The largest banking Merger in the Middle East: Emirates Bank International merger with National Bank of Dubai. By B Rajesh Kumar & Manuel Fernandez

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1








The largest banking Merger in the Middle East: Emirates Bank International merger with
National Bank of Dubai.



By B Rajesh
K
umar
1


& Manuel

Fernande
z
2
































1

B Rajesh Kumar is Assistant Professor at Institute of Management Technology, Dubai. He has obtained his Ph.D in
the area of M&
A from Indian Institute of Technology (IIT Kharagpur). He has published nine empirical research
papers in the area of M&A in top refereed journals in India which includes three in IIMB Management Review, one
each in IIMA Vikalpa and IIMC Decision . He h
as also publication in the Journal of Applied Business and Economics
published by North American Business Press .He has authored two books which include a text book on M&A
published by McGrawhill Co

2

Manuel Fernandez is Assistant Professor at Institute of

Management Technology, Dubai. He received his PhD
from University of Kerala, India and is a Certified Management Accountant from USA. He has more than 26 years of
research and university level teaching experience in the UAE and India. He has published a n
umber of research
articles in refereed journals

2


The largest banking Merger in the Middle East:

Emirates Bank International merger with
National Bank of Dubai
3




This merger brings together the UAE's second and fourth largest banks by assets. As a combined entity, we believe the
Company will be well positioned to grow and to deliver outstanding va
lue to its shareholders, customers, and employees".

"We are proud to be playing a leading role in the development of Dubai as a regional financial centre, in line with HH Sheikh

Mohammed's 2015 Strategic Plan”

H.E. Ahmed Humaid Al Tayer

Chairman Emirates
NBD



Section 1: Highlights of the merger
.

Emirates NBD is the biggest banking group in the Middle East in terms of assets. The Group has
a leading retail banking franchise in the UAE with 536 ATMs and 114 SDMs across both
conventional and Islamic banking franchises. It is a major player in the UAE

corporate banking
arena with a combined market share of almost a fifth of corporate loans .It has also strong
Islamic banking, investment banking, private banking, asset management and brokerage
operations.
The Dubai Government owned around 14 per cent of

NBD and about 77 per of
Emirates
Bank.

On March 6 2007, the merger between Emirates Bank and National Bank of Dubai to form
“Emirates NBD “was announced. Emirates were the second largest and National Bank of Dubai
was the fourth largest bank in UAE. This
merger was in tune with the high levels of growth
achieved by the banking industry over the past few years on the back of the booming UAE and
regional economies. During the past three years, the UAE GDP grew at an average rate of 20 per
cent. In 2007 the t
otal assets of UAE banks grew by 45 per cent to US $ 337 billion. The value of
deposits grew by 35 per cent to US $ 204 billion.

The merger resulted in the union of two powerful legacies which was aimed to become a leading
regional financial institution w
ith an increasing international presence .The merger was aimed to
leverage financial strength, scale and market positioning to capture domestic and regional
opportunities. The merger facilitated the partnership for wholesale,
retail,

investment,

treasury
a
nd Islamic banking clients .The total income of the two banks reached AED 7.1 billion , an
increase of 50 per cent year on year. The group became a major player in the corporate banking
arena with a joint market share of almost a fifth of corporate loans.
This strategic merger was



3

The author developed the case for class discussion rather than to illustrate
either effective or ineffective handling of the situation. The case is based
on published secondary data.


The case, instructor’s manual, and synopsis were anonymously peer reviewed
and accepted by the
Western Case writers Association Conference, March 25,
2009, Kailu
-
Kona, Hawaii
.


All rights are reserved to the author. Contact:
Issam A. Ghazzawi, University o
f La Verne, College of Business and Public
Management, 1750 Third
Street
, La Verne, CA 91750, 909
-
593
-
3511,
ighazzawi@laverne.edu
.

3


meant to create a bank with scale, financial strength and service quality standards to compete
effectively in a dynamic market.

