Middle Eastern fintechs and neobanks are attracting investment from overseas, as the wave of mega-mergers among the region’s largest lenders grinds to a halt.

The pace of deal-making across the Middle East has been little affected by the global coronavirus pandemic. Even as economic growth fell to multi-year lows in 2020, data from Dealogic demonstrates that the volume of agreed deals remained constant, even if values slipped back from the highs recorded the previous year.

Economic recovery in 2021 — prompted by easing Covid-19 restrictions and resurgent oil prices — has propelled the number of deals struck in the region to a five-year high, with the combined value coming in just below the highs of 2019 (see figure 1).

Yet economic recovery in the region has, by contrast, had a dampening impact on merger and acquisition (M&A) activity within the banking sector. After five years of giddy deal-making, the Middle East’s great banking consolidation wave appears to have crested with the merger of Saudi Arabia’s National Commercial Bank (NCB) and Samba Financial Group, completed in April 2021.

While 2021 saw plenty of activity within the banking deal space, the size of the deals announced is markedly lower than has been witnessed in the past five years, creating a new class of megalenders. Of the five largest lenders in The Banker’s Top 25 Middle Eastern Banks rankings for 2021, four have been involved in a merger in the past five years.

“It looks like this wave came to an end with the merger of NCB and Samba Financial Group,” says Mohamed Damak, a senior director at S&P Ratings in Dubai. “At this stage, we do not expect to see any major deal in the next 12–24 months, as there are no indications of such deals.”

Most analysts in 2021 predicted an ongoing wave of consolidation in the sector amid tough competition in over-banked markets; however, higher oil prices, fewer Covid-related lockdowns and the prospect of an uptick in infrastructure spending have taken the pressure off smaller lenders.

“As the environment is improving, there will be less pressure on banks and management to consolidate,” says Mr Damak.

Perhaps as significant as the slowdown in major consolidations among the region’s major lenders is the rise of activity within the local fintech sector. With Covid-related restrictions prompting a boom in the use of digital financial services, 2021 saw significant funding and M&A activity among neobanks and buy now, pay later (BNPL) service providers, highlighting key trends in the evolution of financial services in the region.

The last of the big deals

First announced in October 2020, NCB’s SR55.7bn ($14.8bn) acquisition of Samba completed in April 2021, creating Saudi National Bank (SNB), only the second merger in recent years in Saudi Arabia. By combining the country’s largest and fourth-largest banks, SNB has overtaken Dubai’s Emirates NBD to become the region’s third-largest lender by assets behind Qatar National Bank and First Abu Dhabi Bank (FAB).

With the Saudi government retaining a 50.4% stake in SNB via the Public Investment Fund, the bank is set to be one of the main beneficiaries of the country’s ambitious Vision 2030 economic and social transformation programme.

“[SNB] is well-positioned to benefit from capital expenditure spend M&A synergies, and ongoing growth of the home loan market,” said Arqaam Capital in a recent research note.

In early February, the bank reported an 11% increase in net profits for 2021, with income from special commissions, financing and investment activities prompting a 32% rise in operating income. The previous month saw the bank sell $750m worth of sustainable sukuk, earmarked for projects including renewable energy facilities and other green projects.

Of the few major banking deals announced in the Gulf in 2021, the standout was the acquisition by Qatar’s Masraf Al Rayan of smaller domestic rival Al Khalij Commercial Bank. After negotiations between the two lenders began in mid-2020, the $45bn merger was formally announced in January 2021 and was completed in December.

The merger cements Masraf Al Rayan’s position as Qatar’s second-largest Islamic lender behind Qatar Islamic Bank, and sees it overtake Commercial Bank of Qatar to become the country’s third-largest lender by assets. The tie-up is only the second in Qatar’s history, and follows the coming together of Barwa Bank and International Bank of Qatar to create Dukhan Bank in 2019.

Consolidation among the region’s smaller players is continuing into 2022; Bahrain’s ninth-largest lender Salaam Bank agreed in January 2022 to acquire the consumer banking business of Ithmaar Bank, the seventh-largest bank, after commencing discussions in October 2021. Sharia-compliant lender Ithmaar has long courted a buyer for its retail assets, signing an initial memorandum of understanding with fellow Bahraini lender Bank of Bahrain and Kuwait in September 2020, before ending talks in July 2021.

Minor UAE consolidation

The UAE has been the main theatre of banking sector consolidation during the past five years, beginning with the coming together of First Gulf Bank and National Bank of Abu Dhabi to create FAB in 2017. Other landmark deals include Abu Dhabi Commercial Bank’s (ADCB) absorption of Union National Bank and Al Hilal Bank, and Dubai Islamic Bank’s acquisition of Noor Bank.

UAE’s banks experienced a quieter year in 2021, with deals confined to the minor consolidation level, often involving non-core assets in overseas markets.

ADCB, the country’s third-largest lender behind FAB and Emirates NBD, in February announced the acquisition of a mortgage portfolio worth Dh1.13bn ($307.6m) from local finance firm Abu Dhabi Finance (ADF). Around three-quarters of the portfolio are residential mortgages, with around half secured against property in Abu Dhabi and the others scattered across the other emirates.

The acquisition strengthens ADCB’s real estate portfolio at a time when real estate prices in the country — which had seen a steady decline since 2014 — turned a corner in 2021, spurred on by work-from-home trends, more attractive yields and reforms to the country’s visa regime. Yet concerns remain about the staying power of the recovery, with significant additional supply set to come later this year.

The announcement of ADCB’s ADF acquisition came a month after FAB completed the acquisition of Bank Audi’s branch network in Egypt for an undisclosed sum. In the same month, fellow Lebanese lender Blom Bank sold its operations in Egypt to Bahrain’s Bank ABC for $480m.

