The Malaysian Reserve

Kuwait bank seeks talks to create Islamic lender with RM371.7b in assets

Abu Dhabi lenders national Bank of Abu Dhabi and First Gulf Bank last year merged to create a regional powerhouse with RM707b of assets (Pic Bloomberg)

Lower oil prices over the past 4 years are forcing Gulf lenders to unite for scale and to better compete in a crowded market

Dubai • Kuwait Finance House KSCP (KFH) wants to hold renewed talks with Bahrain’s Ahli United Bank BSC about a takeover, a potential boost to the island kingdom as it seeks financial support from richer neighbours.

Shares in Ahli United Bank, or AUB, rose 6.8% yesterday to the highest levels since April last year, valuing the Manama, Bahrain-based lender at US$5.66 billion (RM22.87 billion). KFH declined as much as 1.3% for a market value of about 3.88 billion dinar (RM51.71 billion).

KFH said on Monday that it contacted AUB about “establishing a new banking entity”. Bloomberg News in May last year reported that the banks began talks, aiming to create an entity with about US$92 billion of assets, but those talks foundered about six months ago over valuation differences.

The proposal comes as debt-laden Bahrain, one of the most vulnerable Gulf Arab economies to lower crude prices, waits for financial support from its neighbours to help reduce ballooning debt and shore up foreign-exchange reserves. Bahrain’s social-insurance fund owns 10% in AUB.

“With the Bahrain government holding a lot of talks with potential official creditors, it seems plausible that AUB has been forced back to the table,” said Richard Segal, a senior analyst at Manulife Asset Management Ltd in London. “Governments would not ordinarily be able to access resources belonging to state pension funds, but these are unconventional times.”

Bahrain, a key Saudi Arabian ally and home to the US Fifth Fleet, hired investment bank Lazard Ltd to advise on how to repair its strained public finances, people with knowledge of the matter said earlier this month.

Lower oil prices over the past four years are forcing Gulf lenders to consolidate for scale and to better compete in a crowded market. Sub-dued credit growth, a squeeze on deposits, higher cost of funds and deteriorating asset qualities are driving consolidation in the regional banking sector.

Abu Dhabi lenders National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC last year merged to create a regional powerhouse with US$175 billion of assets. HSBC Holdings plc’s affiliate Saudi British Bank offered to take over Royal Bank of Scotland Group plc-backed Alawwal Bank in a US$5 billion all- stock deal in May, marking the kingdom’s first bank combination for almost 20 years.

“KFH will benefit in the long term from gaining access to markets such as Iraq and Egypt, increased access to Oman and UK, and further consolidation of presence in Kuwait,” said Joice Mathew, the head of equity research at United Securities in Muscat. “AUB should benefit from KFH’s expertise in fast-growing Islamic banking in an otherwise subdued banking environment in the region.”

Kuwait Investment Authority, the country’s sovereign wealth fund, holds a 24% stake in KFH and in September hired a consultant to study the feasibility of a possible merger between the two banks, the lender said at the time. Kuwait’s Public Institution for Social Security holds about 19% of AUB.

“The integration of business could be challenging” because of the “geographical dispersion” of their assets and combination of Islamic and conventional banking, Mathew said. — Bloomberg