Significance of the merger

Increased Power

The merger created a national champion and a regional powerhouse



Largest UAE bank by assets and market capitalization



Significant strengthening of competitive positioning



Highly diversified business mix



Corporate/retail banking powerhouse



Significantl
y enhanced distribution network in the UAE

Increased Financial Strength and Scale



Largest bank by assets in the GCC



Among t
op
five

regional bank by market capitalization



Well capitalized with the highest shareholders’ equity in the UAE on a combined b
asis.



Expanded regional presence



Strategically positioned to capture high growth potential of domestic and regional
markets


Superior Value creation potential

Expected significant cost and revenue synergies driving value creation

Significant Events

D
ate

Events

06 March 2007

The merger between Emirates Bank and National Bank of Dubai was
announced

14 March 2007

A Merger steering committee was appointed

09 April 2007

Goldman Sachs International appointed as lead financial advisors on the
merger

12 July 2007

Emirates Bank and National Bank of Dubai announced terms of their
merger

05 Sept 2007

Emirates Bank Shareholders approved the merger terms at Extraordinary
General meeting

06 Sept 2007

National Bank of Dubai shareholders approved the merg
er’s terms at an
Extraordinary General Meeting

18 September 2007

Emirates NBD closed its initial offer to shareholders of National Bank of
Dubai and Emirates Bank

08 October 2007

Emirates bank and National Bank of Dubai’s shares were suspended from
4


trading on the Dubai Financial market

16 October 2007

Trading began on shares in Emirates NBD PJSC , the newly merged
banking group listed on the Dubai Financial market .

18 October 2007

Emirates NBD announced the integration of its ATM Network making

it
the largest in the UAE.

04 Nov 2007

The National Bank of Dubai’s building became the new headquarters for
Emirates NBD.



Emirates NBD’s strategy is focused on seven key areas.

1)

Retail banking

The merger was intended to consolidate the bank’s leadership position in the retail
business. The

merger facilitated the creation of a strong brand for the combined retail
business which had the largest distribution network in the UAE.

2)

Wealth Management


Wealth management services have been growing strongly in the UAE on account of
sustainable economic growth. Emirates Private banking offers immense potential for
growth. The

consolidated bank would be in a position to leverage the bank’s investment
banki
ng, asset management, structured product, real estate, trust and family office
product capabilities in order to further enhance the wealth management business.

3)

Corporate banking

The merger was also aimed to boost the combined bank’s leading position in the
corporate banking arena. The rapid growth of small and medium sized enterprises in the
region was meant by Emirates NBD’s sophisticated and tailored product offerings .This
form
s a core strategy for the bank to further increase the growing
corporate and

institutional client base.

4)

Investment Banking

Dubai’s emergence as a financial centre has facilitated Emirates NBD’s attempt to create
a world class investment banking platform.
The merger also intended to enhance the
product capabilities that ranged from corporate finance advisory and execution to private
equity offering.

5)

Islamic Banking

Emirates NBD also envisages enhancing and expanding Islamic banking. The strategic
perspecti
ve involved expanding the current branch network and increasing innovation in
the Shariah compliant product portfolios .Expansion was also possible from cross selling
to the Bank’s broader customer base.

6)

Strategic Expansion

The merger aimed to strength th
e bank’s presence in the GCC particularly in the
Kingdom of Saudi Arabia and Qatar. The merged bank could leverage the scale, financial
strength and existing regional network to pursue this strategic objective.

7)

IT and operations

5


The synergistic benefits w
ould also result from the integration of the two banks
Information systems and operations which could result in value addition through
reduction in costs.


Financial Highlights

The significance of the merger of Emirates Bank International (EBI) and Nation
al Bank
of Dubai (NBD
) was

reflected in the strong pro forma results of Emirates NBD. Total
income reached AED 7.1 billion on a proforma basis .The primary drivers for the
increase in total income were robust growth in customer assets supported by a rise
in
customer deposits across both the retail and wholesale businesses .The group continued
to maintain a healthy mix of funded and non funded income. The growth in income was
supported by a steady increase in fee based product revenue.

