorities intervened and injected new capital into the bank and acquired a majority stake in the bank and changed management. SOURCES: IMF Article IV reports, Central Bank Financial Stability Reports, Moody's, Standard & Poor’s, Fitch, Bloomberg, Reuters and various media and public sources. Data may not be fully comprehensive and pre-2001 difficult to accurately validate. GCC Banks: Consolidate, Go Solo or Fail? Invest Bank Bailout Implications for M&A and Government Support 6
7. A2 : SELECTED GCC RELATED BANKING M&A EVENTS Stress Driven Govt Acquisition ANNOUNCE IDX DATE EFFECTIVE DATE INSTITUTION 1 NAME Stress driven Merger/Acquisition I-1 COUNTRY I-1 SECTOR INSTITUTION 2 NAME I-2 COUNTRY I-2 SECTOR VALUE ($MMs) DEAL TYPE 1 24/12/2018 pending / TBC National Commercial Bank KSA Banks Riyad Bank KSA Banks [182,000] 2 02/09/2018 pending / TBC Abu Dhabi Commercial Bank PJSC UAE Banks Al Hilal Bank PJSC UAE Banks [85,000] early discussions 3 02/09/2018 pending / TBC Abu Dhabi Commercial Bank PJSC UAE Banks Union National Bank PJSC UAE Banks [101,000] 4 28/08/2018 pending / TBC Barwa Bank QSC Qatar Banks International Bank of Qatar Qatar Banks [22,000] 5 16/08/2018 pending / TBC National Bank of Bahrain BSC Bahrain Banks Bahrain Islamic Bank BSC Bahrain Banks - 6 30/07/2018 pending / TBC Bank Dhofar SAOG Oman Banks National Bank of Oman SAOG Oman Banks [20,000] Objection (CBQ 35% SH) 7 16/07/2018 pending / TBC Kuwait Finance House KSCP Kuwait Banks Ahli United Bank KSCC Kuwait Banks [92,000] ongoing discussions 8 24/05/2018 pending / TBC Alizz Islamic Bank SAOG Oman Banks Oman Arab Bank SAOC Oman Banks [7,600] ongoing discussions 9 25/04/2017 pending / TBC Saudi British Bank KSA Banks Alawwal Bank KSA KSA [70,000] 1 22/11/2018 22/11/2018 Ajman Bank PJSC UAE Banks Shuaa Capital PSC UAE Other Fin. 2 22/04/2018 22/04/2018 Bank Aljazira JSC KSA Banks Ahli United Bank BSC Bahrain Banks 3 12/09/2017 20/09/2017 Banque Saudi Fransi KSA Banks Kingdom Holding Co KSA Asset Man. 4 25/12/2016 25/12/2016 Khaleeji Commercial Bank BSC Bahrain Banks Shuaa Capital PSC UAE Other Fin. 5 15/12/2016 15/12/2016 Emirates Lebanon Bank SAL Lebanon Banks Bank of Sharjah PJSC UAE Banks - 6 19/06/2016 30/03/2017 First Gulf Bank PJSC UAE Banks National Bank of Abu Dhabi UAE Banks 180,000 7 22/12/2015 15/06/2016 Finansbank AS Turkey Banks QNB Qatar Banks 3,083 Acquisition - Majority 8 21/05/2015 10/11/2015 Piraeus Bank Egypt SAE Egypt Banks Al Ahli Bank of Kuwait KSC 9 02/10/2014 02/10/2014 Int'l Bank of Qatar QSC Qatar Banks Undisclosed 10 04/09/2014 04/09/2014 Burgan Bank SAKP Kuwait Banks KIPCO Group 11 06/04/2014 01/09/2014 Barclays PLC - Retail Operations UAE Banks Abu Dhabi Islamic Bank PSJC 12 26/10/2013 26/10/2013 First Gulf Bk PJSC UAE Banks Aseel Finance Pvt JSC 13 18/07/2013 20/12/2016 Commercial Bank of Qatar QSC Qatar Banks Alternatifbank AS 14 23/06/2013 06/11/2013 First Gulf Bk PJSC UAE Banks Dubai First PJSC 15 22/05/2013 02/02/2014 Al Salam Bank Bahrain BSC Bahrain Banks BMI Bank BSCC 16 10/01/2013 04/02/2013 Qatar Foundation QSC Qatar Other Fin. Ahli Bank QSC 17 03/01/2013 09/05/2013 Dubai Islamic Bank PSJC UAE Banks 18 24/12/2012 18/07/2013 Commercial Bank of Qatar QSC Qatar Banks 19 20/12/2012 