Times are changing with apparently ever accelerating rapidity, as the Gulf harnesses the latest oil price boom to establish more sustainable, job-creating economies, based on developing businesses within the region, rather than merely buying in expertise and services when needed, and mainly investing abroad.
According to The Banker’s soundings across the region over the past year, a common refrain has gone up from Gulf leaderships and their financial authorities – in brief: the days are over when ‘suitcase bankers’ jetted in to conclude the big deal and then left for their London, New York or, more recently, Dubai bases with a lucrative contract.
Even bulge bracket banks cannot expect to conduct all but symbolic bits of their business outside the area. With the biggest and most isolated market, Saudi Arabia, opening to foreign onshore operations, banks had better rethink their strategies, or they will lose out – or so the current logic goes.
There is growing evidence to suggest that banks are listening. Goldman Sachs made headlines when it announced its decision to set up in the new Qatar Financial Centre (QFC). Lehman Brothers, Morgan Stanley and Credit Suisse are among those also heading for Doha, while many more major banks have been building up their Dubai operations.
On August 8, as much business in the Gulf closed for the brutally hot summer, Goldman Sachs International announced that it had been licensed by the Dubai Financial Services Authority to establish an office in the Dubai International Financial Centre (DIFC). According to Wasim Younan, managing director in the Middle East and North Africa, Goldman intends to expand its business in the region immediately.
Dr Omar Bin Sulaiman, DIFC governor, was quoted as saying: “Goldman Sachs’ renowned expertise in the provision of wholesale banking products and services will bring significant value to public and private sector entities in the region. We look forward to seeing its contribution to the regional corporate sector and financial markets in the years to come.”
Such sentiments are being echoed across the region, as more major institutions establish a physical base in the Gulf Co-operation Council (GCC).
The traditional regional finance centre, Bahrain, is no longer the only player in town. Since it opened in September 2004, the DIFC has attracted bulge bracket banks, as well as regional institutions. Its equities market, the Dubai International Financial Exchange (DIFX), opened in September 2005, and has since led on a number of major issues.
In this evolving environment, “international banks are having to change their strategy to adapt to changing perceptions of what Gulf rulers want”, the finance director of a major Saudi bank told The Banker.
Three years ago, Citigroup, then led by Sandy Weill, announced its decision to withdraw its Citibank arm from its long-standing technical management agreement with Samba (then known as Saudi American Bank). At the time, Citibank said it was responding to changes in global markets, which meant that such a local presence was not required; there had been a strategic rethink in New York.
Some analysts saw other, darker influences at work: expatriates were pulling out of Saudi Arabia in droves, following a spate of terrorist attacks by radical jihadist groups sympathetic to al-Qaeda. The very future of the ruling Al-Sauds was being brought into question, notably in a new publishing industry based in the US apparently dedicated to bashing the kingdom.
Insiders have since suggested that some of Mr Weill’s advisers were not keen on maintaining such intimate links in a country linked with radical Islamism – ignoring the fact that the Saudi ruling family, as much as the US, were in radical Islamists’ sights.
Saudi boom
What a change three years can make. Radical jihadism has not gone away, but British suburbs as much as Riyadh’s poorer neighbourhoods have become the focus, while the Saudi security forces have been relatively effective in tackling the problem of underground cells that target foreigners.
Meanwhile, King Abdullah Bin Abdul Aziz’s accession to the throne in 2005 has ushered in a period of more inclusive politics and reformist economics that has shown, once more, the Al-Sauds’ ability to emerge from hard times by re-establishing their reputation with Saudi Arabia’s 25 million population.
The outlook for the Saudi economy, a critical motor driving investment in the GCC region, is much improved with $70 per barrel oil. The oil price spike seems here to stay, with oil exporters from the world’s largest, Saudi Arabia, acclimatising to a medium-term future of massive current account and budget surpluses.
Tapping liquidity
Across the industry, institutions are recalibrating their investment plans to take account of this trend. Thus Investcorp, the Bahrain-listed investment group, has announced it has expanded its funds under management to more than $10bn, as wealthy Gulf investors look to place more funds into private equity, real estate and hedge funds. Announcing results on August 25, Investcorp chief operating officer Gary Long observed: “There is $2500bn of investable wealth in the Gulf,” making it “the fastest-growing private wealth region in the world”. Some estimates of the amount of funds sloshing around the GCC region are bigger still.