The operating costs

for Emirates NBD was AED 2.7 billion on a pro forma
basis,

an
increase of 51 per cent over 2006. The increase in costs was driven by continued
investments in expanding distribution and product capabilities building robust
infrastructure and developing str
ong governance capabilities.


Net profits of the Group were AED 4 billion (excluding amortization of intangibles) for
2007 on a pro forma basis, an increase of 35 per over 2006. Emirates NBD reported a
25.12% return on average shareholder
equity,

a 1.6% increase in 2006. Total assets
recorded at the end of 2007 were AED 253.8
billion an

increase of 53% for EBI and
NBD’s combined assets in 2006.This positioned Emirates NBD with a 20.5 per cent
market share of banking assets in the UAE and as the la
rgest bank in the Middle
East.


Business Highlights

Emirates NBD’s wholesale banking’s net income (excluding IPO business) grew by 38
per cent and its assets by 42 per cent in the year 2007.The Structured Finance and
Syndication Division (SFS) remained
at the forefront of the UAE’s loan syndication
market in 2007.The division gained a significant share in the local debt syndication
market in value and number of deals acting as mandated lead arrangers and book runners
in a number of high profile transacti
ons. The division also led managed multiple
benchmark transactions for the UAE’s largest and highest profile issuers in the year
2007.
The Financial Institutions Division (FDI) became an important contributor to the
wholesale banking sector in the year 200
7. In
2007,

the division managed an array of
products and services ranging from debt
syndications,

forfeiting trade and payment tie
ups,

structured
credit,

primary and secondary trade financing and asset distribution from
its revenue
contribution.

Consumer

Banking and Wealth Management

As a result of the merger, the Group’s distribution network became the largest in the
UAE in 2007.Emirates NBD ended the year with a total of 88 retail branches following
the opening of 13 new outlets .The number of ATMs inc
reased to 440 following the
6


implementation of an
additional 88

in the period .The expansion of the Al Shaheen and
Suhail branch network to 27 in 2007 positioned the Bank with the largest network of
affluent banking centres in the
country.
Growth in custome
r deposits and loans was
strong in 2007 outperforming the market growth. With the advent of cross selling across
the integrated group, improved delivery across all channels and a partnership with the
UK’s John Charcoal Brokers facilitated NBD to become the

UAE’s leading non Islamic
home loans provider in 2007.These additional advantages increased the importance of the
mortgage business for the bank.

In April 2007, ahead of the Emirates Bank and NBD merger, the asset management
business of EBI merged with th
e asset management business of Emirates Financial
Services to form Emirates
Investment Services
(EIS)
.

Private Banking

As part of its expansion strategy , Emirates NBD acquired two new locations in 2007
.The Private Banking division worked with its London

Office
for

the introduction of the
Hammersmith project to its client base .The Investment Management Group added a mix
of mutual funds to its platform in 2007 covering emerging markets, multi manager ,
global real estate and commodities .

Investment Banking


NBD Investment Bank provides integrated investment banking, financial markets and
private equity solutions and serves the needs of corporations, governments, institutional
and high net worth clients across the GCC and wider MENATSA

region. A number of
transactions were successfully managed by the investment bank on behalf of prestigious
clients such as Nakheel, Dubai Aerospace, Istithmar, Dubai World Trade Centre and
GEMS (loan syndication and bridge finance)

Group Treasury and Ma
rkets

I
n

2007 , the group treasury activities included USD 1.5 billion 5 year syndicated deposit
facility ; USD 1 billion Sukuk

Trust Certificate Issuance program arranged for Emirates
Islamic bank. The Group’s new credit structuring and trading areas b
ecame fully
operational in 2007 .The Foreign Exchange and Interest rate trading volumes increased
positioning the newly merged group as a leading market maker in GCC currencies.

