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Satyendra Pathak
Doha
The merger agreement between Qatari lenders Barwa Bank and International Bank of Qatar (ibq) will be beneficial for the banking sector in Qatar, Moody's Investors Service has said in its latest report.
According to the report, the merger is a positive sign for Qatari market where intense competition has affected profitability of banks.
The merger would help to rebalance the Qatari banking sector, where currently 18 banks serve a population of 2.6 million.
While it is too early to assess the overall impact on the merged banks, Moody's said, it expect the new entity could face considerable integration challenges.
"The final structure and strategy of the enlarged bank is as yet unknown, but it is likely to alter the group's overall risk profile, both in terms of solvency including capital and profitability and liquidity including liquid assets and access to funding," the report said.
"The merger will create the ninth-largest Islamic bank in the Gulf Cooperation Council (GCC) and we would expect it to benefit from the growth of Islamic assets across the Gulf region," it said.
The structure of the Qatari banking sector where Qatar National Bank has an outsized share of the domestic loan market and the smaller banks compete for the remaining lending opportunities has driven intense price competition, resulting in pressure on loan yields and profitability.
The merger that would create the third largest Islamic bank in Qatar and the sixth largest Qatari bank with a 5 percent market share of domestic loans would help to ease these pressures, , the report said.
The consolidation would also modestly balance the competitive pressure on deposits in Qatar's concentrated depositor base.
While the merger remains subject to approval by the relevant authorities and the banks' shareholders, the report said, if approved it would likely be effective by early 2019.
Once completed, the surviving entity will be called Barwa Bank. It will have total assets of around QR80 billion ($22 billion) post consolidation.
Successful consolidation would marginally ease the pressure on rising borrowing costs, the report said.
"The enlarged bank would have a diverse financing and depositor profile. The merger would strengthen the business proposition of the combined entity given the individual segmental strengths of the merged banks," the report said.
Barwa has a solid consumer and corporate business and ibq which also has a strong corporate business is a niche player in private banking.
The expanded capital base of the merged entity would also enable it to participate in larger syndicated loans sometime regionally as well, thus providing some geographical diversification, the report said.
At the same time, the report said, a merger of local banks is a relatively less risky inorganic growth strategy unlike some of their Qatari peers who have expanded internationally into jurisdictions which are riskier than their home market.
"In common with their domestic peers, both Barwa and IBQ display a concentrated deposit base. While ibq has considerably less reliance on deposits from the government, it has large deposits from private banking as its main funding source. As a result, the combined entity's depositor profile would be more diverse than is the case for the individual entities," the report said.
Barwa and ibq had been part of an earlier process alongside a third lender Masref Al Rayyan to merge three banks, but the deal collapsed in June after 18 months of talks.
