National Bank of Abu Dhabi and First Gulf Bank won board approval on Sunday for a merger to create a banking heavyweight with $175 billion in assets, part of the emirate's plan to revamp its economy hit by lower oil prices.
The newly-branded National Bank of Abu Dhabi will become one of the Middle East and Africa's biggest banks when the tie-up is completed in the first quarter of 2017, rivalling Qatar National Bank, which has just purchased Turkey's Finansbank.
The tie-up comes as the Gulf's oil-rich countries take new steps to diversify their economies after two years of lower oil prices have weighed heavily on state revenues.
By creating a national banking champion, Abu Dhabi hopes to better service its own changing economy and those of the region, as well as take on global banking rivals at home and abroad.
With a combined market value of $29.1 billion as of June 30, the new bank will overtake the likes of Britain's Standard Chartered and Royal Bank of Scotland and France's Credit Agricole.
"The proposed merger will create a bank with the financial strength, expertise, and global network to support the UAE's economic ambitions at home and drive the country's growing international business relationships," the banks said in a joint statement.
The deal is one of two significant consolidation efforts currently underway in Abu Dhabi. Last week, the government ordered the merger of state investment funds Mubadala and International Petroleum Investment Company.
Abu Dhabi's efforts to reform the economy are considered slow compared with neighbouring Saudi Arabia, which has adopted a much more radical approach to restructure the economy through a national transformation plan.
Even then, bank mergers are uncommon in the Middle East due to cumbersome regulation and an unwillingness by major shareholders to cede control, indicating significant government support for the deal between NBAD and FGB.