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Investment banking: Wall Street hits Riyadh

Riyadh, October 8, 2007

Saudis have got used to the sight of the cream of Wall Street beating a path to Riyadh’s door.

Over the past couple of months, Merrill Lynch and Bear Stearns have joined the Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank in the front rank of investment banking heavyweights setting up shop in the kingdom.

The influx has gained traction following a July 31 deadline set by the Capital Market Authority (CMA) for commercial banks to shift their investment banking operations into separate institutions and receive individual licences for brokerage, asset management, custodial services, advisory services and securities arranging.

Regional players such as Addax Investment Bank, Shuaa Capital and Rasmala Investments have also elbowed their way into the Saudi market, in the pursuit of potentially lucrative investment banking opportunities. 

In mid-July, NCB Capital, the newly formed investment services and asset management arm of National Commercial Bank (NCB) –  in association with Wall Street’s biggest hitter, Goldman Sachs - began operations. NCB Capital is the first investment subsidiary of a local bank to be licensed by the CMA under the terms of its mandate that forces all banks in the kingdom to separate their investment, brokerage and asset management activities from their commercial banking operations.

The flurry of activity should help to reduce volatility on the stock market and inject much greater know-how and expertise into the corporate advisory, project finance and asset management sectors in the kingdom.

The new players have set themselves the task of rewriting the Saudi banking rulebook. Suitcase bankers are likely to be left in the slipstream, particularly by the larger clients who like the idea of tapping into the formidable resources of a Goldman Sachs or a Merrill Lynch.

But the Saudi footprints sought by the Wall Street banks still raise as many questions as they do answers. Even leaving aside the major correction seen in the Saudi market that saw some $500 billion of market cap lost over the past 18 months, local pickings still look too slim to get the bulge bracket banks’ juices flowing.

“HSBC, which has been there a long time, has tied up most of the big opportunities,” says the head of research at a leading regional investment house. “It will be more difficult to make the kind of money they’re thinking about.”

Most Saudi firms are held by a tightly guarded web of business families who aren’t in a particular hurry to flog them to the highest bidder. The local view is that the investment banks are scouting around to pick up a nice line of corporate finance work. Saudi sceptics believe that the major global investment banks are intent on sucking in as much Gulf capital as they can to plough into assets back home.

Nevertheless, the local economy is buoyant and smaller entrants may struggle to compete with the expertise and flush balance sheets of the major investment banks, in the hunt for IPO advisory work. 

The new entrants will nevertheless find the going tough, given that the level of trading has waned substantially in the past 20 months. Those simply aiming to offer brokerage or mutual funds are unlikely to drum up the sufficient volume of business to make it worthwhile.  Those offering a wider suite of services – from IPOs through M&A advisory to project financings -- will have better opportunities in the medium-to long-term. The kingdom’s nascent debt markets may provide some rich picking in terms of fee income, for example in structuring sukuks.

Investors who have been burned by the Saudi stock market’s rollercoaster ride may also prefer to seek out professional asset managers. Mutual funds only make up 5 per cent of market capitalisation, representing a potentially lucrative growth area for investment banks.  

The Goldmans and Morgan Stanleys


Tags: Saudi Arabia | Wall Street | Jadwa | Investment banking |

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