As a result of the merger, the Group’s direct International footprint extende
d to six
countries outside of UAE namely the kingdom of Saudi Arabia, Qatar, United
Kingdom,

India,

Iran and Singapore. The international banking team participated in four merger and
acquisition transactions successfully acquiring a card services company i
n
Egypt,

a
strategic move for the Group’s North Africa development
plans.


Information Technology and Operations

A number of major system initiatives were implemented in the year 2007 including core
banking system replacement, the adaptation of an ERP system for e HR and Enterprise
Financial Management and the implementation of a state of the art treasury system
7


whi
ch enables integrated processing of the front, middle and back offices. A new
consumer finance system that processes the complete life cycle of loans was implemented
in the year 2007.

According to bank officials, merger synergies achieved in the year 2008

exceeded the
initial expectations in the year 2008 with total synergies achieved during 2008 of AED
235 million exceeding the targeted synergies of AED 124 million by 90% .

The integration of the combined banks Group ATM’s and Smart Deposit Machines
(S
DM) were completed by 2008 which rose to more than 650 across UAE making it the
biggest network in the country. Mobile and online banking has also been fully integrated
with enhanced functionalities and 13 payment partners available to all of the bank’s
cu
stomers.

The Key terms of the merger

The creation of Emirates NBD was by the merger of common ownership of EBI and
NBD. The salient features of the consideration were 1) Exchange ratio of 0.95 Emirates
NBD shares for every NBD share. 2) Exchange ratio of
1 Emirates NBD for every EBI
share.

As on July 01 2007, the implied share price for NBD was AED 8.84.The implied share
price for EBI was AED 9.30.The implied total consideration was AED 13.75 billion.
4
The
offer price represented 14 per cent premium to the
prices on the day prior to
announcement.
The exchange ratio of 0.95 EBI share for 1
NBD share implied that EBI
shareholders owned 66.3 per cent of the share capital in Emirates NBD and NBD
shareholders owned 33.7 per cent of share capital in Emirates NBD.


Key Merger benefits

Shareholders



Creation of the leading UAE banking Franchise



Enhanced regional and international expansion opportunities



Increased financial strength and capital position to support growth



Value creation through revenue and cost syn
ergies established management
expertise and exchange of best practices


Customers



Greater Convenience through broader domestic branch and ATM Networks



Wider access to regional and international markets through the Group’s expanded
presence



Broader p
roduct suite and delivery of more customized financial solutions

Employees




4

Share price of EBI of AED 10.48 on 5 Mar
ch 2007 , implying a share price for NBD of AED 9.96 based on 0.95x
exchange ratio .Market price of NBD on 5March 2007 of AED 8.75 implying 14% premium. All share prices
adjusted for bonus share issues.

8




Enhanced career opportunities through a growing and more diversified organization



Improved training and career development capacity



Greater ability to attract and retain top tale
nt

Synergies expected from the Merger

Revenue synergies

Corporate banking
-
The cross selling of major product capabilities is expected to result in
revenue synergy through increase in fee income.

Retail banking



In this
sector,

the focus will be on cross selling among major product
categories.
Revenue synergy is also expected from incremental revenue generated through
market share/pricing advantages and leveraging of the largest distribution network in
UAE.

Investment banking


Expansion of client base and cross selling of new product capabilities is
expected to lead to revenue synergies
.Greater penetration is also expected particularly
regionally
in larger projects and financing deals by leveraging balance sheet and capital .

Revenue synergy is also expected from improved

cost of funding due to a stronger capital base
and improved sales due to integrated broader offering.



Cost Synergies

Cost synergies is expected to result from retail banking due to a) Branch and ATM network

consolidation b) Integration of card acquiring business c) Pricing advantages on advertising
/marketing spend. The cost synergy was also expected from Optimized head office and group
functions .Cost synergies would also result from reallocation of IT pers
onnel from NBD to EBI
IT dedicated
centre. Cost

synergies were

also expected from brokerage due to improved
efficiency from integrated operations and IT platform. Cost synergies are also expected from
leveraging Emirates Islamic bank as a platform for unif
ied Islamic offerings.

