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More M&As among GCC banks in wake of pandemic, low oil prices

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Banks in the Gulf Cooperation Council (GCC) region will increase mergers and acquisitions because of the coronavirus crisis and prolonged low oil prices, Moody’s Investors Service said in a report 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 Badis Shubailat, an analyst at Moody’s.

“This is prompting a new wave of mergers as banks seek ways to combat revenue pressure.”

The rating agency report suggested that merger deals will be increasingly motivated by purely 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.

Operating efficiency 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, while mergers and acquisitions will remain a recurring credit theme over coming years, the Moody’s report concluded.