(Bloomberg) -- Kuwait Finance House KSCP is seeking to hold talks with Bahrain’s Ahli United Bank BSC for a potential merger that would create an Islamic lender with about $92 billion of assets, six months after negotiations broke down over price.

KFH sent a letter inviting Ahli United to sign a memorandum of understanding and a non-disclosure agreement to start valuation studies, the Kuwait-based bank said in a statement on Monday. The lender wants “to explore the possibility to unify the businesses and assess the feasibility of establishing a new banking entity,” KFH said.

The deal may provide a boost to debt-laden Bahrain, which could raise more than $530 million from selling its social-insurance fund’s 10 percent in Ahli United Bank, as the country struggles to cope with lower oil prices. It also comes after the two lenders earlier this year hit a roadblock in talks over valuation differences, people familiar with the matter said in January. The banks are said to have began talks in May 2017 to combine their operations.

"With the Bahrain government holding a lot of talks with potential official creditors, it seems plausible that Ahli United Bank has been forced back to the table," said Richard Segal, a senior analyst at Manulife Asset Management Ltd. in London. "Governments would not ordinarily be able to access resources belonging to state pension funds, but these are unconventional times.”

Fifth Fleet

Kuwait’s Public Institution for Social Security holds about 19 percent of Ahli United Bank, which may also aid negotiations.

Shares in KFH closed 1.6 percent higher on Monday to extend gains this year to more than 19 percent. Those of Manama-based Ahli United climbed 0.8 percent to pare its decrease for 2018 to 0.3 percent.

Bahrain, one of the most vulnerable Gulf Arab economies to lower crude prices, has been waiting for financial support from its neighbors to help reduce ballooning debt and shore up foreign-exchange reserves. The country, a key Saudi Arabian ally and home to the U.S. Fifth Fleet, hired investment bank Lazard Ltd. to advise on how to repair its strained public finances, people with knowledge of the matter said earlier this month.

Lower oil prices over the past four years are forcing Gulf lenders to consolidate for scale and to better compete in a crowded market. Subdued credit growth, a squeeze on deposits, higher cost of funds and deteriorating asset qualities are driving consolidation in the regional banking sector.

Abu Dhabi lenders National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC last year merged to create a regional powerhouse with $175 billion of assets. HSBC Holdings Plc’s affiliate Saudi British Bank offered to take over RBS-backed Alawwal Bank in a $5 billion all-stock deal in May, marking the kingdom’s first bank combination for almost 20 years.

"KFH will benefit in the long term from gaining access to markets such as Iraq and Egypt, increased access to Oman and U.K. and further consolidation of presence in Kuwait,” said Joice Mathew, the head of equity research at United Securities in Muscat. “AUB should benefit from KFH’s expertise in fast growing Islamic banking in an otherwise subdued banking environment in the region."

Kuwait Investment Authority, the country’s sovereign wealth fund, holds a 24 percent stake in KFH and in September hired a consultant to study the feasibility of a possible merger between the two banks, the lender said at the time.

"The integration of business could be challenging” because of the “geographical dispersion” of their assets and combination of Islamic and conventional banking, Mathew said.

To contact the reporters on this story: Archana Narayanan in Dubai at anarayanan16@bloomberg.net;Abbas Al Lawati in Dubai at aallawati6@bloomberg.net;Dinesh Nair in London at dnair5@bloomberg.net

To contact the editors responsible for this story: Shaji Mathew at shajimathew@bloomberg.net, Vernon Wessels, Jon Menon

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