By Maria Lovin, Carlos Asorey, Adam Butlin and Steven Skorma (UCL and Georgetown University) - Date: 16/02/2019
Overview of the deal
Acquirer: Abu Dhabi Commercial Bank PJSC (ADCB:ADX)
Target: Union National Bank PJSC (UNB:ADX)
Estimated value: $114.0bn
Announcement date: 28th January 2019
Acquirer Advisors: Barclays, Allen & Overy LLP, KPMG
Target Advisors: JPMorgan, Clifford Chance LLP, EY
The UAE banking sector is set to have a powerful new banking group following the decision of Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) to merge and together to acquire Al Hilal Bank. After confirmation of ‘exploratory talks’ regarding a statutory merger between ADCB and UNB on 3rd September last year, their shares have climbed 32% and 48% respectively. This follows a merger between the National Bank of Abu Dhabi and First Gulf Bank in April 2017 to form First Abu Dhabi Bank (FAB) amid a wave of mergers in similar sectors in an attempt by large companies to insulate themselves from the impact of lower oil prices and strong competition from an overcrowded market – 49 banks serve just 9.6 million people.
This new banking group will serve around one million customers, operating under ADCB’s corporate identity though Al Hilal will retain its name and operate as a separate Islamic banking division within the group. ADCB is to issue 0.5966 ADCB shares for each UNB share, a total of 1,641,546,697 new shares issued to UNB shareholders. The deal was recommended unanimously by both boards but is waiting on regulatory and shareholder approval. The deal is ambitiously set for completion in the first half of the year.
"The merger of Abu Dhabi Commercial Banks, Union National Bank and Al Hilal Bank is in line with the UAE's economic vision, to form powerful banking groups with human potentials and financial capabilities that would enhance the national economic competitiveness and its future aspirations.” - Highness Shaikh Mohammed Bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces
Company Details (ADCB)
The Bank is a United Arab Emirates-based public joint stock company that provides retail, commercial, investment, merchant, brokerage and fund management activities through its network of 48 branches in the United Arab Emirates and abroad: 2 branches in India and 1 in the UK.
- Founded in 1985, headquartered in Abu Dhabi, UAE - Chair: Eissa Mohamed Al Suwaidi CEO: Ala’a Eraiqat
- Number of employees: 5,100
- Market Cap: $13.44bn
- LTM Revenue: $3.81bn - LTM P/B: 1.71x
- Shares Outstanding: 5.2bn
- LTM P/E: 10.54x - LTM P/S: 3.46x
Company Details (Union National Bank)
Union National Bank engages in commercial and investment banking activities. The bank offers a variety of products and services, addressing needs ranging from basic requirements of individuals to the more complex requirements of corporate entities. Its extensive network of banking centres encompasses over 56 locations across all the Emirates.
- Founded in 1982, headquartered in Abu Dhabi, UAE - Chair: Nahayan Mabarak Al Nahayan CEO: Mohammad Nasr Abdeen
- Number of employees: 2,073
- Market Cap: $3.93bn
- LTM Revenue:$1.36bn
- LTM P/B: 0.85x
- Shares Outstanding: 2.75bn
- LTM P/E: 9.82x - LTM P/S: 2.56x
Projections and Assumptions
Short term consequences
Initial investor excitement followed the announcement of the proposed merger with ADCB shares rising 13% and UNB shares rising 15% within the first 24 hours. This created billions in market value as ADCB’s market capitalization rose by 5bn dirhams while that of UNB climbed by 1.5bn dirhams. On the day of completion, all outstanding UNB shares on the Abu Dhabi Securities Exchange will be delisted and UNB will operate under ADCB’s retained identity. However, Al Hilal bank will likely continue to operate as a separate Islamic entity within the merged bank retaining its own name once merged.
Following the completion of the deal, the new combined entity will hold a total of 420 billion United Arab Emirates (UAE) dirham ($113.35 billion) in assets which will make it the fifth largest bank within the Gulf Cooperation Council and the third largest among UAE lenders. This will effectively confirm the UAE’s status as the largest and most significant banking hub among countries in the GCC as it will hold three of the Council’s largest banks. A projected 900 million to 1 billion dirhams ($245 - $272 million) in synergy revenue is expected within three years as a result of the merger. Infrastructure and technology costs will immediately be cut helping to create this revenue due to the large scale of the combined bank.
