The UAE has 23 local banks and 28 foreign banks competing for market share in a relatively small economy and population.

The overbanked market squeezes down profit margins. The situation makes banks’ position even more difficult as slower economic growth in the UAE affects their own revenue and profit growth.

While banks in Abu Dhabi have officially quashed speculation of more mergers after First Gulf Bank and National Bank of Abu Dhabi combine, they would not be such a bad idea.

Larger banks would be able to keep their costs down, allow them to grow their footprint and market share, and gain access niche markets.

Usually bank mergers are used in the GCC to save a bank in trouble, but a proactive strategy on mergers would create stronger, more efficient banks.

There are a number of small banks in the UAE that could be potential targets for mergers or acquisitions. Boards are held back from attempting them by large private shareholders, who do not see the improved profits as enough motivation for losing control of banks.

The rise in share prices on the Abu Dhabi exchange as speculation mounted over new mergers, and the subsequent drop, suggests that minority shareholders would support consolidation.

As the UAE adjusts to its new economic reality, with less demand for loans, higher levels of problem loans and reduced profitability, talk of banking sector mergers is likely to grow and grow.