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Assessment of Mergers and Acquisitions in GCC banking

Article in International Journal of Accounting and Finance · November 2014

DOI: 10.1504/IJAF.2014.066088

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358 Int. J. Accounting and Finance, Vol. 4, No. 4, 2014

Assessment of mergers and acquisitions in GCC

banking

Said Gattoufi and Saeed Al-Muharrami*

College of Economics and Political Science,
Sultan Qaboos University,
P.O. Box 20, Muscat, 123 Sultanate of Oman
Email: Gattoufi@squ.edu.om
Email: muharami@squ.edu.om
*Corresponding author

Ghanim Shamas
Salalah College of Technology,
Salalah, 211,
Sultanate of Oman
Email: sandocana@gmail.com

Abstract: This study analyses the impact of mergers and acquisitions (M&A)
on the performance of commercial banking in GCC countries through analysing
a set of ratios. It contributes to the debate about whether mergers and
acquisitions improve the performance of the GCC commercial banks. Seven
financial ratios were used to investigate the impact of M&A on the operational
performance of the merging banks. The sample consists of 42 commercial
banks in the GCC countries. The results of financial ratios are mixed; where
acquiring banks, target banks and banks that went through joint ventures show
mixed results. It was not easy to establish a strong link between banks involved
in M&A and the impact of mergers on their operating performance. However,
the findings suggest that, on average, M&A activity did not have significant
impact on operational performance of banks involved in this type of
consolidation.

Keywords: mergers and acquisitions; M&A; financial ratios; GCC banks.

Reference to this paper should be made as follows: Gattoufi, S.,

Al-Muharrami, S. and Shamas, G. (2014) ‘Assessment of mergers and
acquisitions in GCC banking’, Int. J. Accounting and Finance, Vol. 4, No. 4,
pp.358–377.

Biographical notes: Said Gattoufi received his PhD in Management from

Sabanci University in Turkey in 2002. He obtained his Diplôme de Troisième
Cycle de Gestion and Bachelor in Mathematics from Tunisia. He is currently an
Associate Professor at Sultan Qaboos University in the Sultanate of Oman. His
publications appeared in reputed journals including The Journal of Operational
Research Society and Journal of Risk Finance. His areas of research are in
performance assessment using data envelopment analysis with applications of
inverse DEA in mergers and acquisitions in banking.

Copyright © 2014 Inderscience Enterprises Ltd.

 Assessment of mergers and acquisitions in GCC banking 359

Saeed Al-Muharrami is an Associate Professor of Banking and Finance at

Sultan Qaboos University. He received his BSc in 1988 from University of
Arizona, USA, his MBA in 1994 from Oregon State University, USA, and his
PhD in 2005 from Cardiff University, UK. Beside his teaching and research
duties, he is the Director of Humanities Research Center. His areas of
interest are banking market structure, competitiveness, efficiency, productivity,
performance, commercial and Islamic banks, monetary policy, and feasibility
studies. He has written three books and has published several scientific papers
and publications.

Ghanim Shamas is a Lecturer in the Department of Business Studies, Salalah

College of Technology in Oman since June 2009. He received his Master in
International Accounting and Financial Management from University of
Glasgow in Scotland in 2009. He received his Bachelor in Accounting with
minor in finance from University of Sharjah, UAE, in 2006. He has held the
position of head of accounting section over the period 2011–2013. His current
research interests are mergers and acquisition, performance management, and
efficiency of financial institutions, particularly Islamic institutions.

1 Introduction

Founded in 1981, the Gulf Cooperation Council (GCC) includes six countries bordering
the Gulf. These countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United
Arab Emirates (UAE). The ultimate goal of the GCC creation is to ensure prosperity and
economic development for its members. There is a strong belief among the region’s
decision makers and authorities that facilitating the cross-border economic activities
within the region has a crucial impact on the ongoing economic development efforts.
Thanks to the recent increase in oil and gas revenues, the GCC members accumulated
high liquidity with limited opportunities for investment. The authorities strive to create
opportunities for investment to create jobs in order to lighten the social unrest generated
by an increasing unemployment rate. The contribution of the financial sector, particularly
the banking sectors as the main channel of fund circulation, is the main driver for such
development. The relatively small size of the banks in the region constitutes, in the eve
financial services liberalisation, a major weakness that generate high vulnerability of
banking units in the region facing international giants of banking. Public authorities and
financial regulation authorities, aware of the matter, are encouraging consolidation in the
sector locally and regionally. Multiple consolidations happened in the region and some
are ongoing in-borders and cross-borders, among them two initiated major ones in Oman.
The general trend toward consolidation witnessed in the region is being fastened and
encouraged by regulators, a consolidation that is considered and advised as the main
mean to overcome and mitigate the current global financial crisis, reduce the
vulnerability of the financial system and boost the development through the creation of
banking units able to finance ambitious mega-projects planned in the region. This was in
fact the prerequisite condition for any support in rescuing troubled banks in Kuwait
lately. In UAE, though it was not that much explicit, the banks are under pressure to
merge to be eligible for a government rescue plan. A significant development in the
institutional framework of Oman banking industry was the merger of HSBC Bank Middle
360 S. Gattoufi et al.

East Limited’s Oman branches with Oman International Bank in June 2012. The
registered name of the bank is now HSBC Bank Oman.
Do banks’ mergers and acquisitions (M&As) in Gulf countries enhance bank
performance? In other words, do M&A add value to shareholders? How do M&A affect
the financial as well as the economic performance (efficiency) of these banks? How do
micro and the macroeconomic indicators reflect the impact of M&A on the commercial
banking sector performance in the GCC countries? The research investigates the answers
to these questions using banks annual reports.
The rest of this study has the following structure: Section 2 describes M&As in GCC
banking. Section 3 presents the literature review. Section 4 describes the methodology.
Section 5 presents the empirical results. The final section concludes the study.

