Oil Prices And The Pandemic Will Force Gulf Banks To Merge
The low oil prices and the coronavirus pandemic have increased the financial pressure on the banks in the Gulf region, which will be looking at more mergers and acquisitions opportunities at times of decreased profitability, Moody’s Investors Service said in a report on Tuesday.
The six countries in the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are major producers of oil and gas, and their economies have suffered from the double whammy of the crash in oil prices and the COVID-19 pandemic.
The GCC group of countries comprises OPEC’s top producer Saudi Arabia, the third-largest producer, the UAE, and the fourth-biggest OPEC producer, Kuwait.
“The banks now face larger cost adjustments as low oil prices and the coronavirus fallout constrain growth opportunities and severely dent their profitability,” Moody’s analysts Badis Shubailat said.
“This is prompting a new wave of mergers as banks seek ways to combat revenue pressure,” Shubailat added.
Financial considerations, especially among smaller banks, will be the key motivator of the rising number of merger deals in the bank sector in the region, according to Moody’s.
The wave of banking mergers in the Middle East has always started, with US$440 billion worth of deals already on the table as of July this year. Saudi Arabia has lined up a US$15.6-billion takeover bid from National Commercial Bank, Saudi Arabia’s largest lender by assets, for rival Samba Financial Group.
The pandemic has significantly slowed down the economies of all major oil producers in the Middle East, while the oil price crash—which Saudi Arabia helped to create when it flooded the market with oil in April—has markedly decreased oil revenues for the oil-dependent economies in the region.
Saudi Arabia’s economy, for example, shrank by 7 percent, with the unemployment rate hitting a record high in the second quarter as the combined effect of the oil price crash and the coronavirus pandemic hit the world’s largest oil exporter hard.