Moody’s Expects Rise of M&A Activity in GCC

Banks in the GCC states will witness a rise in merger and acquisition activity enabling future synergies and oil revenue divergences in the region, said global rating agency Moody’s. The ongoing and long-standing alliances among GCC banks will enable larger scale banking in the region in the coming decade, stated Moody’s. ‘‘Consolidation among GCC region banks brings scale to support the diversification of GCC states economies away from oil, and benefits in revenue and cost synergies.” said Francesca Paolina, Analyst at Moody. The ratings agency noted that this development will occur despite the region’s pre-existing strong bank financial fundamentals and their modest level of over-banking. “GCC banks’ shareholder structure is concentrated in a pool of state-linked entities and groups – which facilitates tie-ups between lenders, and means mergers and acquisitions will continue,’’ added Paolina.

Since large banks sponsor substantial projects in the region, they increase their scope of control through M&A. This will better equip them to compete in the international arena. The largest five banks in each GCC economy have a combined market share of 60%-90% of sector loans as of June 2022. This increased from 50%-80% in 2010. In addition, “merged banks will gain pricing power, enhancing their deposit-gathering ability and pushing up net interest income,” stated Moody’s. The agency added that the M&A growth will help offset the rising operating expenses, and boost cost-efficiency further. With the majority of mergers in the last five years involving Islamic banks, the M&A growth will cultivate this break-through of Islamic banking in the region. Large-scale economic diversification initiatives, specifically in Saudi Arabia, are reaching the construction stage, requiring the region’s banks to expand to support these schemes.