The potential for regional markets was underlined earlier this year when prominent Saudi investor Prince Alwaleed Bin Talal decided that the regional listing of his Kingdom Holding Company would debut on the new DIFX, with a parallel listing in London.
Regional institutions are flush with liquidity. Across the region, international banks have been reassessing their Gulf strategies to exploit this golden opportunity. As The Banker has reported consistently over the past year, new financial centres such as the DIFC and QFC have been vying with the region’s traditional financial hub, Bahrain, to draw in major institutions.
Thus in the first half of 2006 alone, several global banks – including Goldman Sachs, Lehman Brothers, Citigroup, Morgan Stanley, Deutsche Bank, EFG International’s subsidiary EFG Bank and American Life Insurance Company – announced plans to expand their Middle East presence through offices in the DIFC and QFC.
Asian banks are also taking note of Dubai’s position between Asia and the West. The Japan Bank for International Cooperation opened in late April – its DIFC branch will cover the GCC, Iran and Yemen. DBS Bank was the first Singapore-based bank to receive a banking licence from the Dubai Financial Services Authority (DFSA) in early April. Japan’s Sumitomo Mitsui Banking Corporation then announced plans to open in the DIFC. Nomura is expected to enter Saudi Arabia.
The steady opening up of the Saudi economy under Mr Abdullah – signalled by the kingdom finally joining the World Trade Organization last November – offers potentially the biggest prize of all. The business of most other regional financial centres has been inflated by Saudi money’s perennial quest for profitable safe havens. Now liberalisation offers the prospect of new investment opportunities much closer to home – through initiatives such as the planned King Abdullah Financial Centre in Riyadh (see The Banker, August 2006) and an opening up of the market to foreign banks.
All this adds up to a dramatically changed environment from the days when foreigners were heading out of Saudi Arabia after the jihadist bombings of 2003-04. It perfectly explains why, earlier this year, Citibank chairman William Rhodes told an interviewer that the oil boom was providing unprecedented opportunities – of the sort that did not exist even during the 1973 and 1979-81 oil price booms – typified by “more willingness to retain the money in the area”. Mr Rhodes indicated that Citigroup would like to return to Saudi Arabia.
New opportunities
According to a senior monetary official, Riyadh is committed to further opening up its financial services sector, “but we will be selective”. Those institutions aspiring to an onshore banking licence or to provide brokerage services “will have to show they have a sufficient size and reputation to qualify”. In discussion with The Banker he concluded: “This will not be a market for mushrooming small banks with low capital.”
In line with its cautious opening up to major foreign institutions, Saudi Arabian Monetary Agency (Sama) and Saudi stock market regulator the Capital Markets Authority (CMA) are licensing an increasing number of brokerage firms and investment banks.
These include regional institutions, such as Lebanon’s Audi Saradar Group, Egypt’s EFG-Hermes Saudi Arabia and National Bank of Kuwait.
Regional institutions are also buying into new Saudi developments such as the estimated $8bn Prince Abdul Aziz Bin Mousaed Economic City, whose partners include Abu Dhabi Investment House and Bahrain-based Gulf Finance House (see page 124).
Dr Abdul Babteen of the Saudi Arabian General Investment Authority (Sagia), which is promoting Mousaed Economic City as one of three new cities, said the government had introduced several new fast-track measures to help investors by clearing away bureaucracy.
Change is apparent across the market. The Saudi authorities have granted brokerage licences to major international institutions such as HSBC, BNP Paribas and Crédit Suisse; others are expected to follow, including Nomura.
It was already several years in the making when the CMA, in November 2005, approved the establishment by HSBC, in joint venture with its Riyadh-based affiliate SABB, of the kingdom’s first full-service, independent investment bank, HSBC Saudi Arabia. HSBC holds 60% of the equity through a wholly owned subsidiary, with SABB (in which HSBC has a 40% shareholding) taking the rest.