2 Commercial banking and consolidation in GCC countries

The high liquidity of the financial sectors boosted by the sharp increases in oil and gas
revenues has created a major element favouring the development of a strong commercial
banking sector. However, the banking sector in the region remained classical in the
nature of its activity and formed by relatively small units, compared to their international
counterparts, that are unable to support the ambitious development programmes intended
by the governments in the region to boost the employment and reduce the possible social
unrest that can be generated by the increasing unemployment rate particularly among
university degree holders. Hence, GCC banks have been considering consolidation
through M&A, as a means for boosting their performance and improve their investment
capabilities, since the early nineties.
Managers of commercial banks in GCC countries realised the need to expand beyond
the usual operations and boundaries through utilising their high liquidity which would
enhance their competitive position. Moreover, being a member of the World Trade
Organization (WTO) obligates all members to open up their market’s doors including
banking sectors to permit foreign rivals to compete with domestic companies. The current
policies in the region are very strict toward foreign banks licensing, despite their explicit
intention to join the WTO. The UAE had in fact stopped granting licences to foreign
banks long time ago, and restricted the number of branches of these foreign banks to a
very limited number. Saudi Arabia didn’t allow foreign banks to open branches in the
country and in the 1980’s existing foreign banks had to comply with the Saudi regulators
and turned into joint-ventures with a minimum of 60% Saudi ownership. Dubai
International Financial Centre (DIFC), where 100% foreign ownership is allowed is a
unique exception in GCC region. Oman sustains parallel stringent requirements with
regard to ownership.
Over the GCC banking history, 40 years, not many GCC banks have succeeded to
build regional platforms. This is not in line with the general aim of GCC that heralded
since its inception, that the development of cross-borders economic activities in the
region as its major raison-d’être. However, there are two exceptions to that, namely the
Ahli United Bank (AUB) located in Bahrain and to a slighter degree the National Bank of
Kuwait (NBK). Surprisingly, Saudi banks, though they are active in the giant economy in
the region, are unable to develop significant cross-borders activities in terms of
commercial banking or investment.
 Assessment of mergers and acquisitions in GCC banking 361

The resolution passed at the 18th summit meeting attended by the leaders of GCC
countries, held in Kuwait in December 1997, allowed national banks in these countries to
open branches in other members’ countries. This represented a major turning point
supporting the efforts towards financial integration among GCC countries, in preparation
for a higher degree of integration at the monetary level and a preparatory step toward the
implementation of WTO Agreement on the liberalisation of the financial services under
the General Agreement on Trade in Services (GATS). Accordingly, many national banks
opened branches and representative offices in other GCC countries. For example, locally
incorporated commercial banks operated in Oman with a network of 479 branches in
2012, an increase of 18 branches from 2011. Locally incorporated commercial banks, in
addition, had 10 branches and two representative offices abroad. Most of these branches
and representative offices are in the other five GCC countries.
Up to date, bulk of banking mergers occurred in the Gulf is different in scale and
financial strength, failing to realise that joining banks could reap the benefits from
amplified balance sheet assets and economies of scale. Instead, hostile mergers have been
the dominant way of integration, where a troubled bank forced to go through merger with
financially healthier one. For instance, NBO had a bad record of loans profile going back
to the late 1990s. Although AHB was regarded as a great and well managed bank, it was
also encountering competitive difficulties. The bank was facing difficulty in its
mortgages finance division when it realised that that profit had been shared by other local
banks that provide housing finance too.
Though inactive regionally despite the public authorities declared wishes and explicit
calls for consolidation regionally and locally, ‘large’ GCC commercial banks preferred to
develop their cross-borders activities outside the GCC. These banks may have realised
that that the economic booming growth is implausible to run forever, hence expanding
their activities abroad will be a wise choice to anticipate the possible saturation of their
home market. Hence, the search for lucrative targets at home, has been more proactive
and they are expanding further into different sectors and regions. For the flourishing
commercial Islamic banks, the South East of Asia is proving fertile hunting grounds.
Kuwait Finance House and Al-Rajhi Bank established extensive operations in Malaysia,
and Qatar International Islamic Bank setting up shop in Pakistan, Commercial Bank of
Kuwait has bid for banks in Egypt and Turkey and Qatar National Bank is expanding its
activities to several countries (Iraq, Yemen, Libya and Tunisia). Also, Commercial Bank
of Kuwait has attempted to seriously consider a worthy bid for control of Turkiye Finans
with Saudi Arabia’s National Commercial Bank as well as stretched its arms to cross
border markets such as Iraq and Syria.
The previous analysis of the commercial banking activity in GCC countries identifies
awareness about the importance and the need for increasing the size of banking units.
This created an ongoing trend of consolidation that took mainly the forms of M&A to
create bigger banks within each country and within the GCC through cross-borders
activities. This trend is encouraged by the regulating authorities to anticipate any future
liberalisation in the banking sector that can be dictated by the possible WTO
membership. Moreover, there are no indicators that the mutation in the sector is about to
end. Contrarily, and as claimed in Gattoufi and Al-Hatmi (2009), it is expected that the
trend will last and possibly with higher pace.
362 S. Gattoufi et al.

