National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) on Sunday confirmed they were in talks over a possible merger or a combination of the two businesses.
Reuters, citing 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 said each lender had formed a working group made up of senior executive management to "review the commercial potential along with any legal and structural aspects of a merger or combination".
Once complete, the groups will provide their recommendations to their respective boards of directors.
"At this time, there is no certainty that discussions between NBAD and FGB will result in a merger or combination," the statement added.