The Abu Dhabi exchange-listed ADCB and UNB have a market value of around $10 billion and $2.9 billion, respectively.
The potential merger will establish a lender with assets of around $110 billion, as the UAE’s capital and biggest sheikhdom is pushing ahead with the consolidation of state-run firms.
The merger transaction, that would create the UAE’s fifth-largest bank, will be announced as early as this month if the three lenders reach a deal, Bloomberg News reported, citing informed sources.
The banking sector in the GCC nation is facing daunting challenges, including sliding profits on the back of the government's lower spending, slower economic growth and a drop in asset quality.
"Consolidation among Abu Dhabi institutions has been picking up as the sheikhdom manages its wealth following the slump in crude prices," Bloomberg said.
In 2017, National Bank of Abu Dhabi and First Gulf Bank, the oil-rich emirate's two largest banks, finalised a merger to create First Abu Dhabi Bank.
In the same vein, Mubadala Investment Company and the Abu Dhabi Investment Council created a sovereign wealth fund in March with about $220 billion of assets.
“As the merger of FAB has played out positively, the smaller banks are feeling the competition now, forcing them to consolidate and stand up against the mega bank,” Joice Mathew, the head of equity research at United Securities in Muscatm, told Bloomberg.
He added that if successful, the three banks' potential merger would contribute to boosting the competitive positioning of these smaller lenders, especially ADCB.