3 Literature review

The topic of M&A is rich and popular academic area. US and European studies are the
big contributions to this topic. However, in the GCC region, the topic is very rare which
makes it hard since there is no any relevant background. Different papers have been
published with regard to GCC covering different topics within the area of banking
industry, but not in the field of bank M&As. Al-Muharrami (2008) examined technical,
pure technical and scale efficiencies in GCC banking using DEA for the period
1993–2002. His findings highlighted first that smaller banks exhibited superior
performance in terms of technical efficiency than did larger ones. Second, big banks
proved to be more successful in adopting the best available technology, while medium
banks proved to be more successful in choosing optimal levels of output.
Al-Obaidan (2008) tried to analyse the optimal bank size in GCC states. He
concluded that non-large banks have technical efficiency approximately 35% as large
banks. Furthermore, scale efficiency of non-large banks is approximately 50% as large
banks. Therefore, economic efficiency of non-large banks is roughly 18% as large banks.
There are, in fact, substantial numbers of studies that have been published trying to
assess the argument of achieving positive gains through M&A. The efficiencies,
economies of scale, and improved management are the main motivations (Madura and
Wiant, 1994). However, studies in this area have shown conflicting findings. Healy et al.
(1992) documented that there is a clear positive link between abnormal stock gains at
merger announcements and the after-merger rises in operating cash flows (OCF).
Houston and Ryngaert (1994) find that, on average, bank M&As do not impact the
overall wealth of all shareholders in the transaction. Managers expect on most occasions
that mergers can reduce costs by excess capacity reduction instead of profit efficiency
enhancement (Houston et al., 2001). Rhoades (1994) summarised the previous studies
over the period from 1980 to 1993. His general conclusion indicated that mergers in
banking did not enhance performance.
Shaffer (1993) argued that it’s possible to achieve ‘X-efficiency’ gains when efficient
banks merge with banks that have lower efficiency. Moreover, findings by some scholars
like Altunbas et al. (1995) and Pilloff and Santomero (1998) reported that acquiring
banks are more efficient than the target banks before the merger. In addition, it’s been
reported that when acquiring banks believe that they can make substantial diversification
gains they are likely to bid for target; which is consistent with the motivation to enhance
to the return of the expected risk tradeoff and profit efficiency increase (Benston et al.,
1995; Amihud et al., 2002). Despite the fact that the reported findings based the last
decade (1990s) showed mixed results, however, occasionally, they have reported that
gains in cost efficiency were achieved, according to Berger and Humphrey (1992, 1997).
The effects of efficiency were specifically studied by Rhoades in 1998 using nine
banks that went through M&A. He suggested motives behind the mergers along with
consolidation process could influence the cost efficiency effects. Also, Al-Sharkas et al.
(2008) investigated the impacts of both efficiencies (cost and profit) of bank
consolidation on the American banking sector reporting that M&As have enhanced the
banks cost and profit efficiencies.
Rezitis (2008) mentioned that studies in Europe showed support for economies of
scale in both ‘very small banks’ and average size banks according to Altunbas
et al. (2001) and Vennet (1996) reported that because of economies of scale there could
be potential efficiency gains in mergers among small and medium-sized European credit
 Assessment of mergers and acquisitions in GCC banking 363

firms. Rezitis (2008) studied the impact of M&As activity on the efficiency and total
factor productivity of Greek banks. His findings suggested that there is a negative effect
of M&As on technical efficiency and total factor productivity growth of Greek banks.

4 Methodology

There are two major approaches used to judge and evaluate the impact of mergers on the
performance. These two approaches are operating performance methodology and market
methodology. This study uses operating performance approach. The operating
performance approach mainly uses accounting data. The central idea is to compares the
performance of merging firms before and after the merger by using accounting data to
determine whether consolidation actually leads to changes in the reported financial
numbers like cost reduction and profit increase. The financial ratios have been used since
the early 1990s in assessing the performance of banking M&As by several authors.
However, there is no common agreement on a single set of ratios which has been agreed
upon.
Cornett and Tehranian (1992) and Linder and Crane (1992) are among the first people
to use this approach to evaluate the performance in bank mergers. Cornett and Tehranian
(1992) included financial ratios in evaluating the impact of M&A on banks. One of their
first papers using financial ratios was in 1992 when they studied the after-merger
performance of USA banks over the period 1982–1987. They used mainly OCF; defined
as “earnings before depreciation, goodwill, interest on long-term debt, and taxes divided
by the market value of assets”. Also, Healy et al. (1992) used financial ratios to assess the
performance of large American banks after the acquisitions. Their study covered mergers
between 1979 and mid-1984. They defined OCF as revenues less cost of goods sold to
the customers, less overhead expenses, plus depreciation.
Campa and Hernando (2006) used seven financial ratios for the acquirers and the
targets prior to the merger and for the acquirer after the mergers. Their sample included a
selected M&A which occurred in the financial industry of European Union between 1998
and 2002. This study adopts a similar approach that has been used by Campa and
Hernando (2006). Selected studies based on the existing literature where financial ratios
were used in assessing the impact of M&A in commercial banks are presented in
Appendix 1.

4.1 Financial ratios

Financial ratios are often used by market participants like creditors and investors in their
decisions to gauge the performance of firm and its financial health. Financial ratios
provide a comparative view among similar banks as well as trends over time for
individual bank. This study includes five categories of seven ratios namely:
1 Profitability: reflects the firm’s capacity to make profits and earnings from its main
business activities. The two ratios are: return on equity (ROE), and net financial
margin (NFM).
2 Solvency: shows to which degree the bank can take up a ‘reasonable level of losses’
before becoming bankrupt. This ratio measures the amount of a bank’s capital
expressed as a percentage of capital to assets; the ratio used is Capitalisation ratio.
364 S. Gattoufi et al.

3 Efficiency: an indicator of how well management and staff have been able to keep
the growth of revenues and income ahead of rising operating costs.