10/06/2013 Emirates NBD Bank PJSC UAE 20 12/12/2012 28/03/2013 QNB 21 30/08/2012 28/03/2013 QNB 22 30/08/2012 30/08/2012 QNB 23 27/06/2012 24/02/2013 24 10/04/2012 31/07/2012 25 02/04/2012 02/04/2012 26 09/01/2012 22/04/2013 27 11/10/2011 12/10/2011 28 06/10/2011 03/06/2012 29 21/08/2011 30 31 2-way or 3-way Merger? Merger Acquisition - Part Merger 27 Acquisition - Part 173 Acquisition - Part 1,536 Acquisition - Part 25 Acquisition - Part Acquisition Merger Kuwait Banks 150 Acquisition - Majority Unknown Brokerage 538 Acquisition - Part Kuwait Other Fin. - UAE Banks UAE Other Fin. - Acquisition Turkey Banks 223 Acquisition UAE Other Fin. 164 Acquisition Bahrain Banks 4,800 Qatar Banks 616 Acquisition - Part Tamweel PJSC UAE Other Fin. 127 Acquisition Alternatifbank AS Turkey Banks 449 Acquisition Banks BNP Paribas Egypt SAE Egypt Banks 500 Acquisition - Majority Qatar Banks Nat'l Societe Generale Bank SAE Egypt Banks 555 Acquisition Qatar Banks Nat'l Societe Generale Bank SAE Egypt Banks 1,974 Qatar Banks Commercial Bank Int'l PJSC UAE Banks - Ithmaar Bank BSC Bahrain Banks First Leasing Bank BSCc Bahrain Brokerage 164 Merger National Bank of Kuwait SAK Kuwait Banks Boubyan Bank KSC Kuwait Banks 435 Acquisition - Majority Bank of Sharjah PJSC UAE Banks Emirates Lebanon Bank SAL Lebanon Banks 75 HSBC Bank Middle East Ltd UAE Banks Lloyds Bank PLC - Onshore Assets UAE Banks - Acquisition of Assets Emirates NBD Bank PJSC UAE Banks Dubai Bank PJSC UAE Banks - Acquisition of Assets HSBC Bank Middle East Ltd Oman Banks Oman Int'l Bank SAOG Oman Banks 6,300 21/08/2011 Barwa Bank QSC Qatar Banks Int'l Bank of Qatar- Islamic Retail Qatar Banks - 16/03/2011 15/04/2011 Qatar Intl Islamic Bank QSC Islamic Bank of Britain PLC 26/02/2011 21/05/2013 National Bank Bahrain + SIO 32 02/12/2010 02/12/2010 34 08/07/2010 21/11/2010 35 16/06/2010 30/09/2010 Abu Dhabi Commercial Bank PJSC 36 05/04/2010 05/04/2010 37 01/01/2010 18/01/2011 38 01/01/2010 39 Qatar Banks Bahrain Banks + Central Bank of Libya Libya United Gulf Bank BSC Bahrain UAE Banks Central Bank of Libya Libya Govt Entity Arab Banking Corp BSC Qatar Investment Authority Qatar Govt Entity Qatar Int'l Islamic Bank QSC 14/03/2011 Qatar Investment Authority Qatar Govt Entity 31/12/2009 16/03/2011 Qatar Investment Authority Qatar 40 31/12/2009 31/12/2009 Qatar Investment Authority 41 19/10/2009 19/10/2009 Ministry of Finance 42 19/07/2009 19/07/2009 National Bank of Kuwait SAK 43 22/03/2009 22/03/2009 State of Qatar 44 23/02/2009 29/10/2009 Al-Salam Bank Bahrain BSC 45 26/01/2009 26/01/2009 Kuwait Investment Authority Kuwait Govt Entity 46 16/12/2008 16/12/2008 Commercial Bank of Kuwait KSC Kuwait Banks 47 16/11/2008 17/11/2008 Qatar Investment Authority Qatar Govt Entity 48 27/08/2008 27/08/2008 QNB Qatar 49 18/02/2008 18/02/2008 Ithmaar Bank BSC 50 04/11/2007 01/01/2008 Ithmaar Bank BSC 51 16/08/2007 07/04/2008 52 14/08/2007 52 17/07/2007 54 55 162 Acquisition - Part Acquisition of Assets Merger Acquisition Acquisition - Part Acquisition Merger Acquisition of Assets UK Banks 8 Acquisition Bahrain Islamic Bank BSC Bahrain Banks 92 Acquisition - Majority Govt Entity Arab Banking Corp BSC Bahrain Banks - Brokerage Burgan Bank SAKP Kuwait Banks - UAE Brokerage 100 Acquisition of Assets Bahrain Banks 377 Acquisition - Majority Qatar Banks 255 Acquisition - Part Qatar Islamic Bank SAQ Qatar Banks - Acquisition - Part Govt Entity Commercial Bank of Qatar QSC Qatar Banks 443 Acquisition - Part Qatar Govt Entity Ahli Bank QSC Qatar Banks - Acquisition - Part UAE Govt Entity Emirates Industrial Bank UAE Banks - Kuwait Banks Kuwait Banks 295 Qatar Govt Entity Bahrain Banks Royal Bank of Scotland NV- Retail Boubyan Bank KSC Comm'l Bank of Qatar - Equity pfo Acquisition - Majority Acquisition - Part Acquisition Acquisition - Majority Qatar Banks 258 Acquisition of Assets Bahraini Saudi Bank Bahrain Banks - Acquisition - Majority Gulf Bank KSCP Kuwait Banks 421 Acquisition - Part Boubyan Bank KSC Kuwait Banks 345 Acquisition - Part Doha Bank(QSC) Qatar Banks 404 Acquisition - Part Banks Commercial Bank Int'l PJSC UAE Banks 302 Acquisition - Part Bahrain Banks BBK BSC Bahrain Banks 327 Acquisition - Part Bahrain Banks Shamil Bank of Bahrain BSC Bahrain Banks - Commercial Bank of Qatar QSC Qatar Banks United Arab Bank PJSC UAE Banks 600 29/10/2007 National Bank of Kuwait SAK Kuwait Banks Al Watany Bank of Egypt SAE Egypt Banks 962 02/04/2008 National Commercial Bank SJSC KSA Banks Turkiye Finans Katilim Bankasi AS Turkey Banks 1,080 22/03/2007 16/10/2007 Emirates Bank Intl PJSC UAE Banks National Bank of Dubai Ltd UAE Banks 44,900 23/06/2006 16/08/2006 Ithmaar Bank BSC Bahrain Banks Shamil Bank of Bahrain EC Bahrain Banks 410 56 26/05/2006 26/05/2006 Commercial Bank of Kuwait KSC Kuwait Banks Bank of Bahrain & Kuwait BSC Bahrain Banks - Acquisition - Part 57 09/10/2005 09/10/2005 The Investment Dar Kuwait Other Fin. Bahrain Islamic Bank BSC Bahrain Banks 85 Acquisition - Part 58 14/05/2005 06/07/2005 Commercial Bank of Qatar QSC Qatar Banks Oman Banks 116 Acquisition - Part 59 08/03/2003 08/03/2003 Olayan Saudi Investment Co KSA Other Fin. Saudi Hollandi Bank SJSC KSA Banks 360 Acquisition - Part 60 03/01/2003 03/01/2003 Public Investment Fund KSA Govt Entity National Commercial Bank SJSC KSA Banks 1,866 Acquisition - Part 61 09/06/2001 09/06/2001 Commercial Bank of Bahrain Bahrain Banks Al-Ahli Commercial Bank Bahrain Banks 4,100 62 29/05/2001 29/05/2001 Kuwait Finance House KSCP Kuwait Banks National Bank of Sharjah UAE Banks - Acquisition - Part 63 18/03/2001 18/03/2001 Ahli United Bank Bsc Bahrain Banks Bank of Kuwait & the Middle East Kuwait Banks 133 Acquisition - Part 64 29/05/2000 30/03/2001 Bank Muscat Al Ahli Al Omani Oman Banks Commercial Bank of Oman Oman Banks 3,380 65 13/01/2000 13/01/2000 GOSI KSA Govt Entity KSA Banks - National Bank of Oman SAOG National Commercial Bank SJSC Acquisition Acquisition - Part Acquisition Acquisition - Majority Merger Acquisition - Majority Merger Merger Acquisition - Part SOURCES: IMF Article IV reports, Central Bank Financial Stability Reports, Moody's, Standard & Poor’s, Fitch, Bloomberg, Reuters and Public sources GCC Banks: Consolidate, Go Solo or Fail? 