The Abu Dhabi Investment Council (ADIC), an investment arm of the Abu Dhabi government, is a current investor in all three banks, holding roughly 63% of ADCB’s shares, 50% of UNB’s, and 100% of Al Hilal’s. The ADIC will hold 60.2% of the combined company shares with ADCB investors holding 28% and UNB shareholders with the remaining 11.8%. Since the ADIC holds such a large stake in all three banks, the regulatory and approval process of the three entities is expected to be eased behind such a strong political and governmental backing from Abu Dhabi. This 3-way merger will help ADCB and UNB to compete against First Abu Dhabi Bank (FAB), which has been dominant since its most recent acquisition in 2017.
Long term upsides
Many banks in the GCC and Persian Gulf region have been involved in consolidation efforts in the region over the past decade as the market has been overbanked for the current population size for some time. Recent large-scale mergers have allowed banks to increase productivity and profitability through economies of scale helping to cut technology and security costs, while also boosting the competitiveness of individual countries’ economies. This was seen in the 2017 creation of First Abu Dhabi Bank in the UAE between First Gulf Bank and National Bank of Abu Dhabi. Additionally, the consolidated banks are able to develop new digital products and increase cybersecurity through newly generated revenue. Merger activity in this industry has increased in recent years as a result of falling oil prices as of 2014 (about a 50% drop), weak macroeconomic growth, rising costs of funding, and increased political backing, which are likely driving forces behind this three-way merger of ADCB, UNB, and Al Hilal. If completed, other banks may look to its success as an incentive for further mergers throughout the region in the overbanked market.
In terms of integrated power, ADCB is currently twice as large as both UNB and Al Hilal combined, so it is expected to be the dominant force of the three banks in the completed merged entity. Additionally, the merger is likely to put an estimated 1,000 jobs at risk due to certain branch closures among the three banks to cut costs if completed. Long term, this layoff could impact other non-oil sectors such as real estate and healthcare amidst low consumer demand and even force migration of foreign workers. If future consolidation is to continue, increased layoffs could have negative long-term impacts of other industries in the region.
Some initial profit losses are expected as a result of the integration process, but long-term revenues and cost cuts will likely benefit all involved parties. Additionally, no significant changes are expected for banks’ clients since they will continue to operate separately over a period of gradual integration.
Risks and Uncertainties
The UAE banking sector remains overcrowded with ever increasing funding and compliance costs, coupled with subdued economic growth due to falling oil prices. Hence, despite the greater scale, cost savings, and improved profitability of the combined entity, the very issues the merger is seeking to protect against could still easily damage even the more financially robust and efficient mega-lender. It should also be noted that unless much preliminary work has already been done, completion will likely take longer than the six months proposed. Moody’s considers the deal to be credit neutral given the similar and complementary credit profiles of ADCB and UNB. However, Moody’s noted that the combined bank's future profit will be initially dented by non-recurring integration costs before benefiting from anticipated expense and revenue synergies. Furthermore, the integration of Al Hilal will involve the adoption of a higher proportion of sub-prime loans than ADCB or UNB currently hold, though the post-merger sub-prime to gross loans ratio will be 4.2%, nearly one percentage point lower than the UAE average.
Striking a balance between maintaining quality customer service - a significant part of their future growth vision - through employee count and cutting jobs to realise the substantial synergies proposed could offer significant challenges to ADCB management, especially in light of disruption to customer service as a direct result of the merger.
Major bank mergers such as this can also lead to some customers switching to other banks. According to the 2017 Retail Banking Satisfaction Study by the global marketing firm JD Power, 46 per cent of respondents whose bank went through a merger within the previous 12 months reported they would definitely switch banks. Service disruption or deterioration, potential fee increases, and closure of bank branches are of great concern to existing customers.
“Consolidation is being driven by a combination of lower oil prices, which have slowed economic growth, and stiff competition as numerous banks serve small populations. We believe the trend will be beneficial for the sector, boosting profitability through operational synergies and giving the banks greater pricing power.” - Ashraf Madani, Senior Analyst at Moody’s
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