4 Lending intensity: the ratio used is net loans to total assets.

5 Risk profile: bankers are concerned with six main types of risks: credit risk, liquidity
risk, market risk, interest rate risk, earnings risk, and capital risk. Each of these forms
of risk can threaten a bank’s solvency and long-run survival. This study uses two
ratios to measure the amount of a bank’s credit risk expressed in loan loss provisions
to total loans, and loan loss provisions to net interest revenue.

These seven ratios, representing the five categories, considered for this study are listed in
Table 1. These ratios are chosen based on Campa and Hernando (2006). The ratio
analysis is used for the micro analysis to analyse the individual financial performance of
those banks that went through M&A, before and after the event takes place.

Table 1 List of ratios considered for the analysis

Ratio Parameters
1 Return on equity (ROE):
(net income / total equity)*100
Profitability
2 Net financial margin (NFM):
(net interest revenue / total earning assets )*100
3 Capitalisation ratio (CAP):
Solvency
(equity / total assets )*100
4 Cost to income ratio (EFF):
Efficiency
(operating expenses / (net interest revenue + other income)*100
5 Lending activity (LOANS):
Lending intensity
(net loans / total assets)*100
6 Loan loss provisions to total loans (PROV):
(loan loss provisions / total loans)*100
Risk profile
7 Loan loss provisions to net interest revenue (RISK):
(loan loss provisions / net interest revenue)*100

The financial statements of GCC commercial banks are prepared in accordance with
International Accounting Standards (IAS). Al-Shammari et al. (2007) reported that IAS
become mandatory in Oman in 1986, Kuwait in 1991 and Bahrain in 1996; where UAE,
Qatar and Saudi Arabia required their listed firms to apply IAS in1999, 1992 and 1999
respectively. This makes the comparison even easier and realistic to draw sound and
logical conclusions about these banks’ performance before and after the consolidations.

4.2 Data description

The study uses financial reports gathered from Bankscope database. The data covers the
period 2003–2007. This study is considering 10 M&A that occurred during the sample
period and they are presented in Table 2. Within the subset of banks that went through
 Assessment of mergers and acquisitions in GCC banking 365

M&A, one can distinguishes three types of banks, namely acquirers, the target banks and
those that went into a joint venture (JV).
Table 2 GCC Commercial banks involved in M&A over the period 2003–2007

Year of M&A Bank role in M&A Country Bank name Code

2005 Acquirer Bahrain Ahli United Bank B003
2006 Acquirer Oman Bank Dhofar SAOG B007
2006 Acquirer Kuwait Bank of Kuwait and Middle East B009
2006 Target Bahrain Bank of Bahrain and Kuwait B012
2006 Acquirer Kuwait Commercial Bank of Kuwait SAK B016
2006 Acquirer Qatar Commercial Bank of Qatar (QSC) B017
2006 JV UAE Mashreq Bank B023
2006 Target Oman National Bank of Oman (SAOG) B029
2006 JV KSA Saudi Investment Bank B038
2006 Acquirer UAE Union National Bank B041

5 Empirical results

In this section we looked at the impact of M&As covering the ten banks involved in
M&A. The averages of the seven ratios for the merging ten banks were calculated and
tabulated in Appendix 2.
1 Ratio 1: ROE
The average of the commercial banking sector experienced a smooth increase
starting from 15.81% in 2003 and reached the highest to 24.7% in 2005. For merging
banks, there were four banks out of 10 that improved their ROE. Three out of these
four banks outperformed the sector. Although bank B023 witnessed a moderate drop
from 30.1% in 2005 to 23.07% in 2007 but it still outperformed the sector. The only
bank that encountered a ‘significant’ drop is B038; it almost dropped by 50% starting
from 23.88% in 2005 then plunged to 12.88% in 2007; this observation can be found
in Appendix 2, Section 1.
2 Ratio 2: NFM
As one can notice in Table 6 there have been moderate fluctuations in the ratio over
the 5 years period. Banks involved in M&As didn’t experienced significant change
after mergers. There were just two banks that stayed above the average. Although
these two banks witnessed a decline in their NFM; the two banks were operating in
the same environment (Oman). None of the 10 banks has improved its NFM. Bank
B023 seems to revert. Profitability indicators in terms of ROE and NFM experienced
mixed results for banks involved in MA; there was no single bank which showed an
improvement in both of these two ratios over the period of 5 years.
3 Ratio 3: capitalisation ratio (CAP)
The average of the sector for this ratio experienced a gradual rise till 2005 where it
started to slowly fall. There was only one bank (B038) which experienced an
366 S. Gattoufi et al.