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8. ‘Acreditus Notes’ are thematic or event-driven pieces shared to provide credible and local insight and opinion into GCC credit and Islamic market developments. Acreditus is a strategic consultancy specialised in providing independent expert credit market, risk, rating and sukuk advisory focussed on GCC and Islamic Banks, Corporates, Sovereigns and their respective Investors to help them navigate the challenging credit environment. We can help build your regional and internal risk assessment capabilities as well as ensure a stronger risk profile for the rating agencies, investors, markets, national regulators and shareholders. About the Author Khalid Ferdous Howladar is the Managing Director of Acreditus. With over 25 years of credit, market and Sukuk finance experience. He is a global authority in his field and has provided over 100 briefings to emerging market investors and audiences at the World Bank, IMF, ECB, IIF, IsDB, AMF, ADIC, IFSB and the IILM amongst many others. His career spans many senior roles in Moody’s Investors Service and Credit Suisse in London and Dubai. Most recently he was Global Head – Islamic Finance and Head of the GCC Banking team. He has a MSc and BEng from Imperial College of Science, Technology and Medicine and a MSc from London Let’s keep in touch 7th Floor, Iris Bay Tower, Al Abraj Street, Business Bay, P.O. Box 48987 Dubai, UAE Business School. He has a passion for ‘inclusive capitalism’ and ‘empowering technology’. www.acreditus.com For the Latest Thinking & Ideas: Email: question@acreditus.com LinkedIN www.linkedin.com/in/khalidhowladar Register: research@acreditus.com Twitter www.twitter.com/khalidhowladar © 2019 Acreditus Strategic Management Consultancy, Acreditus Advisors, Acreditus Partners and/or their licensors and affiliates (collectively, “ACREDITUS”). UA E Trade License 773039. All rights reserved. Acreditus' publications are not intended for use by retail investors and it would be reckless and inappropriate for retail investors to use Acreditus' publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. All information contained herein is protected and remains property of ACREDITUS, and none of such information may be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any such purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person without ACREDITUS' prior written consent. All information contained herein is obtained by ACREDITUS' from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. ACREDITUS' adopts all necessary measures so that the information it uses in producing research is of sufficient quality and from sources ACREDITUS considers to be reliable including, when appropriate, independent third-party sources. However, ACREDITUS cannot in every instance independently verify or validate information received in the preparation of ACREDITUS publications. To the extent permitted by law, ACREDITUS and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information. To the extent permitted by law, ACREDITUS and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, wilful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency or beyond the control of,Go ACREDITUS' any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained GCCwithin Banks: Consolidate, Solo or or Fail? Invest Bank Bailout Implications for M&A and Government Support herein or the use of or inability to use any such information. 8