New sukuk
HSBC Saudi Arabia was created to provide corporate finance and asset management advisory services to corporate clients, and investment advisory services to individuals, as well as managing SABB’s domestic and international equity brokerage and securities businesses. It announced its entry to the market by arranging an SR3bn ($800m) debut sukuk (Islamic bond) issue for Saudi Arabia Basic Industries Corporation (Sabic) – the first public sukuk launched in the Saudi market under the new Capital Market Law.
In this landmark deal – another signal of the kingdom opening up – HSBC was lead manager, with a co-manager group including Banque Saudi Fransi, Gulf International Bank, National Commercial Bank, Samba Financial Group, Saudi Hollandi Bank and SABB.
According to Tim Gray, HSBC Saudi Arabia managing director, the Saudi authorities agreed to the bank’s creation – with other such institutions to follow – because of a perceived weakness among Saudi banks in providing private equity, IPO, M&A and other corporate services. Saudi corporate financing has traditionally focused on syndications; a recent SABB issue for itself introduced Eurobonds to the market, but more is required as the market matures.
This is especially the case as a new generation of privately financed mega-projects is envisaged – notably in the power and water, and petro-chemicals sectors – that will require more sophisticated project financing.
HSBC and other banks have been chasing project finance mandates from their regional offices in Dubai, with specialist teams inputting into deals from London in many cases. The opening up of Saudi Arabia to international entrants could change that situation. All of the most active players in Saudi capital markets – which include Deutsche Bank, Calyon, BNP Paribas and Citigroup (with ABN AMRO), and those banks also big in project finance – are reappraising their strategies, with a view to gearing up for more activity.
Bahraini rivals
Cosmopolitan Bahrain – just across the King Fahd causeway from Saudi Arabia’s oil-producing Eastern Province – has long been the foreign bankers’ regional destination of choice. This predominance has been challenged in recent years, notably by Dubai.
Bankers say they still like Bahrain’s professional environment, which is conservatively managed by regulator Bahrain Monetary Agency – which is in the process of changing into the Central Bank of Bahrain. The CBB will oversee all banking activities, as it does now, as well as the Bahrain Stock Exchange and insurance companies.
For all their public denials, most analysts believe the Bahraini authorities have come under pressure from the financial initiatives driving ahead in neighbouring states. “You can’t have something like the DIFC or DIFX, or even the new Qatar centre sprouting up around the corner and not be concerned,” comments one Bahrain-based international banker.
The response has been the privately promoted Bahrain Financial Harbour scheme – led by the Jennahi family’s Gulf Finance House company – whose first units are to open in 2008. An insurance centre will open by 2009.
Project finance
Qatar’s new centre is strongly focused on bringing in banks that are already active in the gas-rich emirate. The development of Qatar’s North Field gas reserves has created world-scale banking and investment opportunities, which have made Qatar a focus of the global project finance business.
Last year’s $10.25bn Qatargas 2 deal broke several project financing records and involved about 57 banks. According to one estimate, some $130bn in Qatari project finance deals are planned or under way.
The Doha authorities want to reduce the input of suitcase bankers, with foreign banks handling this business to set up in the QFC, rather than flying in to do deals. According to Stuart Pearce, QFC chief executive: “Qatar needed a vibrant financial market in order to support what Qatar wants to do itself.”
The strategy seems to be working. Goldman Sachs’ commitment to join the QFC was taken to show that its business model, concentrating on specialist activities tailored to the needs of the fast-growing national economy, was a viable strategy. “The centre was not set up as a ‘me too’,” says Mr Pearce. With huge volumes of investment coming in, “you need a partnership with financial firms.
He adds: “QFC was set up to build this partnership, rather than just have people flying in and out. And while people are doing business here they could use Qatar as a base for the Gulf and the wider Middle East and North Africa (MENA) region. When we have been talking to banks they see the economic story very clearly.”
Space reservations for the QFC’s new office tower, designed to house 40 firms, have sold well and Mr Pearce believes a second building of similar size will be needed by early next year.
Rivalling – and potentially dwarfing – all these developments is the planned King Abdullah Financial Centre in the north of Riyadh, one of whose aims is to provide an amendable base for foreign banks operating in the kingdom. Such projects are a statement of intent: even in the kingdom that hosts Islam’s two holiest places, foreign bankers are now to be encouraged to ply their trade, working to a set of rules on which international capital and religious authorities have already shown they can agree.