In 2008, full year synergy targets were exceeded on all revenue, costs and one off synergies with
achieved synergies AED 235 million ahead of target by 90 per cent .

Target Synergies : AED 346 million of recurring annual synergies we
re expected by the third
year post merger ,plus AED 26 million of one off synergies totaling AED 372 million .The
recurring synergies as given below was expected to be delivered 33 per cent in year 1 (2008),
66% in year 2 (2009) and fully by 2010.

Synergie
s
(2010)

Total AED
m
illion

% of Smaller base

% of combined base

Actual

Benchmark***


Actual

9


Revenue

195

10.5%

5
-
10%


4.1%

Costs

151

22.2%

14
-
26%


8.3%



Source:

Emirates NBD Merger Report

Year 1 target therefore AED 12 m
illion

(33% of AED 372 million) of which recurring synergies
represent ;( one off synergy commitment in 2008 is AED 9 million)

Synergies
(2008)

Total AED
m

% of Smaller base

% of combined base

Actual

Benchmark***


Actual

Revenue

65

3.5%

1.7
-
3.3%


4.1%

Costs

50

7.4%

4.6
-
8.6%


2.7%

Note: Base

used was 2006 financial parameters for computing synergy targets .Smaller base was
NBD and combined was aggregated EBI and NBD .

It is reported that the achieved synergies were to a tune of AED 235 million

ahead of 2008

full
year target by 90 per
cent.

Key drivers of Revenue synergies



Revenue Synergies for 2008 full year (AED 104 m) resulted on account of:



Largest distribution network of 120 branches and 659 ATMs and SDMs.



Focus on cross selling like mortgages greater than AED 100 m loans



Enhanced market share/ pricing advantages
.




Embedded customer efficiency framework which was reflected in tripling of branch sales

Key drivers of Cost synergies



Cost Synergies:
2008 (AED 109 million)



Single Head office in place



Created efficiencies through uni
fied business models



Combined marketing and advertising efficiencies



One off Synergies for 2008 full year (AED 22 m)

On account of projects and initiatives
discontinued

due to merger namely Islamic banking set up previously planned in
NBD.


Governance

The board was evenly split with six members
from EBI

and six from NBD .There were 12 non
executive
positions.

Integration
Process
.

10


Emirates NBD was listed on Dubai Stock
Exchange on 16
th

October 2007.The first Annual
General meeting for Emirates NBD took place on 23rd
th

March


2007.

By April 2008, the
combined bank was able to successfully integrate 92 smart deposit machines
.By July 2008 , the
integration of ATMs was com
pleted to form the largest network in the UAE which consisted of
545 ATMs. Emirates NBD’s large corporate unit was inaugurated by July
2008.During the

period Aug

Dec 2008 integration of other systems took place. Treasury teams started
functioning as a si
ngle foreign exchange trading entity. Mobile and online banking were
integrated with enhanced
functionalities. The

integration of credit cards platform
was completed

by Feb 2009.

The
entire
integration process
was fully on tract for completion by 2009
.The major milestones in
the system integration like r
etail loan systems on FinnOne, the General ledger on Oracle and the
integration of the call centre platforms were completed in 2009. The final milestone of the
migration of NBD customers on to the new c
ore banking system, Finacle were planned for
November 2009. The integration
process with

respect to legal aspects were expected to be
completed by the final quarter of 2009
.

