Mergers: Turbocharging Growth!

By Adnan Ahmed Youssef 

Around 15 years ago, particularly in the aftermath of the 2008 global crisis, I began writing occasional articles underscoring the significance of banking mergers.

The crisis underscored the imperative need to capitalize on this strategic approach, with our discussions at that time delving into various vulnerabilities identified in banks that experienced collapses or significant losses.

Factors such as weak capital, insufficient liquidity, and excessive indebtedness emerged as direct catalysts, prompting a deeper examination of the merger landscape. Over the ensuing years, the impetus for mergers has gained momentum, buoyed by the successive introduction of Basel 3 regulations.

These regulations imposed a myriad of requirements on banks concerning capital adequacy, liquidity, and operational risk management. Consequently, the application of the International Accounting Standard (9) has become integral, necessitating the fortification of banks’ capital through avenues like new capital issuances or mergers.

Simultaneously, the rapid strides in technological and digital transformation have become pivotal in shaping the future landscape of global banking services.

This paradigm shift demands substantial investments in systems, personnel, technologies, and innovations, compelling both small and large banks to contemplate the prospect of mergers. The current discourse revisits this topic in light of the recent announcement of the NBB and BBK intending a merger.

This development comes on the heels of several mergers and acquisitions observed in the local market in recent years, underscoring the dynamism and maturity of the Bahraini banking sector.

In the face of a fiercely competitive market locally, regionally (within the Gulf and the Arab world), and globally, there is a substantial need for a strategic repositioning to ensure sustained growth and expansion.

Noting that Bahrain stands among the pioneers in experiencing banking mergers, with the Central Bank of Bahrain playing a pivotal role in bolstering the regulatory and financial environment to catalyze such operations.

Against the backdrop of extensive economic and financial reforms in the Kingdom, mergers and acquisitions have emerged as pivotal drivers of economic growth, both within the merged banks and at the macroeconomic level.

It’s widely recognized that the ongoing reforms are anchored in expanding the role of the private sector, fostering the attraction of foreign investment, and catalyzing the growth of nascent economic sectors, particularly in the sectors of innovation, entrepreneurship, and small-scale enterprises.

These evolving economic dynamics necessitate the establishment of robust financial, commercial, and industrial entities that spearhead transformational processes across various sectors. In recent years, Gulf banks have embarked on a robust trajectory of acquisitions and mergers, aiming to bolster their competitiveness in global markets, ramp up investments in technological transformation, streamline costs, mitigate financial and commercial risks, and access untapped markets.

These strategic maneuvers also underscore the substantial economic prowess of Gulf economies, with several regional companies attaining global prominence. Consequently, the region is poised to witness a surge in mergers and acquisitions across diverse sectors such as industry, agriculture, and public services.

In this transformative landscape, banking mergers and acquisitions serve as catalysts for a myriad of factors.

They foster the integration of strengths, address weaknesses within merged entities, bolster their capacity to finance large-scale development projects, expand digital banking services, and facilitate forays into green initiatives and support for SMEs. Notably, governmental and regulatory directives emphasize the retention of employees post-merger, ensuring job continuity without downsizing.

Moreover, profitability, market dynamics, competition, and technological advancements stand out as additional drivers of bank integration.

While the overall health of the GCC banking sector remains robust, margin pressures necessitate the consolidation of banks into larger, more competitive entities. The proliferation of over 100 commercial banks in the Gulf countries, catering to a population of 55 million, underscores the significance of consolidation efforts in optimizing resources vis-à-vis population size.

Furthermore, the imperative to contend with digital disruptions compels banks to make substantial investments, a feat that may be better achieved through strategic mergers.

(Adnan Ahmed Youssef is Chairman of Bahrain Association of Banks and former President of the Union of Arab Banks)