SICO sees 12% upside on NBAD, FGB merger

If the proposed merger of United Arab Emirates’ National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) were to happen in the near future, the combined market capitalization of the merged entity could rise by 12 percent due to the shared synergies, Chiradeep Ghosh of Bahrain-based investment bank SICO said in a note Monday. 

Both NBAD and FGB announced on Abu Dhabi Stock Exchange on Sunday that they have formed a working group to review the commercial potential along with any legal and structural aspect of any merger or combination between the two banks.

SICO said: “We believe neither of the banks is large enough to acquire the other through a cash deal. NBAD has a tier 1 capital of AED 41 billion, while FGB’s tier 1 capital is AED 32 billion.”

Therefore, merger through share-swap agreement is the most realistic option, SICO said. “At our current valuation we expect to see 0.7 share of FGB for every 1.0 share of NBAD or 1.4-1.5 shares of NBAD for every 1.0 share of FGB.”

A merger through share-swap agreement would mean equity share dilution for existing shareholders, the note added.

Meanwhile, SICO has maintained the target price of AED 9 per share for NBAD along with a “sell” rating and AED 12.9 per share for FGB with a “neutral” rating for FGB, without incorporating the impact of the proposed merger. 

Other areas of potential positive impact of a merger are:

More competitive: The large balance sheet, post-merger will help the bank take bigger share of future loan syndication pie.

Shared branch network: FGB has low branch network and can benefit from NBAD's branch penetration to grow its business.  

Varying areas of expertise: FGB has a strong retail franchise, while NBAD has a robust public sector banking business which offers potential for cross selling.

Areas of operation: FGB plans to continue its growth within the UAE, while NBAD has intentions to diversify outside.