* Masraf Al Rayan, Al Khalij Commercial Bank merger led to creation of one of the most important Shariah-compliant banks in Qatar and in Middle East, says KPMG
* Masraf Al Rayan, Al Khalij Commercial Bank merger led to creation of one of the most important Shariah-compliant banks in Qatar and in Middle East, says KPMG
Banks in GCC are looking to consolidate to strengthen their profitability against the backdrop of Covid-19 pandemic and volatile oil prices, KPMG has said in a report.
The year 2020 has been a challenging for banks operating in the region. For economies that are highly reliant on oil revenue, the volatile prices resulted in contractions in credit and equity markets along with global financial market developments and the underlying domestic vulnerabilities, KPMG noted.
Despite the banking sector soundness that provided an important cushioning in the GCC to the oil price decline since 2014, liquidity conditions have started to tighten due to the recent dual shock.
According to KPMG, the current unprecedented times of the pandemic have resulted in subdued business activity, especially for small and medium sized enterprise's (SME), which account for nearly 85%–90% of registered companies in the region. This has resulted in banks experiencing surge in non-performing loans or credit losses, further impacting net interest margins. In GCC, the overall net profit declined by 34.7%.
“Impact of Covid-19 coupled with volatile oil prices and low interest rates is having a significant effect on the core profitability of banks in the region. The increase in non-performing loans (NPLs) due to increasing cash flow stress of corporate and retail customers have further impacted return to the shareholders. Due to a combination of these factors, banking profits are expected to come under strain, raising concerns over the operating models of some financial institutions”, said Venkat Krishnaswamy, partner and head (Advisory) at KPMG Qatar.
The five largest banks in the region account for approximately 70% of the total assets.
The top five banks in Qatar have a market share (based on total assets as on December 31, 2020) of approximately 86%, while the remaining four banks constitute to a relatively smaller chunk of the total market, making it difficult to maintain profits especially in current scenario, KPMG noted.
Many small banks from the region can be seen turning to consolidation as a way to overcome any possibilities of economic fallout. Principally, a stronger bank will address the stakeholder’s concerns towards stability, solvency and liquidity.
“With global economy coming under stress leading to reduced profitability and coupled with increasing pressure by the regulators for capital requirements and compliance costs, we are witnessing a rising trend in the M&A activity in the banking industry with the latest one being Masraf Al Rayan entering into a merger agreement with Al Khaliji Commercial Bank”, noted Himanshu Bhatla, associate director at KPMG Qatar and lead for Masraf Al Rayan and Al Khaliji Commercial Bank merger transaction.
The year 2021 began with the announcement of Masraf Al Rayan and Al Khalij Commercial Bank entering into a merger agreement. This merger has led to the creation of one of the most important Shariah-compliant banks in Qatar and within the Middle East with combined assets worth around QR178bn as of December 31, 2020.
“The significant uptick within the global capital markets within the past few months, the economic support measures by the central banks and therefore the resilience shown by a number of the larger banks through the strength of their balance sheets has acted as a catalyst to absorb shocks and led to a recovery in banking stock valuations in the region”, says Karthik Jagadeesan, manager at KPMG Qatar and co-lead for Masraf Al Rayan and Al Khaliji Commercial Bank merger transaction.
Cross-border transactions are not likely in the near short term, the growing momentum in domestic M&A activity along with the normalisation in the geopolitical situation may set the scene for cross-border deals in the region over the medium term.
However, the lack of regulatory coordination remains a key barrier to cross-border M&A deals. While there is a great amount of risk associated with cross-border activities, with a proper due-diligence, institutions could consider such mergers as a way of strengthening their banking system and enhancing efficiency further, KPMG said.
Banks in GCC are looking to consolidate to strengthen their profitability against the backdrop of Covid-19 pandemic and volatile oil prices, KPMG has said in a report.
The year 2020 has been a challenging for banks operating in the region. For economies that are highly reliant on oil revenue, the volatile prices resulted in contractions in credit and equity markets along with global financial market developments and the underlying domestic vulnerabilities, KPMG noted.
Despite the banking sector soundness that provided an important cushioning in the GCC to the oil price decline since 2014, liquidity conditions have started to tighten due to the recent dual shock.
According to KPMG, the current unprecedented times of the pandemic have resulted in subdued business activity, especially for small and medium sized enterprise's (SME), which account for nearly 85%–90% of registered companies in the region. This has resulted in banks experiencing surge in non-performing loans or credit losses, further impacting net interest margins. In GCC, the overall net profit declined by 34.7%.
“Impact of Covid-19 coupled with volatile oil prices and low interest rates is having a significant effect on the core profitability of banks in the region. The increase in non-performing loans (NPLs) due to increasing cash flow stress of corporate and retail customers have further impacted return to the shareholders. Due to a combination of these factors, banking profits are expected to come under strain, raising concerns over the operating models of some financial institutions”, said Venkat Krishnaswamy, partner and head (Advisory) at KPMG Qatar.
The five largest banks in the region account for approximately 70% of the total assets.
The top five banks in Qatar have a market share (based on total assets as on December 31, 2020) of approximately 86%, while the remaining four banks constitute to a relatively smaller chunk of the total market, making it difficult to maintain profits especially in current scenario, KPMG noted.
Many small banks from the region can be seen turning to consolidation as a way to overcome any possibilities of economic fallout. Principally, a stronger bank will address the stakeholder’s concerns towards stability, solvency and liquidity.
“With global economy coming under stress leading to reduced profitability and coupled with increasing pressure by the regulators for capital requirements and compliance costs, we are witnessing a rising trend in the M&A activity in the banking industry with the latest one being Masraf Al Rayan entering into a merger agreement with Al Khaliji Commercial Bank”, noted Himanshu Bhatla, associate director at KPMG Qatar and lead for Masraf Al Rayan and Al Khaliji Commercial Bank merger transaction.
The year 2021 began with the announcement of Masraf Al Rayan and Al Khalij Commercial Bank entering into a merger agreement. This merger has led to the creation of one of the most important Shariah-compliant banks in Qatar and within the Middle East with combined assets worth around QR178bn as of December 31, 2020.
“The significant uptick within the global capital markets within the past few months, the economic support measures by the central banks and therefore the resilience shown by a number of the larger banks through the strength of their balance sheets has acted as a catalyst to absorb shocks and led to a recovery in banking stock valuations in the region”, says Karthik Jagadeesan, manager at KPMG Qatar and co-lead for Masraf Al Rayan and Al Khaliji Commercial Bank merger transaction.
Cross-border transactions are not likely in the near short term, the growing momentum in domestic M&A activity along with the normalisation in the geopolitical situation may set the scene for cross-border deals in the region over the medium term.
However, the lack of regulatory coordination remains a key barrier to cross-border M&A deals. While there is a great amount of risk associated with cross-border activities, with a proper due-diligence, institutions could consider such mergers as a way of strengthening their banking system and enhancing efficiency further, KPMG said.