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Virus forcing GCC banks to hasten consolidation

6 Oct 2020

A recession triggered by the COVID-19 pandemic and low oil prices will accelerate the mergers and acquisitions (M&A) in the GCC banking sector, Moody’s Investors Service said on Tuesday.

“The banks now face larger cost adjustments as low oil prices and the coronavirus fallout constrain growth opportunities and severely dent their profitability,” said BadisShubailat, analyst at Moody’s. “This is prompting a new wave of mergers as banks seek ways to combat revenue pressure.”

Moody’s in a new report said that the merger deals willbe increasingly motivated by pure financial considerations. Bank consolidation in the 

GCC region has so far largely involved shareholders (typically the government and related entities) consolidating their positions in different banks amid weakening operating conditions.

‘Pressures building from the oil price and pandemic shocks will increasingly drive purely financially driven transactions, particularly among smaller banks crowded out by larger competitors,’ the global ratings agency said. 

Operating efficiency for the GCC banks, Moody’s said, will be key to maintaining profitability. The twin challenges of the pandemic and protracted low oil prices will hit banks’ profitability through slower credit growth, slimmer net interest margins and higher provisioning for bad loans.

‘The revenue shock will shift management attention to cost discipline and consolidation opportunities. Mergers and acquisitions will remain a recurring credit theme over coming years,’ Moody’s said.

The new era of low prices since 2014 will continue to present lower economic growth and fewer business opportunities for the banks in the Gulf Cooperation Council.

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