A decision by Saudi authorities to put a temporary halt to licensing of new foreign banks until the country completed an evaluation process for those issued in the past few years was something of a surprise. This could be a blessing in disguise for the sector, however, because it offers bankers and the international financial industry a chance to re-evaluate the sector and gain insight into the Kingdom’s future demand for new foreign banks.
The governor of the Saudi Arabian Monetary Agency (SAMA), Hamad Saud Al Sayari, said in early December 2006 that Saudi Arabia would not issue new licenses until it had reviewed the sector. Insiders told Executive that the outcome of this review is not at all a foregone conclusion.
“SAMA, which has issued full-fledged licenses to 11 foreign banks, has a committee reviewing these licenses to determine future demand. Even those in the committee do not know when they will finish the evaluation process. The only thing that is sure is that it will take time,” said an official close to the agency, who wished to remain anonymous.
It is clear that the Saudi market has a lot of use for advanced banking skills. With budget expenditures of $100 million scheduled for 2007, on the back of another $80 billion budget expenditure in 2006 (plus a 2006 budget surplus of an incredibly cozy $71 billion), the proverbial oil wealth of the desert kingdom is searching more than ever before for productive investment channels.
The Saudi banking sector is heading into a regional boom and expansion plan, especially in line with the joint government and private sector projects for building – until now four – giant economic cities. Over the next few years, these four new megalopolis projects in Rabigh, Hael, Medina and Jazan alone will require investments of more than SR155 billion ($41.3 billion).
Along the way, these cities will create a huge demand for financial advising, corporate financing and consultancy skills which are the domain of investment banks. But, smart banking is not only needed to help ascertaining that the humongous investments into the Saudi socioeconomic future will not be put into the sand wrongly.
The growing affluence of Saudi individuals and families and their retail banking requirements also have attracted new banks to the market after many years in which a small number of domestic banks served the country. On top of this, the opening of the stock market to new investors and the strong interest of local retail investors to buy and sell stock on the Tadawul stock exchange led to a push of new brokerage and financial services providers into the market. The authorities facilitated this by issuing a wave of new financial intermediary licenses in 2006.
In the premier league of investment banking and commercial banking, SAMA opened the sector to foreign banks in 2001, and it gave nine licenses to operate as investment banks (see table I) that can provide services in the Saudi stock market. It awarded ten licenses for foreign banks to operate commercial banks in Saudi Arabia (see table II) with retail branch networks.
“As the Saudi economy grows and we are experiencing a boom, there are opportunities for everybody. As the Investment banking sector attracts more attention and more participants, and then there is greater competition for the corporate world in Saudi Arabia,” John Sfakianakis, chief economist at SABB Bank in Saudi Arabia told Executive.
In his view, it is positive that SAMA wanted to take a comprehensive look at the market to evaluate the investment banking sector. “This in no way means that the investment banking sector will see a clamp down or suffer a setback in any way,” Sfakianakis added.
Sfakianakis said that the UAE market has attracted many investment banks despite its smaller size. “It is not a matter of numbers of investment banks but it is measured by how much the economy grows and it seems that the Saudi economy will be growing for many years to come,” Sfakianakis added.
The Saudi banking sector’s total deposits (which are the total of demand, time and savings and other quasi-monetary deposits) reached around 550 billion Saudi riyals ($146.6 billion) at the end of October 2006.
Other analysts said that the sector is saturated and there is no need for new entrants to the Saudi market. “I think the country is over banked because there is an influx of lots of banks and they are all focusing on corporate finance services, whereas many different corporate finance opportunities have surfaced,” said Peter Wright, managing director at Saudi financial firm, Capital Advisory Group.
Wright said that the provision of services like advisory and IPO management services in the past has not been massive but, claimed that international firms with such capacities have for a long time been present in the country, operating through representative offices. Before 2001, foreign banks were only allowed to provide financial consulting, advising but not brokerage, or IPO management services.
The opening of foreign banks started partially by allowing foreign banks to enter into the Saudi banking sector as joint ventures with minority stakes. But due to the astounding growth levels, these foreign banks now want to assume a bigger role and are trying to expand on their own.
Some of the operating 11 Saudi banks – National Commercial, Riyad, Samba, Rajhi, Saudi British (SABB), Saudi Fransi, Arab National (ANB), AlJazira, Saudi Hollandi, Al Bilad and Saudi Investment (SAIB), and Al Enmaa Bank (or Development Bank), which is due to start operations in the first half of 2007 – already are joint venture banks. This is the case for Amman-based Arab Bank’s 40% stake in Arab National Bank, just as French Calyon Corporate and Investment Bank owns 31% in Banque Saudi Fransi and UK-based HSBC Bank Middle East owns 40% in SABB.
Of current interest is Saudi Hollandi Bank, in which Dutch bank ABN Amro has a 40% stake which it is intending to sell. Rumors of the sell-off plans have been circulating for weeks in Saudi banking circles, making analysts question why ABN Amro might want to divest.
“If ABN Amro is not seeing its growth plans fulfilled through Saudi Hollandi Bank, then the best time to exit is now because of the reasonable attractive valuation of ABN Amro’s 40% stake in Saudi Hollandi Bank and the high liquidity in the market,” Loannis Karapatakis, managing director of global investment banking advisory at HSBC Saudi Arabia, told Executive.
Some European analysts opined that ABN Amro might want to concentrate its resources in developed markets closer to home, such as Italy, where it had made a $9.9 billion acquisition, Banca Antonveneta, earlier in 2006.
Several Mideast-based economists, however, reasoned that ABN Amro’s decision could be based on an interest to expand in Saudi Arabia by establishing a separate foreign bank 100% under its ownership. This was the view of Saad Benani, a vice president of global markets at Merrill Lynch, who told Executive that ABN Amro could be interested in establishing a wholly-owned subsidiary in Saudi Arabia.
Whatever ABN Amro’s intentions, regional and international banks were quick and eager in looking to buy the 40% stake in Saudi Hollandi that is allegedly up for grabs. These foreign suitors included the National Bank of Kuwait, Britain’s Standard Chartered, and the Audi Saradar Group, which already has a new subsidiary in the kingdom, Audi Saudi Arabia.
The example of leading banks in Lebanon and Egypt – like Audi and EFG-Hermes – which were awarded full fledged licenses to operate in Saudi Arabia, has triggered other regional banks to do the same. Kuwait-based Global Investment House, for example, is also interested in setting a foothold on the Saudi banking soil and it translated its interest by applying in November to SAMA for a license to operate in Saudi Arabia.
The wave of new licenses to operate either as full financial and investment firm or as partial ones raged in 2006 whereby the Saudi Capital Market Authority, the government body that regulates the stock market, issued 36 licenses for Arab, international and local firms to offer brokerage, asset management, financial advisory and corporate finance services in Saudi Arabia.
After SAMA’s decision, this trend will likely culminate giving way to other firms to study carefully the market and see whether their venture into the Saudi financial market is still viable or not.