In a region abounding with new wealth and enticing investment opportunities, no market has greater scale and vaster projects than Saudi Arabia. The kingdom’s banks are pulsating with financial energy and the youthful Saudi population has a voracious appetite for financial services that will help them in making the best of their future.
The market’s great potentials have not left international bank unimpressed and after Saudi Arabia in 2001 started relaxing stringent regulations for foreigners conducting business, 15 foreign banks have set up shop in the kingdom.
The combined net profit of the 10 listed Saudi banks and the National Commercial Bank (NCB) reached $9.42 billion for 2006 – a yearly growth of 30.3%. The kingdom perches over 1% of the world’s wealth. Naturally, investment and commercial bankers are bursting with excitement at the prospects of the country’s underdeveloped banking industry.
“Right now we’re at a crossroads; for the past two or three years, growth was based on fees from the stock market boom and now that is slowing down,” Mazen Tammar, senior economic analyst for NCB told Executive in a telephone interview. “Now we’re looking at investment banking activities – IPOs, financial advising and mortgage systems which will be implemented by 2007 or 2008. We are seeing a shift from fees from equity trading towards more mortgage and real estate development growth.”
Ambitious strategy
While the commercial banks are pursuing their strategies, macroeconomic markers have been set that will require even more breadth and depth of financial services. Compared with the prescribed future of a diversified Saudi economic powerhouse, the supply of banking is still low, especially since the kingdom has presented a great ambition to become one of the world’s most competitive economies in a very short time. The government’s “10×10 plan” calls for rising to a spot in the top ten globally competitive investment countries by 2010.
As a center piece of planning the economic and social development of the coming decades, the government has initiated the construction of four economic cities. Banking is an integral need for the financing of these epochal projects and in reaching the competitiveness goal.
Michel du Bois, general manager of the Riyadh branch for BNP Paribas, told Executive that “investments in investment banks are mainly to finance huge government projects. This is where investment banks have developed most of their products offered – the project financing, guarantees and export financing.”
To link new developments across this vast kingdom, railways are being built. The railways combined with the economically diverse cities are making investors giddy at the thought of cash invested and returns made.
“We’re talking about one trillion riyals worth of mega projects, roughly $280 billion of mega projects to be implemented from now until 2014. Of course banks will benefit,” Tammar said.
On the retail side, important demand for more banking services arises from the economic boom which is boosting the middle class, which means that the number of paychecks being deposited is on the rise and customers are demanding all the services that come with becoming a banked population.
“The contribution of middle class paycheck deposits into commercial banks are a steep upward source of growth and provides a potential for retail growth,” du Bois said. Total deposits in Saudi commercial banks reached $146.6 billion at the end of October 2006.
These increases in paycheck deposits allowed banks to amplify their consumer loans base, Tammar said. He noted that the Central Bank, SAMA, put a cap on consumer lending when more and more customers fell into the trap of borrowing money for share purchases on the Saudi Stock Exchange (SSE).
The loans-for-stock-speculations proved a bitter pill for many enthusiastic Saudi citizens last year as the SSE crashed and the retail buyers found themselves left with nothing but debt instead of having the nest eggs they wanted to create. However, with calming of the securities markets this year and sound economic fundamentals in place, retail lending may soon swell again, analysts said.
The kingdom has learned from the economic devastation the end of the first oil boom created in 1985, as high oil prices dropped and the economy lacked diversity to sustain itself. This past one-trick economy is now rapidly diversifying into media sectors, cement, textiles and various other industries. The investment needed for emerging economic cities to cater this growth is coming from the government and local and foreign private industries. In response, investment banks increasingly dot the country’s terrain.
Booming banking sector
Dealogic, a US-based financial data group, estimates that the Middle East generated $913 million in investment banking fees for 2006. Saudi is believed to account for half of these fees.
Jobs are now aplenty with this formidable growth, and an empowered middle class is continuously expanding. The Saudi Arabian General Investment Authority expects the four economic cities to generate another one million jobs within the next 10 to 20 years.
To keep the banking sector development in line with supervisory targets, SAMA has taken a range of measures that aim to control the influx of foreign banks while also further steering away from “suitcase banking”– bank operations from external countries that aren’t locally licensed.
In December, SAMA said it would put a temporary moratorium on issuance of new licenses for foreign banks while assessing current foreign involvement in the sector. But some analysts commented that SAMA realized that banks were flooding the kingdom, which was quick to saturate.
The involvement of foreign banks in the Saudi market was aided first when authorities allowed the entry of branches of banks based in other member countries of the Gulf Cooperation Council (GCC) in the late 1990s. Legislation at the beginning of the 21st century then allowed investment banks, brokerage and related services. In 2003, Deutsche Bank became the first non-GCC operator to win a banking license in the kingdom.
Now foreign commercial banks can operate in one of two ways, as a joint-venture bank or as a branch. Foreign ownership in these join-ventures cannot exceed a maximum of 60% of the banks equity, a boost from the 40% limit in past years.
Surprisingly few banks, with the exception of Deutsche Bank, operate as standalone banks. Most big foreign banks entered the market through joint-ventures – Morgan Stanley and Riyadh’s Capital Group have coupled up and Goldman Sachs will enter the market with NCB.
“Maybe it’s because they don’t understand the culture and regulatory system here,” Tammar mused on the question why joint ventures exceed standalone banks. “Most local banks know their way around regulations and can help manage credit issues. If you come on your own you may not understand the country and that can be costly.”
How foreign and local banks will duke it out for clients still remains unknown as many newcomers like the Goldman Sachs-NCB venture are just finding their feet. But it is already clear that foreign banks have an edge in project finance, large ventures, and investment banking, though most are in partnership with local banks. In the mass market, local commercial banks and the increasingly popular Islamic providers will be hard to unseat as the favorites of Saudi consumers.
Strong examples for the appeal of the local banking breed are al-Rajhi Bank as the fastest growing private sector bank and Bank Al Jazira, for many years the smallest domestic bank, which turned its compliance with sharia into its greatest asset and engine of impressive growth.
“On the retail side it will be different for foreign banks to compete except by joint ventures which will allow foreign banks to compete with locals,” du Bois said. “But foreign banks which operate in investment banking are competitive as they bring to the market new products, guarantees on financing and new ideas as well as their knowledge of asset management, mergers and acquisitions.”