improvement in CAP ratio; also, the bank outperformed the sector average. Although
the CAP ratios of rest of the nine banks have declined three banks still outperformed
the sector; the banks are B012, B029 and B038. There was only one bank that
encountered ‘substantial’ drop; the bank was B017, CAP fell from 25.59% in 2005 to
13.72% in 2007.
4 Ratio 4: efficiency
The ratio (for the whole banking sector) has experienced fluctuations over the period
from 2003 to 2007. Despite the theoretical belief that banks improve their efficiency
through mergers, merging banks experienced mixed performance in their cost to
income ratio (efficiency). There were only two banks that witnessed improvement in
their efficiency after the mergers; namely bank B007 and B023. These two banks
were operating in the same environment (Oman), though, the banks were still below
the sector’s averages in the period surrounding the M&A. While the efficiency ratios
for five banks deteriorated they still outperformed the sector. There were three banks
that encountered ‘considerable’ deterioration in their efficiency ratios; B012 from
42.58% in 2005 (from Bahrain) to 67.16% in 2007, bank B023 from 25.35% in 2005
to 37.08% in 2007 and bank B041 from 17.77% in 2005 to 29.88% in 2007. The last
two banks are from UAE.
5 Ratio 5: lending activity (LOANS)
The sector has seen slight and gradual increase in the lending activity ratio as shown
in Table 3.
There were five banks out of the ten that improved their lending capacities; the banks
are, B009, B012, B016, B017, and B041. However, one only bank out of these five
outperformed the sector; B041 jumped from 59.27% in 2005 to 67.4% in 2007. Out
of the other five banks that experienced decline in their lending activities, two were
still above the sector’s averages despite their decline; namely B007 and B023
(Omani Banks).
6 Ratio 6: loan loss provisions to total loans (PROV)
The overall change in averages of sector’s performance of loan loss provisions has
improved (lower in value) of the period from 2003-2007 as depicted in Table 4.
There is a common improvement (lower in value) among all ten banks involved in
M&A for the first time; all have improved their loan loss provisions. The (PROV)
ratios performance can be found in Appendix 2, Section 6. However, the
improvement wasn’t significant except for four banks where there was ‘remarkable’
improve in ratios; almost improved by 50%. These bank are B007 from 4.13% in
2004 to 1.49% in 2007, B016 dropped from 11.42% in 2005 to 6.94% in 2007, B029
improved from 12.18% to 5.54% a year after the merger and finally bank B041
lowered its risk profile from 3.85% (2005) to 1.32% (2007). This could mean that
merging banks were able to establish good customer profiles by attracting more
lucrative clients.
7 Ratio 7: loan loss provisions to net interest revenue (RISK)
The overall trends for this ratio improved (lower in value) over the period of
five years.
 Assessment of mergers and acquisitions in GCC banking 367

For the banks involved in M&A there were seven banks out of ten that improved
their risk profiles after the merger; six out of seven of these banks experienced
‘significant’ improvement. There was just one bank which experienced almost no
change in its risk profile; the bank was B012 where (RISK) was 6.33% in 2005 and
6.39% in 2007. Bank B016 was the only bank which has its risk profile improved
and outperformed the sector’s average. The bank that has its risk profile deteriorated
after the merger were B017; from 2.87% in 2005 to 5.52% in 2007 and bank B007
(from 2.87% to 5.52%). These observations can be found in Appendix 2, Section 7.

Table 3 Sector lending activity (LOANS)

2003 2004 2005 2006 2007

Average (sector) 55.42% 56.22% 56.91% 58.67% 58.2%

Table 4 Loan loss provisions to total loans (PROV)

2003 2004 2005 2006 2007

Average (sector) 7.55% 5.28% 5.09% 4.04% 3.21%

Table 5 Averages of loan loss provisions to net interest revenue (RISK)

2003 2004 2005 2006 2007

Average (sector) 21.48 16.58 13.12 6.27 7.08

5.1 Comparison within the merged banks

Within the subset of banks that went through M&A, one can distinguishes three types of
banks, namely acquirers, the target banks and those that went into a JV. This section
investigates the impact of M&A on each of these classes. Starting with acquiring banks,
as reported in Table 6, all acquirer banks have experienced lower risk profile after merger
except bank B007 the merger which is consistent with Campa and Hernando (2006)
findings. This is also consistent with the findings of Benston et al. (1995) and Amihud
et al. (2002) justifying it as a motive to improve risk expected return tradeoff and increase
profit efficiency,.
All acquiring banks experienced an improvement in their loan loss provisions ratios
which could be a sign of the bank’s ability to attract new customers. Efficiency ratio has
improved over the period; from 39.27% in (2003) to 34.82% in (2007) for the whole
sector, it can be seen in Table 6. For the acquiring banks, however, the efficiency has
slightly worsened (except for bank B007) this is the opposite of Campa and Hernando
(2006) findings. Nevertheless, since mergers in GCC banks are horizontal type then
according to Berger and Humphrey (1992) and Rhoades (1993) when the acquiring banks
are more efficient than the target banks, horizontal mergers produce no efficiency gains.
CAP had deteriorated over the five years among all acquiring banks. However, the
changes, in most banks, were moderate. As discussed in the section above, lending
capacity of the sector has increased slowly. The acquirers have increased their lending
capacity with exceptional performance for bank (B007); which is consistent with Campa
and Hernando (2006) reported results.

Ratios
Loan loss provisions to net
interest revenue (RISK)
Loan loss provisions to total
loans (PROV)
Lending activity (LOANS)
Cost to income ratio (EFF)
Capitalisation ratio (CAP)
Net financial margin (NFM)
Return on equity (ROE)
Notes: The merging years were ignored, 2005 for bank B007 and 2006 for the rest of the banks.
368
Table 6
Acquirers
S. Gattoufi et al.
Bank B003 Bank B007 Bank B009 Bank B016 Bank B017 Bank B041
Change from 2004 to Change from 2004 to Change from 2005 to Change from 2005 to Change from 2005 to Change from 2005 to
2006 2006 2007 2007 2007 2007
29 to 6 = significant 2 to 5 = worsen 13 to 11 = improved 15 to 3= significant (0.38) to 5 = significant 34 to 5 = significant
improvement improvement improvement improvement
4 to 1 = improved 6 to 3 = improved 4 to 3 = improved 11 to 6 = improved 0.7 to 0.5 = improved 3 to 1 = improved
35 to 42 = improved 76 to73 = worsen 47 to 55 = improved 50 to 51 = improved 49 to 55 = improved 59 to 67 = improved
42 to 43 = worsen 44 to 38 = improved 30 to 33 = worsen 20 to 21 = worsen 29.09 to 29.5 = worsen 17 to 29 = worsen
(significant)
12 to 8 =worsen 12 to 11 =worsen 14 to 13 = worsen 16 to 12 = worsen 25 to 13=worsen 14 to 12 = worsen
1.8 to 1.7 = worsen 4 to 3 = worsen 2.5 to 2.3 = worsen 3.7 to 2.7 = worsen 2.7 to 2.4 =worsen (very 2.3 to 2.2 = worsen
(very small change) (very small change) small change) (very small change)
11 to 14 = improved 24 to 20 =worsen 21 to 20=worsen 24 to 23 = worsen 18 to 23 = improved 30 to 18 = worsen
(significant drop)
Evaluating the performance of acquiring banks before and after the merger
 Assessment of mergers and acquisitions in GCC banking 369

