Doha: The potential merger of Masraf Al Rayan and Al Khalij Commercial Bank (al khaliji) would maintain the combined entity’s (Masraf and al khaliji) position as Qatar’s secondlargest Islamic bank, enhancing its franchise and supporting its solid profitability, Moody’s said yesterday.
On 30 June, Masraf Al Rayan and al khaliji announced that they had begun negotiations over a potential merger. The merged entity would continue to operate as an Islamic bank. Masraf is currently Qatar’s fourth-largest bank, with a 6 percent share of banking system assets as of December 2019.
Al Khaliji is one of the smaller banks in Qatar, with a market share of around 3 percent of system assets as of the same date. The proposed merger is at an early stage and subject to central bank, regulatory and government approvals, as well as the approval of the banks’ shareholders once due diligence has been completed.
The merger would be credit positive for Masraf because the combined entity would lead to creation of an Islamic bank with an improved market share of total assets and position it as Qatar’s third-largest bank behind Qatar National Bank and Qatar Islamic Bank.
The merged entity would have total assets (both conventional and Islamic) of around $45bn, or around 9 percent share of total banking system assets.
The merged bank would have a larger Islamic franchise and market share, and therefore greater pricing power, which would support profitability. In addition, the larger scale will also help contain funding costs by enhancing the bank’s deposit gathering ability amid Qatar’s likely recession this year.
The merged bank’s product diversification would benefit from the banks’ individual segment strengths.
Masraf has a strong relationship with the Qatari government, with loans to the government and public-sector entities making up around 47 percent of its financing book at year-end 2019. Al Khaliji has a solid corporate business, with loans to the government and publicsector entities making up around 47 percent of its financing book at year-end 2019.
Al Khaliji has a solid corporate business, with loans to the government and public sector entities comprising around 17 percent of its financing book at year-end 2019. While both Masraf and Al Khaliji have been focusing on retail banking, the merged bank will have the required scale which will support their retail banking business.
If the merger goes ahead, Masraf will absorb Al Khaliji’s creditors, which would benefit from its stronger domestic government franchise and balance sheet. Masraf reports higher pre-provision income and net profitability, areas in which Al Khaliji compares unfavourably with domestic peers.
These potential benefits would need to be weighed against integration challenges that the merger may entail, as well as in light of the strategy the newly merged entity adopts. “Once the new structure and strategy is agreed, we would assess any changes in overall risk profile, including the group’s capital and profitability, liquid assets and access to funding”, Moody’s said.
The proposed merger would be the second consolidation in Qatar’s banking system after Barwa Bank merged with International Bank of Qatar in 2019 to create Qatar’s third-largest Islamic bank and sixth-largest bank overall.
However, merger announcements in Qatar historically have not always resulted in a transaction.
The successful merger between the above entities in 2019 was following a cancellation of a three-way merger between Masraf, Barwa Bank and International Bank of Qatar. Slowing economic growth amid low oil prices is driving banking sector consolidation both in Qatar and in the Gulf Cooperatio
