The historic oil price crash and Covid-19 pandemic have left major producers of the commodity in a deep economic crisis. Dramatic production cuts by OPEC+ has exacerbated the situation by further lowering export inflows for economies that depend heavily on oil dollars. Some, such as the UAE, have tried to put on a brave face by touting the strength of their banking systems and claiming they can withstand shocks of any scale.
Unfortunately, a growing body of evidence suggests pretty much the opposite: A wave of banking mergers is sweeping through the Middle East as the sector scrambles to stay afloat amid slowing economic growth.
About $440 billion worth of deals are already on the table. That’s a remarkable feat for a region that has the lowest banking penetration anywhere on the globe.
Interestingly, Saudi Arabia–guilty of initiating the oil price war with Russia that triggered the oil price crash–is well represented in the growing trend.
Source: World Bank
#1 Saudi Arabia The National Commercial Bank, Saudi Arabia’s largest lender by assets, has lined up a $15.6 billion takeover bid for rival Samba Financial Group. The $15.6B tab represents a nearly 30% premium to Samba’s valuation before the deal was announced, while the potential deal will create a $210 billion (assets) behemoth.
The Saudi Arabian Monetary Authority, the Kingdom’s central bank, has unveiled nearly $27 billion in stimulus packages to support its flagging banking system suffering from years of weak private sector loan growth. The Kingdom’s oil and gas sector accounts for 50% of GDP and 70% of export earnings. The IMF has estimated Saudi Arabia’s fiscal breakeven sits at $76.1 per barrel, a far cry from the current ~$40/bbl.
Related: U.S. Natural Gas Production, Consumption And Exports Hit Record In 2019
The Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, is looking to complete other such mergers to make the sector more competitive. The PIF is NCB’s and Samba’s largest shareholder with a 44% and 23% slice of NCB and Samba, respectively.
In June, Qatar’s Masraf Al Rayan QSC and Al Khalij Commercial Bank PQSC kicked off initial negotiations to merge their operations. The potential merger could create a combined entity with more than $45 billion in assets as well as one of the largest Sharia (Islamic) compliant banks in the region. The deal follows the 2018 tie-up between the country’s Barwa Bank and International Bank of Qatar that saw the proposed three-way merger with Masraf Al Rayan abandoned.
Qatar is the world’s 17th largest producer of oil, pumping 1.5 million barrels of the commodity per day. The country’s economy is heavily reliant on oil, with petroleum and natural gas accounting for more than 60% of GDP, 85% of export earnings, and roughly 70% of total government revenue. Nevertheless, the IMF has tapped Qatar as one of only seven countries expected to run a budget surplus in the current fiscal year thanks to heavily scaling back capital spending.
Source: The Print