NFM has deteriorated among all buying banks. We should be careful not to associate this
to the impact of the merger activity rather than to the performance of the banking sector
where it demonstrated gradual and slight decline associated with this ratio (net interest
revenue divided by total earning assets).
The profit of the acquiring banks measured by ROE has improved for two banks out
of three banks. Bank B017 has increased its ROE by almost 5% which could be linked to
the affect M&A since it outperformed all banks that involved in M&A as well as the
whole banking sector as illustrated in Table 7.
Table 7 Exceptional ROE for Bank B017

2003 2004 2005 2006 2007

(ROE) 23.19 17.16 18.07 15.26 23.45
Average(market) 15.81 18.85 24.79 22.02 20.84
Average (Banks without M&A) 17.39 19.68 25.83 22.45 21.25
Average (Banks with M&A) 10.751 16.205 21.46 20.64 19.545

The second subset of banks that went through consolidations is those that were the target
for a merger or an acquisition. Changes of the corresponding financial ratios before and
after the merger action are reported in Table 8.
Table 8 Changes in the financial ratios of target banks before and after the consolidation

Targets
Ratios Bank B012 Bank B029
Change from 2005 to 2007 Change from 2005 to 2007
Loan loss provisions to net 6.3 to 6.6 = worsen 54 to 19 = significant
interest revenue (RISK) (very small change) improvement
Loan loss provisions to total 5 to 4 = improved 12 to 5 = improved
loans (PROV)
Lending activity (LOANS) 53.04 to 53.89 = improved 64 to 61 = worsen
(very small change)
Cost to income ratio (EFF) 42 to 67 = worsen 52 to 45 = improved
Capitalisation ratio (CAP) 11.57 to 11.34 = worsen (very 20 to 15 = worsen
small change)
Net financial margin (NFM) 2.6 to 2.8 = improved (very 3.9 to 3.2 = worsen
small change)
Return on Equity (ROE) 17 to 14 = worsen 15 to 21 = improved
Note: The merging year (2006) was ignored.
Unlike the acquiring banks where they demonstrated consistency in their performance as
a whole; there was inconsistent performance of those banks being a target. While target
bank (B029) had its risk profile improved the other bank experienced the totally opposite;
its risk profile improved significantly (from 54% to 19% a year after the merger).
Similar to acquirer banks, the (PROV) for the target banks was improved over time.
CAP has also dropped for the target banks. The target banks’ profitability showed an
overall improvement; two target banks out of three have their profit increased measured
by and just one target bank has NFM enhanced.
370 S. Gattoufi et al.

Only one target bank had improved efficiency ratio (got lower in value); this is
consistent with Campa and Hernando (2006) findings. On the other hand, this does not
agree with Vennet (1996) when they reported that higher efficiency profitable banks are
more likely to buy less efficient and profitable banks which are small in size. Comparing
to acquiring banks, the lending capacities for these banks were mixed, one had improved
where the other deteriorated which is opposite of acquirers (where all improved their
lending activities.
The third subset of banks that had a consolidation action is those that went into JV.
Changes of the corresponding financial ratios between and after the consolidation action
are reported in Table 9.
Table 9 Changes in the financial ratios of JV banks before and after consolidation

Joint ventures (JV)

Ratios Bank B023 Bank B038
Change from 2005 to 2007 Change from 2005 to 2007
Loan loss provisions to net 29 to 17 = improved 12 to 8 = improved
interest revenue (RISK)
Loan loss provisions to total 3 to 2 = improved 3.36 to 3.03 = improved
loans (PROV) (very small change)
Lending activity (LOANS) 47 to 43 = worsen 50 to 49 = worsen
Cost to income ratio (EFF) 25 to 37 = worsen 2 to 34 = worsen
Capitalisation ratio (CAP) 17 to 11 = worsen 13 to 14 = improved
Net financial margin (NFM) 2.5 to 2.3 = worsen 2.3 to 2.5 = improved
(very small change)
Return on equity (ROE) 30 to 23 = improved 23 to 12 = worsen (significant)
Note: The merging year was 2006 therefore ignored.
The two banks involved in JV activities have improved their risk profile significantly.
This is expected due to the diversification where risk can potentially be reduced; bank
B023 joined operation with an investment bank where bank B038 joined with finance
company.
JV banks’ profitability measured in terms of ROE and NFM didn’t improve after the
consolidations. Similar behaviour was experienced for the JVs lending activities. Similar
to other banks in the subsample, JV banks have enhanced their loan loss provisions.
Efficiency of the two banks improved (ratio cost to income has dropped in value).

