The boards of Abu Dhabi-government-controlled National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) have voted to merge the two financial giants in the emirate and recommend the deal to respective shareholders. The transaction is expected to create the largest lender by assets in the Middle East and North African (Mena) region next year.

The statement did not say when the shareholders of the NBAD and FGB will meet to vote on the possible combination. The merger is subject regulatory approvals and getting a nod from at least 75 per cent of shareholders from each bank.

Both entities will continue to operate independently until the merger becomes effective, which is expected in the first quarter of 2017.

“The proposed merger will create a bank with the financial strength, expertise, and global network to support the UAE’s economic ambitions at home and drive the country’s growing international business relationships,’’ the lenders said in a joint statement to Abu Dhabi Securities Market (ADX), where their shares are traded.

The proposed transaction is a merger of equals and will be executed through a share swap, with FGB shareholders receiving 1.254 NBAD shares for each FGB share they hold. The exchange ratio implies a discount to FGB’s shareholders of 3.9 per cent based on closing share prices on 30 June and a discount of 12.2 per cent to the three months’ average share price as on 16 June 2016, when the media reported the transaction, according to the statement.

Once the new NBAD shares are issued, FGB shareholders will own approximately 52 per cent of the combined entity and NBAD shareholders will own 48 per cent. The Government of Abu Dhabi and its related entities will own about 37 per cent on the new bank, which will retain NBAD’s brand name. Shares of First Gulf Bank will be delisted on the effective date of the merger.

The board of the combined lender will include four nominated directors of FGB and the same number of directors from NBAD.

Sheikh Tahnoon bin Zayed al-Nahyan, who is currently chairman of FGB, is the chairman designate of the new bank, while Nasser Ahmed Alsowaidi, who is currently Chairman of NBAD, is named the Vice

Chairman designate. The merged entity will be steered by Abdulhamid M. Saeed as the chief executive officer. The new board and management will assume the roles once merger becomes effective and until then Andre Sayegh and Alex Thursby will continue to lead their banks independently as CEOs at FGB and NBAD, respectively, according to the statement.

Largest bank

The combined bank will be the largest bank in Mena, with AED642bn ($175bn) of assets and a combined market capitalisation of approximately AED106.9bn. It entity will have a 26 per cent share of outstanding loans in the UAE alone, and will operate an international network of branches and offices spanning 19 countries.

“The boards of FGB and NBAD believe that the merger offers significant benefits to customers and investors. FGB has a market-leading consumer banking franchise, with one of the strongest credit card offerings in the UAE

and a long-standing National Housing Loan programme run for the Abu Dhabi government. NBAD is a leader in the UAE in wholesale banking and capital markets advisory with strong international connectivity,’’ according to the statement.

The combined bank will be well-diversified, with loans to the corporate sector representing 52 per cent of the total loan book, retail sector accounting for 26 per cent, and loans to the government sector representing 22 per cent.

Both the banks expect to achieve economies of scale through the transaction and deliver cost synergies of approximately AED500m annually. Cost benefits are expected to be realised over three years, and the one-time integration cost is expected to reach about AED600m.

The proposed merger comes at a time when the lenders in the UAE 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 is 69 per cent owned by sovereign wealth fund Abu Dhabi Investment Council while state-owned investment fund Mubadala Development is the biggest shareholder in FGB.

If the deal gets shareholders and regulatory approval, 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 into other countries as growth slows.

Credit Suisse and UBS Investment Bank are acting as financial adviser to NBAD and FGB, on the deal while Allen & Overy and Freshfields Bruckhaus Deringer are acting as legal adviser to the banks, respectively.