A run on the stock market and the impact of Saudi investors pulling out their money from other Gulf Co-operation Council (GCC) exchanges sent shockwaves across the region in March. This came after a period when the oil price spike and a massive growth in consumer spending, industrial and real estate investment had convinced some economists that the Gulf’s boom would go on indefinitely.
Most financiers and analysts canvassed by The Banker agreed that the March meltdown – when the Tadawul All-Share Index lost 30% of its value despite the authorities imposing a limit of a maximum 5% daily losses and gains – was necessary to educate a boom market typified by “irrational exuberance” (a phrase used by more than one source in Riyadh).
“Like other shares, bank stocks were trading too high,” an official source commented. “Two months ago, Al Rajhi Bank was capitalised the same as JP Morgan and about twice [that of] Deutsche Bank – now it’s down to Deutsche Bank level, which gives you some idea of how far things had gone.”
Strong fundamentals
But as the dust settles on the equities crisis, Saudi bankers and regional economists believe the kingdom’s underlying fundamentals remain strong.
“For the first time in three decades, a substantial rise in the oil price is not linked to cyclicality,” Arab National Bank (ANB) managing director Robert Eid told The Banker: “Now, for the first time, there is a quasi-consensus worldwide that the high level of prices will stay for a long time.” With $50 to $60-a-barrel oil, the kingdom is booming, “but over the longer term even $30 oil is good for Saudi Arabia”. And, Dr Eid observes: “This is now starting to trickle down into the wider economy.”
Banque Saudi Fransi (BSF) chief financial officer Philippe Touchard agrees: “2005 was a very good year for the banks but the proceeds of the oil spike were not yet fully in the economy – a lot of gains remain in US and Swiss banks – and this is coming in now.”
Several bankers observed that the government retired a lot of debt and the government bond market, a Saudi staple, ground to a halt. “It was the banks that created liquidity by providing corporate capital and consumer financing,” Mr Touchard says.
Two years into the oil price spike, the effects of more expensive oil are filtering into the economy as government and private sector-funded projects start to proliferate, along with very buoyant consumer spending. GDP grew by 26% in 2005, to about $316bn.
With Saudi political management enjoying a period of stability since King Abdullah Bin Abdelaziz Al-Saud came to the throne last year, the economy is expected to comfortably weather the stock market turbulence still buffeting investors across the Gulf as this report went to press.
“Maybe bank profits won’t grow by as much as they did in 2005 in 2006 but the situation remains very comfortable,” an official source says. The most conservative figure for unencumbered foreign reserves is $27bn, but the real figure is probably much higher with the budget in surplus, despite a substantial hike in government capital spending.
HR challenge
Many banks envisage further growth, and most put developing and retaining their human resources at the top of the agenda. Expatriate managers are still in evidence, but increasingly banks are run by Saudis. National Commercial Bank (NCB) reports that its Saudi-isation ratio rose to 86.1% in 2005, and most banks are running at similar levels. There are only seven expatriate managers remaining in BSF’s management.
Saudi Arabia is no longer a market where expatriate labour can be bussed in as required, or where local hires take menial or figurehead jobs. “The Saudi banking system is dependent on, and reflects, the demographic – and in this country of such high birth rates, that means developing the skills of new, young generations, and developing products that attract them,” says one Riyadh banker.
Hiring, retaining and, if necessary, poaching staff is now a constant topic of discussion among senior executives. “We’re facing competition [for staff] from the new banks coming in, but this is only a small part of the challenge,” says ANB’s Dr Eid: “We are facing what you would call in the English property market ‘gazumping’, and that is still mainly from banks already operating here, whose growth is putting real pressures on the labour market.”
The HSBC group has established the kingdom’s first integrated investment bank, HSBC Saudi Arabia, which already has a team of 220 and growing, reflecting the extent of the proliferation of Saudi project and corporate finance. Some of these executives have come from SABB, the recently rebranded Saudi British Bank, but many more are being recruited, internationally and in the kingdom.
“We are looking for talented people, and we will do what we can to get them and keep them,” says SABB chief executive Tim Grey, who has been resident for four years in Saudi Arabia while building up the operation.