6 Concluding remarks

This study provides an empirical assessment of banking consolidation of commercial

banks in GCC countries. It addresses the question whether M&As improve the
performance of the GCC commercial banks. Seven financial ratios were used to
investigate the impact of M&A on the operational performance of the merging banks for
the period from 2003 to 2007. The sample consists of 42 commercial banks in the GCC
countries. The results of financial ratios are mixed; where acquiring banks, target and
banks went through JV show mixed results and it wasn’t easy to establish a strong like
between bank involved in M&A and the impact of mergers on their operating
 Assessment of mergers and acquisitions in GCC banking 371

performance. However, the findings suggest that, on average, M&A activity didn’t have
significant impact on operational performance of banks involved in M&As.
The results could be important for bank shareholders and bank managers since M&As
rarely add value or enhance performance. They may also help regulators and supervisory
authorities in their definition of a coherent competition and merger policies; realising that
M&As are not the real ‘magic’ solution. They should enlighten the investors, the
managers and the government regulators that M&As do not have a definite clear benefit
for the stakeholders. Although if there are any gains or benefit they are still limited and
insignificant.
However, there could be some benefits that the bank might realise from the
consolidation even if it doesn’t accomplish operating efficiency gains. Rhoades (1998)
reported that the benefits could include “a more diversified deposit and loan base, a
different strategic orientation and a good vehicle for growth”.
The industrialists insist on the benefits and advantages that can be brought by the
M&A activities. On the other hand, vast number of academic studies reported no or
limited positive impact for the M&A strategies. Could it be due to the models used to
study the impact of M&A? Or could it be the managerial motives justified for the
consolidations? The real explanations will take more efforts and deep investigations and
it may be very long time before the research community as well as the industrialists can
document solid conclusions; only the future can provide the ultimate findings.

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Year Outlet Author Country Methodology Ratios/accounting data Table A1
Appendix 1

1992 Journal of Financial Cornett and USA Accounting ratios Operating cash flows (OCF) = (earnings before depreciation, goodwill,
Economics Tehranian interest on long-term debt and taxes) / (market value assets)
1992 Journal of Financial Paul Healy USA Accounting ratios Pretax operating cash flow return on assets: operating cash flows as
Economics sales minus COGS and selling administrative expenses plus depreciation
and goodwill expenses, asset employed using market values, which
represent the opportunity cost of the assets.
1996 Journal of Banking Rudi Vander Europe Accounting ratios + stochastic cost ROA, ROE, two cost ratios: the labour cost ratio, the operating expense
and Finance Vennet frontier ratio .For the stochastic cost frontier: two outputs (loans and
investments) three inputs(cost of labour, capital and deposits)
1998 Journal of Banking Stephen USA Financial ratios + translog cost function Five balance sheet ratios: ROA, no interest expense, total expenses,
and Finance Rhoades expenses to assets and other no interest expenses-to assets ratios are the
components of no interest expenses revenue, net income(after taxes) to
average assets
1999 Journal of Banking Benjamin Esty USA Accounting ratios + interest-rate beta ROA, book equity/assets ,non-performing assets /total assets,
and Finance et al. non-interest expense/average assets, purchase price/target book value,
purchase price/target trailing EPS, premium to target core deposits
1999 Banco de España Fuentes and Spain Financial ratios Profit generating capacity: Total income = interest
Sastre income + commissions +result on financial operations, interest
expenses, gross income = total income – interest
expenses – operating expenses. Net income = total income – interest
expenses – operating expenses, all these ratios are expressed as a percent
age of average total assets. Efficiency and productivity: operating
expenses/average total assets, operating expenses/ total income,
Assessment of mergers and acquisitions in GCC banking

operating expenses/gross income. Productivity per employee: average

total assets / number of employees, productivity per office: average total
assets / number of offices, number of employees and offices following
merger. Indicators of market share and total assets growth: market share
(in terms of total assets). Indicators of business structure: Lending-
Selected references that used ratios in analysing the efficiency of banks

deposit activity in pesetas, as a percentage of total assets. Indicator of

capital adequacy: capital / total assets
373
 374

Table A1

Year Outlet Author Country Methodology Ratios/accounting data

2001 Journal of Benjamin, L. New Accounting ratio + DEA Operating efficiency: cost to income ratio, operating expense / average
Asia-Pacific and David, T. Zealand total assets, employee’s productivity: operating income / average
Business employees, ROA. DEA Model (1) after 1990: inputs: interest expense,
non-interest expense .outputs: net interest income, non-interest income.
S. Gattoufi et al.

DEA Model (2) after 1990: inputs: interest expense, non-interest

expense. Outputs: customer deposits, net loans and advances, operating
income. DEA Model (3) before 1990: inputs: interest expense,
non-interest expense. Outputs: deposits, loans and advances
2004 Journal of Banking Megginson and USA Accounting data + ordinary least square Market-to-book value ratios, operating cash
and Finance Morgan (OLS) flows = (Sales – COGS-selling and administrative
expenses + depreciation and will amortisation) / ( market value of
common equity + the book value of preferred stock and debt)
2006 Journal of Banking Campa and European Accounting ratios + event study Measures of Profitability: ROE and net financial margin (NFM),
and Finance Hernando Union Solvency: capitalisation ratio (CAP). Efficiency: cost to income ratio
(EFF). Lending intensity: net loans to total assets (LOANS). Risk
profile: loan loss provisions to total loans (PROV) and loan loss
provisions to net interest revenue (RISK)
2006 Journal of Money, Marcia Millon USA Accounting ratio + regression model 40 Accounting ratio were used, e.g.,: liquidity risk indicators: loans to
Credit and Banking et al. total assets, core deposits to total assets, total loans to total deposits,
liquidity ratio. Growth indicators: asset growth rate, deposits growth.
Profitability indicators: ROA, ROE, net interest margin. Capital
adequacy indicators: Total capital to assets, loans to total capital,
deposits to total capital .Asset quality indicators: allowance for loan
losses to loans, loan loss provision to loans. Operating efficiency
indicators: non-interest expense to non-interest revenue, non-interest
expenses to net operating income, non-interest to total assets
(personal expenses to total assets, fixed assets to total assets, total assets
to employees, net income to employees)
Selected references that used ratios in analysing the efficiency of banks (continued)
 Assessment of mergers and acquisitions in GCC banking 375