The divestments come amid unprecedented pressure on Lebanese lenders in the midst of the country’s worst financial crisis in history, with new capital requirements introduced in August 2020 obliging lenders to trim non-core assets. Despite such pressures, there have been no mergers announced between the country’s banks to date.

Of the assets divested by Lebanese banks, their operations in Egypt have been among the most appealing for would-be suitors. Despite a slowdown in 2020, the country remains one of the fastest growing major economies in the Middle East and Africa, with president Abdel Fattah el-Sisi recently pledging to take steps to encourage growth in the country’s beleaguered private sector.

“Continued infrastructure investments and robust spending will support economic growth, while initiatives to deepen financial inclusion will provide ample business opportunities for banks,” said Moody’s Investor Service in a February research note. “Rapid loan growth, combined with lower loan-loss provisioning needs, will push profitability slightly higher, despite rising operating costs and high tax rates.”

In the past year, UAE-based Shuaa Capital sold off its remaining 13.64% shareholding in Bahrain’s Khaleeji Commercial Bank (KHCB) — held both directly by Shuaa and via its Goldilocks fund — to Bahrain’s GFH, for around $17m.

The sale of its shares in KHCB — Bahrain’s 12th-largest lender by assets, which specialises in real estate finance — is part of Shuaa’s ongoing divestment of non-core assets, and took GFH’s shareholding in the lender to more than 69%. GFH subsequently submitted a voluntary conditional offer to acquire the remainder of KHCB’s shares in November 2021.

Jassim Alseddiqi, Shuaa’s CEO who also serves as GFH’s chairman, increased his direct stake in Shuaa Capital in July to just under 30%. The value of the transaction, which was executed via a ‘special deal’ on the Dubai Financial Market, was not disclosed.

Outside of the Gulf, French development finance institution Proparco announced a $12m investment in Bank of Palestine in July, in return for a 3.33% stake. The investment, made through Proparco’s parent Agence Française de Développement’s Fonds d’investissement et de soutien aux entreprises en Afrique, was earmarked to provide small and medium-sized enterprise (SME) financing in the territory, with more than 200 SMEs set to benefit.

Digital deals

One of the most important deals to occur in the UAE’s banking sector in 2021 was the April acquisition of defunct lender Dubai Bank by UAE-based investment firm Eradah Capital — again for an undisclosed sum. The purchase of the assets of Dubai Bank from Emirates NBD was made with a view to using its licence to launch Zand, one of the country’s first standalone digital banks, its CEO Olivier Crespin told The Banker earlier this year. Zand, which is chaired by Mohammed Alabbar, the founder of Dubai-based property giant Emaar Properties, is expected to begin offering services by the end of the first quarter.

A similar strategy is understood to be being deployed by Abu Dhabi-based investment firm ADQ, which is reported to be using one of the banking licences freed up by the merger of National Bank of Abu Dhabi and First Gulf Bank in 2017 to launch its own digital lender, Wio. The new lender, whose other shareholders include investment company Alpha Dhabi, FAB and local telco Etisalat, plans to launch a beta version of its app for SMEs in the coming months. 

Another neobank set to launch early in 2022 is Israel’s One Zero. The brainchild of Amnon Shashua, the founder of autonomous driving systems company Mobileye (acquired by Intel in 2017 for $15.3bn), the lender is the country’s first standalone digital bank and its first new entrant in 40 years.

The bank announced $120m worth of Series A funding in December 2021, valuing the company at around $320m. Tencent, Julius Baer and Japan’s SBI were among the investors to participate in the funding round. Initially licensed in 2019, One Zero received final approval to begin operations in January and is expected to launch services in the coming months.

The rise of BNPL

As consolidation within the mainstream lenders in the region slows, focus is set to turn increasingly to the region’s fintech ecosystems, with newer digital players attracting growing attention from investors both inside and outside the region. Western Union’s acquisition in November 2020 of a 15% stake in Saudi-based stc Bank — which upended Saudi Arabia’s local payments market under its previous brand, STC Pay — was an early marker of the sort of outside interest in the sector.

Much of the deal activity within the fintech space in 2021 was perhaps unsurprisingly concentrated in the UAE. The country’s start-ups accounted for 26% of all funding transactions across the Middle East and north Africa (excluding Israel) and 45% of all capital deployed during the year, according to regional start-up data platform Magnitt.

Funding hit a new high in 2021 in the UAE, with fintech and e-commerce players accounting for 36% of all transactions registered in the country during the year.

Of particular note has been the rise in recent years of BNPL providers, catering to young populations with high levels of disposable incomes in the UAE and wider Gulf region, which have already attracted the interest of overseas investors.

In May, Australia’s Zip acquired Dubai-based BNPL provider Spotii for an enterprise value of $20m, building on its existing 20% stake in the firm. Founded in 2019, Spotii is active in the UAE, Saudi Arabia and Bahrain, offering services to more than 700 merchants.

Fellow Dubai-based BNPL provider Tabby, which began operations in 2020, announced in August $50m worth of Series B funding from investors including Global Founders Capital and STV, valuing the company at $300m. Tabby was founded by Hosam Arab, formerly CEO of e-commerce fashion retailer Namshi, acquired by bricks and mortar retail giant Emaar Malls in 2019.

In a move echoing Namshi’s acquisition, UAE-based business conglomerate Gargash Group, owner of local asset manager Daman Investments, in September announced the acquisition of Abu Dhabi-based digital financial services firm Deem Finance, which provides personal loans, credit cards and wholesale deposit products for corporate clients. The value of the transaction was not disclosed.


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