The Daily Update - NBAD-FGB merger, Saudi oil and Russian bonds

Reports this week suggest that two of largest state-owned banks in Abu Dhabi are looking to merge; National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB). According to those in the know, the merger could lead to the creation of a bank with a market cap just under USD30bn, larger than that of Standard Chartered and Deutsche Bank for example. The NBAD-FGB tie-up would see combined assets of ~USD171bn, according to Q1’16 figures. If the merger goes through, the combined entity could be the MENA region’s largest bank in terms of assets, ahead of  QNB, which recorded assets at USD150bn in Q1’16.

The merger would add gravitas to the Emirate’s financial free zone, Abu Dhabi Global Market (ADGM), which launched last year, and increase the prospect of international expansion. This news alongside the Abu Dhabi’s push to become MENA’s capital of financial technology, or FinTech, will no doubt help the Emirate’s continued effort in diversifying away from the hydrocarbon sector.

Staying with the Middle East, during his visit to the US, the new Saudi energy and industry minister, Khalid al-Falih insisted that the supply glut “has disappeared”, what remains, he says, is the “overhang of inventory”. He went on to discuss the OPEC kingpin’s “strategic importance” in balancing “supply and demand once market conditions recover”, adding “The kingdom's oil policies are rooted in responsibility, and Saudi Arabia is seeking to maintain that balance while also giving heed to moderate prices for producers and consumers.” He did indicate caution to those producers who look to higher prices in the short term saying, “The tools that Opec has used in the past - targeting specific prices - have not always worked in the long term...They create market dislocations and ultimately hurt producers and consumer.” Brent Crude remains above the $50pb level for now.

Keeping with the oil theme, and on to the second largest oil producer, Russia which has seen benchmark yields fall to near two year lows as the central bank resumed rate cuts after a ten month hold. We are holders of hard currency quasi-sovereign debt, which have been some of the best performers so far this year; state-owned Gazprom 8.625% 2034 (USD) are trading ~125bps lower, at a yield of 6.2% and Russian Railways 7.487% 2031 (GBP) has rallied over 155 bps to 6.6%. Both positions continue to offer attractive risk adjusted expected returns of 16.8% and 23.1% respectively.

As interesting as all this may be, we are sure everyone’s minds are fixated on the impending Referendum results, to be officially announced at 07:00 BST tomorrow from Manchester Town Hall. With only a few hours left to vote, both sides continue with all their might to sway opinions. Whatever the outcome, current opinion polls suggest that half the population will be unhappy with the “too-close-to-call” result. The bookies and sterling have made up their minds, the pound traded at year high against the dollar intraday today. Happy voting fellow Brits.

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