The
Current Scenario


The strategic priorities for the combined Emirates NBD would

be to navigate the current
environment and take advantage of the
opportunities.
During the 9 month period ended 30
th

September 2009, the total income grew up by 24 per
cent compared

to AED 6.7 billion for the
same period in
2008. During this

period the credit quality
remained healthy across the bank’s
corporate and retail portfolios .The total income for the first 9 months of 2009 rose by 24 per
cent to AED 8278 million compared to AED 6664 million in the comparable period of 2008.In
the thir
d quarter of 2009, total income grew by 39% to AED 2768 million
from AED 1985
million in Q3
2008. The NPL
ratio,

excluding impaired investment
securities, increased

to 1.88%
in Q3
2009 from 1.56% reported in Q2 2009 and 0.95% reported in 2008
.



Emirates N
BD’s branch network grew further in the 9 months ended 30 September 2009, with
the addition of 5 new branches, taking the total to 99. Wholesale banking deposits increased by
23 per cent since 31 December 2008 and the advances portfolio increased by 9 per
cent since the
end of 2008.The merged bank have now a combined market share of almost a fifth of corporate
assets in the UAE

The largest banking merger of the Middle East is expected to be completed this year on target
and with synergies ahead of forecast

.In the context of recessionary trends across the world,
Emirates NBD has to pursue its growth opportunities
to realize the synergistic benefits from the
merger.



11






Appendix

Financial
Parameters:

Emirates Bank






Parameter(AED in
000)

2005

2006

Total Assets

59412867

95878141

Total Liabilities

51662648

87000094

Loans and
Receivables

38567246

59278208

Customer deposits

29464340

40887052

Total operating
Income

2240901

2896209

Net Profit

1728581

1888292

Financial
Parameters:

NBD

Parameter(AED in
000)

2005

2006

Total Assets

51408311

69276170

Total Liabilities

45910627

63232535

Loans and
Receivables

27936688

43218217

Customer deposits

37091537

45408116

Total operating
Income

1641009

1861416

Net Profit

1102795

1106347


Financial Parameters: Emirates NBD Consolidated data for premerger and post merger period

Value in '000 AED

Year







Parameters

2005

2006

2007

2008

Total Assets

110821178

165154311

253815643

282413676

Total Liabilities

97573275

150232629

228656889

256651755

Loans and Advances

66503934

102496425

151952233

188006789

Customer deposits

66555877

86295168

126134743

139979804

Total Operating Income

3881910

4757625

4959337

8446716

Net Profit

2831376

2994639

2770908

3681233

12






Table:
1
NBD Share price daily returns during the announcement period:

Day t

Return in %

Cumulative Return in %

-
5

0

0

-
4

0.975

0.975

-
3

1.44

2.415

-
2

-
1.9

0.515

-
1

1.94

2.455

0

0.47

2.925

1

4.73

7.655

2

0.45

8.105

3

-
5.8

2.305

4

-
0.47

1.835

5

1.92

3.755



Figure: 1 Share Price returns for NBD during the merger announcement period (
-
40 to + 40 day )



-0.05
0
0.05
0.1
0.15
0.2
0.25
-40
-36
-32
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
24
28
32
36
40
Cumulative share price returns
-
NBD

Cumulative share price
returns -NBD
1
3







Table:
3

Emirates Bank‘s
Share price daily returns during the announcement period:

Day t

Return in %

Cumulative Return in %

-
5

-
2.86

-
2.86

-
4

-
2.95

-
5.81

-
3

-
0.38

-
6.19

-
2

4.19

-
2

-
1

-
4.02

-
6.02

0

-
3.05

-
9.07

1

7.48

-
1.59

2

-
3.60

-
5.19

3

-
1.14

-
6.33

4

-
1.92

-
8.25

5

1.96

-
6.29


Figure:
2

Share Price returns for
EBI
during the merger announcement period (
-
40 to + 40 day)



-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
-40
-34
-28
-22
-16
-10
-4
2
8
14
20
26
32
38
Cumulative share price returns for
EBI

Cumulative share price
returns for EBI
14








References

1)


www.ebindmerger.com

2)

http://emiratesnbd.com/newsroom/article.cfm?newsID=308

3)

Emirates NBD Annual Report 2007,