Mergers and acquisitions could help improve the sector outlook despite COVID-19

Qatar’s almost saturated banking market could see more consolidation due to the low profitability of banks triggered by the COVID-19 pandemic, particularly those with weaker franchises and limited pricing power, according to global ratings agency, Fitch.

Banks are also consolidating to create better capitalised institutions and improve competitive advantages to support the Qatar National Vision 2030.  

The recently agreed merger for Al Khaliji Bank and Masraf Al Rayan bank is a prime example of the trend. The merger will create Qatar’s largest Shariah-compliant bank by total assets, worth QAR. 172bn after Al Khaliji’s business is absorbed by Al Rayan. 

This will be the second merger in Qatar between an Islamic bank and a conventional bank after Islamic Bank Dukhan and International Bank of Qatar (IBQ) merged in April 2019.

Al Rayan will issue 0.50 Al Rayan shares for every Al Khaliji share, corresponding to a total of 1,800 million new shares issued to Al Khaliji shareholders, as both banks are currently publicly traded and listed on the Qatar Stock Exchange. 

Qatari bank mergers could generate cost synergies that alleviate pressure on profitability from low profit margins and higher loan impairment charges due to the pandemic. 

Dukhan’s cost-to-income ratio decreased to 32% from 38% in 2018 after the bank realised 90% of its planned cost synergies from its merger. Masraf Al Rayan’s merger should result in a cost-to-income ratio of about 20%, comparing well with peers.

Mergers can also increase banks’ asset quality risks from collateral valuations, changes in loan classification policies and building provisions against purchased credit-impaired assets. 

Dukhan’s Stage 2 financing ratio increased to 19% from 14%, largely due to the reclassification of some of IBQ’s loans that had been recorded as Stage 1 at the time of the merger.

In a nutshell, financial experts believe there were too many banks in the Qatari market for too few customers, the banks themselves have realised this and as a result several of them have chosen to merge, thereby reducing their expenses and costs while staying competitive. 

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