Shares in National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) soared on Sunday after they confirmed discussing a possible merger to create what would be one of the largest banks in the Middle East and Africa.
Both banks have close links to the Abu Dhabi government, which has been cutting costs and restructuring its assets to increase efficiency as low oil prices slash its revenues.
Analysts said an NBAD-FGB tie-up could mark the start of a wave of consolidation in the United Arab Emirates banking sector, which is crowded with more than 50 banks and squeezed by lower government spending and tougher global capital rules.
Reuters, quoting sources aware of the matter, had reported on Thursday that the two banks were in preliminary talks on a merger.
In Sunday's statement, the banks, Abu Dhabi's largest and third largest lenders by assets, said each had formed a working group to "review the commercial potential along with any legal and structural aspects of a merger or combination." The groups would provide recommendations to their respective boards of directors.
Many analysts said that in the absence of details of how and when the merger might take place, buying the stocks in response to the merger news was risky.
"Shareholders have nothing to gain, in our view," wrote analysts at HSBC, adding that any share swap to pay for a merger could dilute the value of holdings in both banks.
But local investors welcomed the idea of an Abu Dhabi mega bank, pushing NBAD shares up their 15 percent daily limit on Sunday while FGB rocketed 11.5 percent. Shares in other Abu Dhabi banks also climbed on speculation that they might eventually be involved in an M&A wave.