Dec. 12 (Bloomberg) -- Mizuho Financial Group Inc., Japan's third-largest bank by market value, plans to set up an investment bank in Saudi Arabia, home to the world's best-performing stock market this quarter.

Mizuho Corporate Bank Ltd. and Mizuho Securities Co. will establish a joint venture in Riyadh in the first half of next year, two people with direct knowledge of the matter said, declining to be identified before an official announcement. The unit will initially hire about 20 local bankers, and Mizuho is seeking an investment-banking license in the country, they said.

Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. have entered Saudi Arabia this year, seeking to profit from the rising wealth created by soaring oil prices. Japan's banks, whose combined profit fell about 50 percent in the fiscal first half, plan to expand overseas as loan demand stalls at home.

``Japanese banks are laggards in getting into the Middle East,'' said Katsuhito Sasajima, a Tokyo-based-banking analyst at JPMorgan Chase & Co. ``With U.S. and European banks tripped up by subprime, they can catch up quickly even though they started a lap behind.''

Mizuho Financial's Tokyo-based spokeswoman Masako Shiono declined to comment.

Hiroshi Saito, chief executive officer of Mizuho Corporate, aims to boost overseas revenue as a proportion of the total to 40 percent this fiscal year, from 33 percent in the 12 months ended March 31. The bank has offices in Dubai, Tehran and Bahrain.

Bank Stampede

Saudi Arabia's Tadawul All Share Index has surged 38 percent since Sept. 28, the best performance among 90 benchmarks globally tracked by Bloomberg.

A 2003 capital markets law required Saudi banks to divide their commercial and investment banking into separate companies, opening the way for global banks to apply for brokerage and investment-banking licenses.

Merrill Lynch, the third-largest U.S. securities firm by market value, received a Saudi banking license in June. Morgan Stanley started an investment-banking venture in the nation in August. Goldman, the world's most profitable securities firm, in February said it signed an agreement with the investment-banking unit of Jeddah-based National Commercial Bank.

Gains in the price of oil, which reached a record $99.29 a barrel last month, have bolstered economies in the Middle East, making the region more attractive to banks. Economies there may expand 9.2 percent next year, Morgan Stanley estimates. Saudi Arabia has the world's largest proven oil reserves.

Follow the Money

Saudi Arabia's cumulative investment in overseas securities tripled to $180 billion in the two years ended April 30, according to a June report issued by Kenichiro Yoshida, an economist at Mizuho Research Institute.

Mizuho Financial and larger Mitsubishi UFJ Financial Group Inc. are pushing overseas as demand for credit weakens at home. Domestic lending by Japan's so-called city banks, which include Mizuho and Mitsubishi UFJ, contracted 0.8 percent from a year earlier in November, the Bank of Japan said this week.

By contrast, the value of Mizuho Financial's outstanding loans to overseas clients grew 13 percent to 9.2 trillion yen ($82.2 billion) in the six months ended Sept. 30.

The syndicated loan market in Saudi Arabia, Kuwait, Qatar, Oman and Bahrain was worth $80 billion in 2006, compared with $50 billion in 2005 and $10 billion in 2003, according to Mizuho Research Institute.

``Japanese banks must go where the money is,'' Sasajima said. ``They cannot sit still in Japan where they are unlikely to generate much profit.''

To contact the reporters on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net; Kazu Hirano in Tokyo at khirano1@bloomberg.net.

Last Updated: December 11, 2007 20:53 EST