COMPETITION FOR BANKING business in Saudi Arabia is set to become even more intense and cut-throat in the coming months as a new breed of financial institutions starts to compete aggressively for a share of a market that has until recently been dominated by a small group of commercial banks.
There are various approaches to developing investment banking businesses but those in the market agree that there will be casualties and that not all the new entrants will be able to survive a period in which customers are able to demand better-quality service at the tightest margins.
Some of the new entrants, such as the largest, Falcom, which has capital of SR1 billion ($266.7 million), are planning to take on the big banks head on; others, such as Jadwa Investment, are looking for niches in the high-net-worth business. A third group, including Forsa Investments, will be looking to provide services to small and medium-sized businesses.
Foreign banks – the global investment banks, including Deutsche Bank and Goldman Sachs, and regional institutions, such as EFG Hermes and Emirates NBD – are also opening up in the Kingdom and will provide competition that is just as tough.
The consequences of new local and international banks coming into the market are already evident. Companies and wealthy individuals looking for brokerage, asset management or traditional investment banking are now being offered a wider choice than ever before.
There are now more than 20 financial institutions with full banking licences and more than 60 investment companies, although bankers point out that many of this latter group don’t have the capacity to offer more than advisory services. Bankers say that only six to 10 local institutions will be able to provide a wide range of services.
The intense competition is having inevitable consequences. Margins and terms are being squeezed so tightly that some investment houses are rumoured to be making tiny profits or even substantial losses in order to build market share. This, say bankers, applies to the arrangement of IPOs, brokerage business and asset management.
There will be long-term profitable business for those who hold their nerve and identify parts of the market that are unserved or badly served. "We will fool ourselves if we think we can take on the big banks in their own territory, such as universal broking or bonds and IPOs for the largest corporations," says Mazen Hassounah, managing director and chief executive of Rana Investments, a long-established broker that has taken an investment banking licence.
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"There is a gap that needs to be filled because the local banks have not been offering the best services they could. Only the fittest will survive, there will be mergers and the successful will take over the unsuccessful"
Khaldoon Sorour, Forsa Investments |
This analysis is backed up by Abdullah Al-Rashoud, chief executive of KSB Capital Group, who says that new entrants can either be "aggressive and take on the traditional banks or they can be competitive by being unique and developing their own strategies".
The best opportunities look to be in sectors of the market such as private equity and the servicing of the needs of the growing number of small and medium-sized businesses that have not been well served by the long-established banks in the past decade.
There are chances to do IPO and bond business with the growing number of Saudi Arabian companies that now believe that the advantages of raising money through the market outweigh the price paid in greater transparency.
Financial revolution
"Those who succeed will be the ones that can supply the needs of the market," says Khaldoon Sorour, chief executive at Forsa Investments. "It will of course be tough but there is a gap that needs to be filled because the local banks have not been offering the best services they could. Only the fittest will survive, there will be mergers and the successful will take over the unsuccessful."
The trigger for what is nothing short of a revolution in the Saudi Arabian financial sector was the Capital Markets Law of 2004, which formalized the stock market and investment banking sector. The over-the-counter market was replaced by an independently regulated stock exchange, and rules for IPOs and bonds were formalized and liberalized, triggering a massive increase in privatization and equity investment. At the same time the banking sector opened up to substantive outside competition.
One of the most significant changes was that commercial banks were required to spin off their investment banking services, including broking and asset management, by July this year.
Rana Investments’ Hassounah says: "We were established in 1986 and have always offered asset management, corporate finance and advisory services. When the Capital Markets Law was passed we decided to add brokerage and administrative custody to our range of services."
These changes have, on balance, been helpful to new entrants to the market, says KSB’s Al-Rashoud. He argues that, as the regulations are all new, "everyone, whether recently or long established, has to adapt, which means there is a level playing field. Moreover, the laws forcing the banks to separate their investment banking and brokerage from their commercial business mean that they too have to set up what are effectively new institutions."
A further issue to affect the new institutions – both positively and negatively – has been the extreme volatility of the Saudi Arabian stock exchange. The Tadawul All-Share Index (Tasi) peaked at 20,000 in February 2006, before plunging by more than 60% by the end of the year (capitalization fell from $834 billion to $500 billion).
Prices have been more stable this year, falling by just under 3% up to mid-August, but the impact of the crash has been profound. Some investment houses, such as Forsa, have had to delay their launches because of the losses suffered by some of their potential investors.
Plunging profits
The impact on the commercial banks has also been significant. Profits at Bank Al-Jazira Bank, which is also the largest brokerage business, plunged in the first quarter by almost 56% because of falling rates for commission and other fees – almost all of this decline being attributable to the poor performance of the Saudi bourse.