Appendix 2

Table A2 Ratios of banks involved in M&A

Bank code 2003 2004 2005 2006 2007

Section 1 ROE
B003 10.48 11.36 14.47 14.95 16.09
B007 18.44 16.96 19.29 23.26 22.38
B009 12.06 14.07 20.51 20.44 19.81
B012 19.44 18.21 17.69 18.15 14.06
B016 22.28 21.51 24.64 23.24 23.81
B017 23.19 17.16 18.07 15.26 23.45
B023 16.57 17.45 30.01 20.4 23.07
B029 –53.62 5.21 15.01 17.24 21.37
B038 18.28 18.59 23.88 35.48 12.88
B041 20.39 21.53 30.98 17.93 18.53
Section 2 Net financial margin (NFM)
B003 2.05 1.8 1.68 1.77 1.66
B007 5.23 4.55 4.17 4.14 3.73
B009 1.65 1.87 2.47 2.59 2.26
B012 2.24 2.34 2.6 2.79 2.81
B016 2.41 3.25 3.73 3.7 2.71
B017 3.55 2.94 2.72 2.68 2.45
B023 3.09 3.05 2.56 2.27 2.33
B029 3.38 3.47 3.91 3.71 3.11
B038 2.49 2.4 2.37 2.65 2.5
B041 2.94 2.56 2.32 2.32 2.25
Section 3 Capitalisation ratio (CAP)
B003 49.22 42.02 39.47 43.09 37.73
B007 13.33 12.28 12.86 13.43 11.57
B009 12.02 12.11 14.05 13.32 13.55
B012 9.48 11.11 11.57 11.1 11.34
B016 13.47 15.51 16.05 16.61 12.29
B017 16.06 20.25 25.59 18.55 13.72
B023 16.03 16.45 17.52 14.01 11.97
B029 11.92 14.26 20.09 17.06 15.77
B038 12.48 12.64 13.41 14.69 14.55
B041 11.63 9.02 14.98 14.5 12.09
376 S. Gattoufi et al.

Table A2 Ratios of banks involved in M&A (continued)

Bank code 2003 2004 2005 2006 2007

Section 4 Cost to income ratio (EFF)
B003 49.22 42.02 39.47 43.09 37.73
B007 41.89 46.67 44 38.97 38.55
B009 38.01 39.83 29.89 32.21 32.94
B012 48.84 47.18 42.58 40.93 67.16
B016 25.81 20.31 20.63 21.57 21.01
B017 39.07 38.15 29.09 36.02 29.58
B023 37.76 33.39 25.35 36.56 37.08
B029 48.5 57.22 52.17 46.73 45.76
B038 30.35 29.24 23.21 17.74 34.51
B041 33.57 28.1 17.77 25.45 29.88
Section 5 Lending activity (LOANS)
B003 38.33 35.72 43.15 42.66 52.21
B007 77.45 73.74 76.17 78.99 73.77
B009 43.92 46.87 47.01 47.84 55.91
B012 50.18 53.82 53.04 55.38 53.89
B016 45.71 53.9 50.08 51.73 51.62
B017 52.99 51.88 49.07 57.18 55.12
B023 56.18 55.11 47.85 51.81 43.75
B029 64.74 72.04 64.76 65.02 61.41
B038 46.39 45.65 50.01 50.66 49.69
B041 57.23 65.76 59.27 66.15 67.4
Section 6 Loan loss provisions to total loans (PROV)
B003 5.68 4.13 1.9 1.49 1.39
B007 9.29 6.94 6.01 5.05 3.93
B009 4.03 3.8 4.73 4 3.38
B012 10.69 7.12 5.85 4.81 4.27
B016 11.81 13.36 11.42 9.76 6.94
B017 n.a. 1.78 0.76 0.52 0.54
B023 3.4 3.76 3.28 2.92 2.67
B029 23.75 24.04 12.18 8.63 5.54
B038 4.45 4.37 3.36 3.62 3.03
B041 8.13 5.36 3.85 1.94 1.32
 Assessment of mergers and acquisitions in GCC banking 377

Table A2 Ratios of banks involved in M&A (continued)

Bank code 2003 2004 2005 2006 2007

Section 7 Loan loss provisions to net interest revenue (RISK)
B003 14.48 29.94 9.79 6.04 7.05
B007 18.22 11.16 2.87 –2.57 5.52
B009 22.41 17.82 13.7 2.83 11.04
B012 3.89 7.5 6.33 11.91 6.39
B016 27.93 18.5 15.17 9.87 3.69
B017 3.78 –5.42 –0.38 1.01 5.41
B023 21.66 34.52 29.93 12.29 17.28
B029 245.33 112.78 54.93 29.78 19.85
B038 15.6 21.52 12.38 9.06 8.86
B041 14.61 28.35 34.62 15.62 5.63

Appendix 3

Table A3 Averages per ratio per year

2003 2004 2005 2006 2007

ROE 15.81 18.85 24.79 22.02 20.84
Net financial margin (NFM) 3.11 3.07 3.24 3.20 2.92
Capitalisation ratio (CAP) 13.70 14.18 16.60 14.68 13.16
Cost to income ratio (EFF) 39.27 36.45 30.60 34.16 34.82
Lending activity (LOANS) 55.42 56.22 56.91 58.67 58.20
Loan loss provisions to total 7.55 5.28 5.09 4.04 3.21
loans (PROV)
Loan loss provisions to net 21.48 16.58 13.12 6.27 7.08
interest revenue (RISK)

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