JPMorgan to HSBC to Gain as Saudi Opens $531 Billion Bourse

HSBC Holdings Plc and JPMorgan Chase & Co. are among the banks set to profit after the Riyadh-based Capital Market Authority announced plans this week to open Saudi Arabia’s bourse to foreign investors.

The CMA said on July 22 that it would open up the oil-producing kingdom’s $531 billion stock market to foreigners next year. That may attract inflows of about $35 billion to the Arab world’s largest bourse, according to Aleksandar Stojanovski, a Dubai-based research analyst at Deutsche Bank AG.

Morgan Stanley, Standard Chartered Plc, Bank of America Corp. and Credit Suisse Group AG have joined HSBC and JPMorgan in building local teams, partly in anticipation that the world’s biggest oil exporter and de facto leader of OPEC would lift barriers to one of the most-restricted major stock exchanges. King Abdullah, the 90-year-old monarch, is seeking to lure capital to the $745 billion economy that has withstood political turmoil elsewhere in the Middle East.

“International banks with an existing presence on the ground and a track record in the kingdom will have a first move advantage when the stock market opens,” Bassel Khatoun, Dubai-based co-head of Middle East North Africa equity at Franklin Templeton Investments (ME) Ltd., said by phone yesterday. “The opportunity of the opening is sizable enough to attract more international players.”

Market Highs

Saudi Arabia’s cabinet authorized overseas financial institutions to trade equities in the Tadawul All Share Index and gave the CMA scope to determine the exact timing, according to the official news agency, SPA. Non-resident foreigners outside the six-nation Gulf Cooperation Council are currently limited to investing through equity swaps and exchange-traded funds.

The Tadawul climbed 0.4 percent to 10,202.55 at 12:39 p.m. in Riyadh, its highest level in more than six years.

Saudi Arabia’s 12 local banks are also expected to benefit from the market opening. Three of them have joint ventures with global investment banks, including Royal Bank of Scotland Group Plc and Credit Agricole SA.

HSBC, which owns 40 percent of Riyadh-based Saudi British Bank, is prioritizing Saudi Arabia as one of five key markets in the Middle East and North Africa along with the U.A.E., Egypt, Oman and Qatar. The London-based bank earned $438 million from the country last year, making it HSBC’s second-biggest Middle East operation after the U.A.E., according to its annual report.

“The news is to be welcomed,” Mohammad Al Tuwaijri, the Saudi chief executive officer of HSBC in the Middle East and North Africa, said by e-mail. “This is one of the most important moments in the history of Saudi financial markets.”

Generating Fees

The joint-venture banks have the international relationships to take foreign investors into the Saudi market, said Yasir Al Rumayyan, CEO of Saudi Fransi Capital, the investment banking arm of Banque Saudi Fransi. Credit Agricole holds a 31 percent stake of Banque Saudi Fransi, according to data compiled by Bloomberg.

“Many international institutional investors like to deal directly with companies that they know, especially when going into a new market,” said Al Rumayyan. “We, and the other joint venture banks, expect to be a preferred partner for them and that will help us generate fees and win deals.”

The nation’s capital Riyadh is developing the King Abdullah Financial District to the north of the city as it seeks to attract more financial services firms. The country is pursuing a $130 billion spending plan to boost non-oil industries as it struggles to maintain the 6.4 percent average economic growth rate achieved over the past four years.

Licensing Issues

Under Saudi Arabian regulations, foreign banks can’t work on any domestic corporate banking deals unless they have a domestic license.

“Anyone who doesn’t have a local license will redouble efforts to get one,” Samer Mardini, Dubai-based vice president of fixed income at SJS Markets, said in the phone interview yesterday.

Arqaam Capital Ltd., the Dubai-based investment bank expanding across the Middle East and Africa, said in February it plans to open in Saudi Arabia within the next year to take advantage of rising demand for assets in the region.

HSBC was awarded a mandate for the largest Saudi Arabian share sale in at least 12 years, after being appointed in April with Bahrain’s Gulf International Bank as financial adviser on the sale of a 15 percent stake in Jeddah-based National Commercial Bank.

Shifting Presence

JPMorgan was adviser and sole underwriter on the $2.5 billion initial public offering of Saudi Arabian Mining Co. in 2008.

Morgan Stanley and Credit Suisse shifted their regional trading businesses to Saudi Arabia about 18 months ago, while Standard Chartered, which gets more than three-quarters of its earnings from emerging markets, opened an office in the country in 2011.

Some foreign banks have been shrinking their operations in the kingdom. Barclays Saudi Arabia canceled its license to conduct securities business in the country in June, the same month that Goldman Sachs Group Inc. halted some activities.

Citigroup Inc., which counts the kingdom’s Prince Alwaleed bin Talal among its biggest shareholders, sold its 20 percent stake in the Saudi American Bank, now known as Samba Financial Group, to the state Public Investment Fund for $760 million in 2004, ending a business that started in 1955. The previous year, it had ended its management contract with the bank.

Citigroup and JPMorgan declined to comment for this story.

Citi has “missed out on a fantastic growth story,” John Sfakianakis, an investment strategist based in Saudi Arabia, said in a telephone interview yesterday.

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