VTB Weighs Saudi Equity as Morgan Stanley Shifts From Dubai

VTB Capital Plc, the investment banking unit of Russia’s second-largest lender, is considering an equities business in Saudi Arabia after starting a program that allows foreign investors to buy the nation’s shares.

“We may look at setting up in Saudi,” Makram Abboud, Chief Executive Officer for the investment bank in the Middle East and Africa, said in an interview in Dubai on Jan. 15. “We re-evaluate our position every six months. We’ll see how this program goes. We strongly believe in the Saudi market.”

The bank opened its so-called dollar-denominated participatory notes program last week, a mechanism that allows foreigners to invest in Saudi shares while circumventing restrictions on direct investments. Average daily trading volume for the country’s benchmark stock index gained 74 percent last year, while Dubai’s was about half the volume it traded in 2008.

Banks such as Morgan Stanley and Credit Suisse AG are shifting regional equities teams to Riyadh from Dubai as Saudi volumes surge. Morgan Stanley is cutting three equities positions in Dubai as part of the shift, according to a banker familiar with the matter, while Zurich-based Credit Suisse is cutting three Dubai positions and transferring another to Riyadh, a person familiar with the matter said last month.

Biggest Oil Exporter

Saudi Arabia, the world’s biggest oil exporter, is embarking on about $500 billion in government spending and projects including the world’s tallest tower in Jeddah. Both Credit Suisse and Morgan Stanley are relocating from Dubai, while VTB is remaining in the city for its Saudi coverage.

The nation’s $727 billion economy grew 6.8 percent in 2012, including expansion of 7.2 percent for non-oil industries, the Finance Ministry said in December. That beat the 5.6 percent median estimate of 16 analysts compiled by Bloomberg. The Saudi market is closed today for the weekend.

“Every other regional market is relatively small in terms of liquidity compared to Saudi,” Abboud said. “Foreign institutional trading averages less than 2 percent which is relatively low,” he said.

Foreign, non-Persian Gulf investors can’t directly invest in the Saudi market, which lists companies including Saudi Basic Industries Corp., the world’s largest petrochemicals maker.

‘Value Story’

Saudi Arabian stocks are the “value story” across emerging markets this year, VTB Capital analysts Digvijay Singh and Alexey Zabotkin wrote in a note to investors on Dec. 27, with an overweight recommendation on the kingdom. Oil prices and strong dividend yields will help Saudi stocks, they said.

The Saudi benchmark Tadawul All Share Index has gained 3.5 percent so far this month, outpacing an advance of 1.5 percent for the MSCI Emerging Markets Index as of yesterday’s close. The measure offers a dividend yield of 3.5 percent compared with 2.7 percent for emerging market stocks. Shares valued at about 7.6 billion riyals ($2 billion) were traded on average in Saudi Arabia last year, data compiled by Bloomberg show. That compares with $52.5 million traded in Dubai and $61.3 million in Qatar.

The kingdom allowed citizens of neighboring Gulf countries to buy and sell shares freely in 2007. Non-resident foreigners are permitted to trade through share-swap transactions and exchange-traded funds. The first ETF was approved in March 2010.

Fueled Speculation

Saudi Arabia’s decision to allow foreign companies to list securities on the bourse about a year ago fueled speculation it may ease restrictions on foreigners. The kingdom will only open the market to international investors gradually and after concluding there will be no negative impact on trading, the official Saudi Press Agency reported in April, citing Capital Market Authority Chairman Abdulrahman al-Tuwaijri.

VTB Capital also plans a targeted expansion in the Middle East and Africa region as other international lenders retreat.

“We’re looking to expand in areas where other banks have scaled back too much,” Abboud said. The bank provides advisory, fixed-income trading and structured lending and asset management services throughout the Middle East and Africa, Abboud said. There is also growing demand for access into Russia, he said.

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