Female workers
At SABB, 84% of the staff are Saudis and 14% are female – a relatively high proportion in a conservative social environment where special arrangements have to be made to house a female workforce. “Our women are becoming an important part of the work force and the number will rise further over time,” says SABB managing director John Coverdale.
Better qualified staff are becoming essential as the market becomes ever more sophisticated, with a growing variety of capital markets operations – for example, SABB recently finalised the first Islamic interest rate swaps – as well as increasingly demanding customers.
Recent macroeconomic growth is reflected in the big profits reported by a banking sector whose methods of operation and image have changed beyond recognition in recent years. With 10 international bank groups licensed to come in and compete with a similar number of domestic players, competition for business and good employees is becoming intense.
Even while the Tadawul index was melting down, Standard & Poor’s was announcing its latest upgrade, raising SABB to A from A-. This reflected the solid overall Saudi economic environment, SABB’s membership of the HSBC Group and the expectation it will “maintain its solid earnings stream and good market position”.
Improved ratings have been necessary as banks have been approaching the international capital markets to borrow, in a situation where the government bond market seems to be a thing of the past. SABB led the way with a Eurobond issue. Last October, NCB launched a $700m five-year bond, the first drawdown of a $1.5bn euro medium-term note (EMTN) programme, with 80% of the bonds going to Europe and Asia.
Bank profits remain very strong, giving impetus to growth at home and abroad. NCB recorded net income of SR5.01bn ($1.3bn) in 2005, 41.9% up on 2004. ANB posted a SR1.83bn net profit – up 57% from the previous year (with average profits growth for the past five years of 36%). Riyadh Bank’s net profit increased by 42% to SR2.84bn.
International banks are very receptive to these sorts of numbers. Following NCB’s EMTN drawdown, its chairman, Abdullah Bahamdan, said: “The strong response of the international capital markets is a reflection of the bank’s strong franchise and sustained financial excellence, fuelled by our one million-strong customer base.” This is endorsed by a slew of ratings upgrades. The well-regarded ANB got an upgrade in January from Fitch Ratings, which highlighted the bank’s “continued large franchise, consistent profitability, sound capitalisation and a strengthening economic environment in Saudi Arabia”.
Rebranding drive
As local consumers become more sophisticated and Saudi banks look beyond their traditional markets to consolidate their accelerated growth, so rebranding and technological innovation is the order of the day across the sector. Across Saudi cities, new logos are appearing in billboard advertising and on the mushrooming ATM outlets.
Saudi British Bank has become SABB, with the logo of its international partner, HSBC, attached. In February, Al Rajhi Banking and Investment Corporation, the world’s largest Islamic bank with a paid-up capital of SR4.5bn ($1.2bn) and more than 400 branches in the kingdom, unveiled a new corporate identity and name-change to the simpler Al Rajhi Bank.
CEO Abdullah Sulaiman Al Rajhi says: “The whole world is witnessing rapid development that affects all aspects of life and business. Our valuable traditions never hold us back from moving fast in the course of progress, they push us forward and allow us to deploy new technologies, innovative services and rich products that suit our culture. Hence, we realised the necessity for adopting a formal change in the shape and name of the bank.”
Al Rajhi Bank is a model for Sharia (Islamic law) compliant Saudi business development. The Al Rajhi family’s banking and trading activities began 50 years ago. In 1978, individual establishments were merged into Al Rajhi Trading and Exchange Corporation and in 1987 this was converted into a joint stock company. It now boasts the kingdom’s largest ATM network (1400 machines) and more than 8000 merchant terminals.
Not all Saudi banks are styled as Islamic institutions. The conservative central bank, Saudi Arabian Monetary Agency (SAMA), does not recognise a separate category of institution, and insists that Islamic institutions express their accounts in conventional terms, so there is parity across the kingdom.
However, all Saudi-based banks are now focused on Islamic products. Thus the largest institution, Jeddah-based NCB – whose main areas of retail banking growth include personal finance, mortgages, Takaful (insurance) and credit cards – is not an Islamic bank, but its branches are now predominantly Islamic. Since early 2005, NCB has offered only Islamic or non-conventional finance in retail.
