The proposed merger between Masraf Al Rayan and Al Khaliji will not only support profitability but also enlarge Islamic franchise and market share as well as give the required scale to support the retail banking and contain funding costs, according to Moody's, an international credit rating agency.

The merged entity would have total assets (conventional and Islamic) of around $45bn, or around 9% share of total banking system assets, the credit rating agency said in a note.

"The merged bank would have a larger Islamic franchise and market share, and therefore greater pricing power, which would support profitability. In addition, the larger scale will also help contain funding costs by enhancing the bank's deposit gathering ability," it said.

The proposed merger would be the second consolidation in Qatar's banking system after Barwa Bank merged with International Bank of Qatar in 2019 to create Qatar's third-largest Islamic bank and sixth-largest bank overall.

Masraf Al Rayan is currently Qatar's fourth-largest bank, with a 6% share of banking system assets at the end of December 2019. Al Khaliji is one of the smaller banks in Qatar, with a market share of around 3% of system assets as of the same date.

"The merger will be credit positive for Masraf Al Rayan because the combined entity will lead to creation of an Islamic bank with an improved market share of total assets and position it as Qatar's third-largest bank behind QNB and Qatar Islamic Bank," Moody's said.

The merged bank's product diversification would benefit from the banks' individual segment strengths, it found.

Masraf Al Rayan has a strong relationship with the Qatari government, with loans to the government and public-sector entities making up around 47% of its financing book at year-end 2019; while Al Khaliji has a solid corporate business, with loans to the government and public sector entities comprising around 17% of its financing book at year-end 2019.

With both Masraf Al Rayan and Al Khaliji focusing on retail banking, Moody's said the merged bank would have the required scale to support their retail banking business.

"If the merger goes ahead, Masraf Al Rayan will absorb Al Khaliji’s creditors, which would benefit from its stronger domestic government franchise and balance sheet," it said.

Masraf Al Rayan reports higher pre-provision income and net profitability, areas in which Al Khaliji compares "unfavourably" with domestic peers, the rating agency observed.

These potential benefits would need to be weighed against integration challenges that the merger may entail, as well as in light of the strategy the newly merged entity adopts, Moody's said.

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