On 24 March 2020 the Central Bank of the UAE issued Circular No. 02/2020 implementing its Major Acquisitions Regulations (Regulations). The purpose of the Regulations is to regulate and supervise major acquisitions being undertaken by banks in the UAE with a view to ensuring the soundness of UAE banks and contributing to financial stability and protection of retail customers.
Although Federal Law 14/2018 regarding the Central Bank & Organization of Financial Institutions and Activities (Banking Law) included provisions relating to holders of controlling interests in licensed financial institutions in the UAE and required institutions to obtain Central Bank prior approval of mergers and acquisitions, the Regulations now impose more targeted obligations and requirements on banks considering such transactions.
Commercial banks in the UAE are divided between locally incorporated banks, which are public shareholding companies licensed to operate in the UAE, and branches of foreign banks which have obtained the Central Bank's licenses to operate in the UAE. As at 30 June 2019 there was a total of 49 banks operating in the UAE, 22 of those banks were local banks and 27 were foreign banks1. In comparison to other jurisdictions, the UAE's banking market is arguably over-saturated. By way of comparison, there are 13 licensed local banks and 13 licensed and operational foreign banks in Saudi Arabia in May 20202, serving a population of 34.81 million people, which is 0.07 banks per 100,000 people. The UAE, which has a population of 9.6 million people, has 0.51 banks per 100,000 people.
It is therefore not surprising that a number of mergers and acquisitions have occurred between UAE/GCC based banks in recent years, including a merger between Abu Dhabi Commercial Bank, Union National Bank and Al Hilal in May 2019, an acquisition of Noor Bank by Dubai Islamic Bank in January 2020 and merger of the National Bank of Abu Dhabi and First Gulf Bank in April 2017. A variety of additional factors, including a potentially vulnerable real estate sector, declining oil prices and the impact of COVID-19 on the global economy are likely to drive further consolidation in the market. Indeed, ratings agency Fitch has warned that banks in the UAE may be forced to consolidate if the current COVID-19 pandemic continues3.
The Regulations are, therefore, timely. The Regulations apply to all banks licensed to carry out financial activities by the Central Bank in the UAE, including subsidiaries, affiliates and international branches.
Key features of the Regulations include:
- Banks must not acquire any institution, or transfer any of their liabilities to another person without first obtaining Central Bank approval.
- Banks must obtain approval from the Central Bank prior to completing a 'Major Acquisition'. A 'Major Acquisition' is an acquisition or investment by a bank where the aggregate amount being acquired exceeds 5% of the bank's total regulatory capital (calculated by reference to that bank's specific capital adequacy requirements), or which is otherwise deemed to be a 'Major Acquisition' by the Central Bank.
- In obtaining prior approval, banks must provide certain minimum information for the Central Bank's consideration, including the projected impact on the bank, due diligence reports and valuation methodologies.
- Banks must not hold shares (and convertible debt) in companies beyond a limit of 10% of their total regulatory capital (this will not apply to an acquisition of a subsidiary or affiliate, but such acquisition will still be subject to Central Bank approval).
- A bank's board of directors must implement policies and procedures to enable identification and mitigation of risks associated with Major Acquisitions.
- Major Acquisitions being undertaken by UAE banks outside of the UAE will be subject to enhanced consideration and due diligence.
Although banks will already be mindful of their obligations under the Banking Law when considering mergers and acquisitions, the Regulations impose an enhanced level of requirements which should be considered in the early stages of the contemplation of a transaction. The wide application of the Regulations also means that it may not be immediately clear what transactions would be classed as "Major Acquisitions" for the purpose of the Regulations. The requirement to provide copies of due diligence findings to the Central Bank will likely raise questions around the Central Bank's reliance on those reports, and deal advisors to banks undertaking transactions in the UAE should also be cognizant of how that information could be used by the Central Bank in its decision making process.