Other local banks are the same. “We are phasing out conventional retail financing,” says BSF’s Mr Touchard.
BSF has sought to expand its product range by introducing bancassurance and classic insurance products – structured as Islamic Takaful instruments – working with French insurer AGF, which agreed to reinsure the bank’s underwriting, after SAMA indicated it wanted to see long-term products in the market distributed by banks.
Mr Touchard reports that BSF is also looking at a new range of consumer finance products, although “we can’t yet release details as they are at the strategic planning stage – but they will be innovative”.
Most other banks have also identified consumer finance as a major growth area. “Compared with other markets, the level of personal debt to GDP is still very low, and customers are pushing with demand for more,” Mr Touchard says. In response to exponential growth in consumer credit, SAMA has issued new rules covering consumer credit.
Global expansion
A majority of Saudi banks are looking to expand abroad. NCB operates around 270 branches within the kingdom – including 243 branches dedicated to Islamic banking services – but also has two international branches, in Beirut and Bahrain, and offices in London, Seoul, Tokyo and Singapore. And NCB has not ruled out further global expansion in the near future.
Al Rajhi Bank has ambitions to expand abroad. Now the only Saudi bank with a licence to operate in Indonesia, its first branch will open soon in Malaysia with many more planned. One reason for the group’s recent name change, it says, is “to give it a broader appeal as it grows its international customer base”.
Further reform is expected across the sector following Saudi Arabia’s membership of the World Trade Organization (WTO), which was finalised last December after a dozen years of often difficult negotiations. WTO membership means increased competition in banking and insurance.
Already foreign banks are moving in, with 10 institutions given licenses to operate onshore branches: BNP Paribas, HSBC, JPMorgan, Deutsche Bank, National Bank of Kuwait, National Bank of Bahrain, Emirates Bank, Gulf International Bank, State Bank of India and National Bank of Pakistan.
These banks were selected because “they are well-known, have a record of doing business and often have long pockets – the criteria is to have an elite bank from each market,” an official source says. “The international banks chosen were given foreign branch licences as a reflection of their long-term presence and commitment.”
The Gulf-based banks are all seen as national champions, and their presence was demanded under a heads of state-level GCC agreement.
Will more be allowed in soon? “The last thing we need is an over-banked market,” the source says. “One thing that’s certain is that you won’t see any small banks with low capital being allowed in.”
It is possible one or two more national champions will be allowed in – for example, there is no Chinese bank in the kingdom, despite burgeoning business relations (although no application from Beijing for a licence is in the pipeline) – but overall, “moving from 10 to 20 banks in three to four years is not a bad target”.
Corporate winners
Major Saudi corporates are set to gain from this opening. According to SAMBA Bank, the petrochemicals industry is a major winner from WTO entry, given that “the kingdom made no commitment to change the pricing of feedstock and… the Chemical Tariff Harmonisation Agreement substantially lowers tariffs globally on chemical imports, including all of the 64 chemicals exported by [Saudi Arabia Basic Industries Corporation] Sabic.”
Saudi petrochemicals exporters will thus retain a substantial cost advantage over their competitors while gaining better market access to foreign markets as tariffs decline globally.
Sabic’s chief executive and vice-chairman Mohammed Al-Mady believes that under the WTO regime, “Sabic will be able to protect its rights by using WTO dispute settlement system through the ministry of commerce and enjoy the benefit of trading without worrying about unjustifiable actions by countries’ governments”.
This has sent a strong signal to the markets. An opening-up of sectors previously dominated by parastatals, such as petrochemicals, is feeding into a dizzying number of major new investment schemes, promoted by local investors.
Meanwhile, increased government and private spending is finally trickling down through the economy, says ANB’s Dr Eid. “It’s not just about the mega-projects – there are also the bridges, roads, schools, housing and other things that are now reaching their construction phase, which involve smaller contractors that have to import a lot of their goods.”
At all levels, the economy is booming, even if the Saudi stock exchange correction may have dampened some investors’ spirits.
