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DUBAI—Two of Abu Dhabi's top lenders on Sunday said their boards have agreed on a merger plan that will create a Middle East banking giant with $175 billion in assets and emerging market ambitions.

The board of directors at National Bank of Abu Dhabi and First Gulf Bank recommended merging the two lenders via a share-swap transaction, which is expected to close in the first quarter of 2017, the banks said. The proposal was first announced last month.

Combined, the new entity will have a market value of about $29 billion, larger than the likes of Standard Chartered and Deutsche Bank.

Abu Dhabi is the capital of the seven-member United Arab Emirates. Its economy largely depends on oil exports unlike neighboring Dubai, which doesn't posses the same energy resources and started diversifying years earlier. With its finances hit by the two-year oil price slump, the emirate is consolidating its assets to cut costs and create stronger entities to face economic challenges. Last week, Abu Dhabi also engineered the proposed combination of two large state investment funds.

With a bigger balance sheet and a network that extends to 19 countries, the new entity could give Abu Dhabi more financial muscle and an international presence to support the emirate's growth plans at home and overseas.

NBAD and FGB in the past few years have been trying to expand their emerging markets presence as domestic growth has run out of steam. FGB, for example, has a branch in Singapore and representative offices in Hong Kong and Seoul. National Bank of Abu Dhabi is active in the Far East as well, but also in Sã o Paulo, Shanghai, Geneva and Washington, D.C.

"Expansion across fast growing emerging markets presents a vast business opportunity for our customers and for us, as a larger, stronger, combined bank," said Nasser Ahmed Alsowaidi, chairman of NBAD. "We will have the capital, expertise and international networks to be the preferred financial partner for anyone doing business along the West-East corridor," Mr. Alsowaidi said.

Several regional banks have been reeling as a consequence of the drop in energy prices. Governments from Abu Dhabi to Riyadh have had to rein in spending as oil revenues dropped, dampening growth in an already fragile economic environment. Government-owned banks such as NBAD not only finance large infrastructure investments but were also the prime recipients of government deposits when the region was still awash with oil-dollars.

The merger may also spark more consolidation in the United Arab Emirates banking sector where almost 50 local and international banks compete. Merger activity of this size is rare in the Persian Gulf, where the vast majority of banks are owned by local governments or members of the ruling families, who are usually reluctant sellers.

Under the terms of the deal, billed as a merger of equals, FGB shareholders would receive 1.254 NBAD shares for each FGB share they hold, implying a discount for FGB shareholders of 3.9% based on the June 30 closing price. FGB's shares would be delisted after the transaction is completed.

Once shareholders and regulators approve the merger, the Abu Dhabi government and related entities would hold a 37% stake in the new entity, which would retain the name of National Bank of Abu Dhabi.

Abdulhamid Saeed, FGB's current managing director, has been named to become the new bank's chief executive officer. He already serves on several boards of regional investment entities, including sovereign-wealth fund Mubadala. NBAD's current chief, former Standard Chartered executive Alex Thursby, will continue to be at the bank's helm until the merger is completed.

Credit Suisse and UBS were financial advisers to NBAD and FGB, respectively, on the proposed merger.

Write to Nicolas Parasie at nicolas.parasie@wsj.com

(END) Dow Jones Newswires

July 03, 2016 21:05 ET (01:05 GMT)

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