Abu Dhabi-government-controlled National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) are exploring a merger that will create the biggest bank by assets in the Middle East, the two lenders have confirmed.

“NBAD and FGB have commenced discussions regarding the possibility of a merger of the two banks or a combination of the two businesses,’’ the lenders said in joint statement on Abu Dhabi Securities Exchange, where their shares are traded. Each bank has formed a working group made up of senior executive management to review the commercial potential along with any legal and structural aspects of a merger or combination, they said in the statement.

Discussions to create a single banking entity are in a preliminary stage, according to the joint statement. “On completion of the review, the working groups will provide their recommendations to the respective board of directors of each bank,’’ the statement said. “At this time, there is no certainty that discussions between NBAD and FGB will result in a merger or combination.’’

The merger will create a lender with assets of about $170bn, more than Qatar National Bank (QNB), which currently is the largest bank in the Gulf region, according to news agency Bloomberg. The talks of merger come at a time when the lenders are grappling with slowing economies, reduced government spending and deteriorating assets quality. Both NBAD and FGB posted a drop in first-quarter net income.

NBAD, with a market value of about $11.3bn, is 69 per cent owned by sovereign wealth fund Abu Dhabi Investment Council. State-owned investment fund Mubadala Development is the biggest shareholder in FGB, whose market capitalisation is $14.4bn, according to Bloomberg data.

First Gulf Bank could pay a premium of as much as 14 per cent to buy NBAD, according to a report from Dubai-based Arqaam Capital. NBAD would play the role of a junior partner in a deal, analyst Jaap Meijer said in the report. Meijer said a combination between the two may also pressure other banks in the country to merge.

If a deal is successful, it will be the first major banking merger since National Bank of Dubai and Emirates Bank International combined to create Emirates NBD in 2007. Shayne Nelson, the bank’s chief executive officer, has called for further consolidation, saying too many banks are serving a relatively small population.

The UAE is home to about 50 local regional and international banks, many of which are looking to expand in other countries to as growth slows in the relatively smaller domestic market.

Recent major deals in the UAE include mergers in the commodities and real estate industries. Emirates Global Aluminium was formed in 2013 through the combination of Dubai and Abu Dhabi’s aluminum companies, and Abu Dhabi property developer Aldar Properties acquired Sorouh Real Estate in June the same year.