Capital Market Authority governor Mohammed Al Sheikh revived one of the main issues in Saudi investment banking at a Euromoney conference in early May. His organization, he said, was indeed examining ways to open the Saudi stock market to foreigners.
No timeframe has been given. But coming just three months after Al Sheikh left the local office of law firm Latham & Watkins to head the regulator, it will still have been music to the ears of investment bankers in the country. They have long waited for this moment.
Investment bankers are confident that demand exists among foreign investors – not that anyone is getting too excited about the market opening just yet. "There is interest among international investors in the Saudi market," says a senior bank executive. "The market is growing quickly and it is seen as relatively stable compared with other countries in the region. But we’ve been hearing about the stock market opening to foreigners for quite a while, and I don’t think it will happen quickly."
Revenue lags behind
Overall, although Saudi Arabia is the largest economy in the region, investment banking revenues there have consistently lagged well behind those in the UAE over the past four years, according to Dealogic. Even Qatar has been not far behind or sometimes even ahead of its much larger neighbour in investment banking revenue.
According to Dealogic, between April 1 2012 and March 31 2013 total investment banking revenues in Saudi Arabia jumped to $187 million: a four-year high, up from $106 million in the previous 12 months. But in the same period, revenues in the UAE totalled $230 million, and they were $115 million in Qatar.
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Despite these relatively meagre pickings, the investment banking scene in Saudi Arabia is crowded, with 85 firms offering advisory, brokerage and fund management services. They include investment banking arms of local banks, smaller standalone players and big international firms. When it comes to where the opportunities are, size matters. Brokerage, which is big business in a country where retail investors account for 90% of stock market trading, is dominated by local big hitters such as Al Jazira Capital and Al Rajhi Capital. They have the pool of customers and the ability to provide margin lending.
Asset management is a more level playing field, but this sector is restricted by the dominance of retail investment. Debt capital markets is another area where the big banks rule the roost, as they have the balance sheet required. Here, Islamic bonds (sukuk) are becoming an ever more important line of business.
"There is a lot of business. Companies need to grow and develop in a booming economy," says Walid Khoury, chief executive of HSBC Saudi Arabia. "We’re seeing more companies coming to the sukuk market and diversifying their sources of funding. It is a natural development of the market. First, companies rely on banks, then they need to find other sources for diversification or because they have reached their borrowing limits."
Slim pickings
But pickings are slimmer in other areas of the Saudi market. The kingdom has the Arab world’s largest stock exchange, but there is usually no more than a handful of IPOs in a single year. Large M&A transactions are also rare. According to Dealogic, there was only one M&A deal worth over $1 billion in Saudi Arabia between March 1 and March 31 2013, compared with three such deals in the UAE and four in Qatar.
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| Tariq Al Sudairy, managing director of investment banking at Jadwa Investment |
"There is a great deal of competition for corporate finance advisory work, so it is not an easy market to play in," says Tariq Al Sudairy, managing director of investment banking at Jadwa Investment. "Over the last couple of years there have been three to five premium IPOs a year. When you have many investment banks chasing after them there isn’t much to go around. And we have not seen many large M&A transactions over the last few years." Some trends in the market should help to boost the number of deals. Family-owned businesses are becoming more professional and are looking for new sources of finance to maintain growth. For some that means IPOs, for others it could mean M&A; private equity is also becoming an option.
"In investment banking I think the potential is huge," says Guarev Shah, CEO of Al Rajhi Capital. "Institutionalization of family groups, greater investment and modernization of hydrocarbons, industrial development to grow the non-oil economy: all of this is going to require efficient access to capital, whether through equity or sukuk."