Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) have agreed to merge and together to acquire Al Hilal Bank.
The transaction, which has been recommended unanimously to shareholders by the boards of ADCB and UNB, is subject to regulatory and shareholder approvals to be sought in the coming weeks.
The new banking group will carry the Abu Dhabi Commercial Bank (ADCB) identity and will continue to benefit from strong institutional backing, through the Government of Abu Dhabi’s majority ownership.
Al Hilal Bank will retain its existing name and brand and operate as a separate Islamic banking entity within the group.
ADCB will reinforce its position as the third largest financial institution in the UAE and will become the fifth largest in the Gulf Cooperation Council (GCC) region, with assets of AED 420 billion (USD 114 billion).
It is expected to have around one million customers, with a significant share of the UAE market as follows (as at 30 September, 2018): 15% of total assets, 21% of retail loans, and 16% of deposits.
The proposed transaction between ADCB and Union National Bank (UNB) will be executed through a statutory merger.
ADCB will issue 0.5966 ADCB shares for every UNB share, corresponding to a total of 1,641,546,697 new shares issued to UNB shareholders. The exchange ratio implies a premium to UNB shareholders of 0.6% versus the closing price of 28 January 2019 and 13.7% versus the pre-leak share price.
On the effective date of the merger, UNB shares will be delisted from the Abu Dhabi Securities Exchange. The combined bank will retain ADCB’s legal registrations.
Al Hilal Bank will be acquired by the combined ADCB/UNB entity, for a consideration of approximately AED 1 billion, by issuing a mandatory convertible note for up to 117,647,058 post-merger ADCB shares to Abu Dhabi Investment Council (ADIC) after the completion of the statutory merger.
The three banks will continue to operate independently until the combination becomes effective, which is expected within the first half of 2019.
The combination is subject to approvals by shareholders and relevant regulators, including the UAE Central Bank.
The transaction requires the approval of at least 75% by value of the shares represented at quorate general assembly meetings of each of ADCB and UNB.
Following completion of the merger of ADCB and UNB and the acquisition of Al Hilal Bank, the Government of Abu Dhabi, through the Abu Dhabi Investment Council, will own 60.2% of the combined bank. Other ADCB shareholders will own 28.0%, and other UNB shareholders will own 11.8% of the combined bank.
H.E. Eissa Mohamed Al Suwaidi is the Chairman designate of the new banking group, and H.E. Mohamed Bin Dhaen Al Hamli is the Vice Chairman designate. Ala’a Eraiqat is the Group Chief Executive Officer designate of the new banking group. The new board and management of the combined bank will assume their new roles when the transaction becomes effective.
The transaction will create significant scope for achieving cost efficiencies in the coming years. The combination is expected to deliver cost synergies of approximately AED 615 million (USD 167 million) annually on a run rate basis, which equates to around 13% of the three banks’ combined cost base, above the global benchmark of between 8% to 10% for similar domestic transactions. These benefits are expected to be realized over two to three years.
The combined bank will benefit from a strong balance sheet, solid financial metrics, and favorable access to capital markets. Its capital position will comfortably exceed Basel III regulatory requirements.
The combined bank’s funding profile will be diverse, with pro forma customer deposits accounting for 75% of total funding, including a strong low-cost CASA (current account savings account) base of AED 96 billion, and wholesale funding making up 18% of total funding as of 30 September 2018. The bank will also have a healthy pro forma net loan-to-deposit ratio of 96.5% as of 30 September 2018.
The bank’s profitability metrics will be strong, with a pro forma cost-to-income ratio of 36.0%5, with significant potential for improvement thanks to substantial cost saving opportunities and expected double-digit returns on average equity. The pro forma net interest margin of the combined bank is 3.0%.
The combined bank will have a well-diversified business and customer portfolio. Corporate gross loans will represent 75% of the total loan book, while consumer banking loans will account for 25% as of 30 September 2018.
The new banking group will operate the third largest Islamic banking franchise in the UAE, with a 13% market share. Islamic banking customers will benefit from a distinctive offering with a wide range of Sharia-compliant products and services.