Investment bankers turn to Saudi Arabia

Saudi Arabia is not a country that stands out as a trendsetter.

But as the Gulf enjoys a period of unprecedented expansion, the kingdom has been turning heads throughout the investment banking world.

In the past two years a series of major international players - including Merrill Lynch, Deutsche Bank and JPMorgan - have been granted licences to open offices as the financial services sector has been liberalised. Last month UBS joined the list.

Most investment banks had been doing business in the kingdom for some years. Their executives flew in and out offering wealth management and other services.

But the line from bankers today is that a group is not considered a player in the region unless it has a full-blown presence in Saudi Arabia.

At the same time there is pressure on international institutions to boost Middle East business to counter slowdowns elsewhere and the hits banks have taken from the subprime crisis.

The extent of new business the groups have been able to attract in Saudi Arabia is open to question, however. While merger and acquisition activity has picked up, most deals are relatively small and margins are not great.

Recent entrants face stiff competition as a growing number of institutions scramble for business, according to bankers in the region. "It's the egg and the chicken," says one. "The banks don't have market share so they are going out and buying it to show that they have done something."

Sophisticated products

Another banker says the market does not yet demand the sophisticated products that bigger institutions offer, while the amount of money groups can generate from investment banking is "quite small compared with what is achievable elsewhere".

That can make it tricky for a Saudi-based operation to compete for resources with other group offices that are doing deals in Europe or the US.

"The fact is, every bank has finite resources and, like any sensible entity, would want to deploy its resources where it can make the most impact in terms of returns to the shareholders of the bank," one banker says.

Jamal Al Kishi, Deutsche Bank's chief executive in the kingdom, says the group is still bullish about the market but realises that entering Saudi Arabia requires "patience and commitment".

Since opening an office in April 2006, Deutsche has completed a couple of private placements and is looking at two or three more between now and mid-2009, Al Kishi says. It has launched more than 35 funds but has yet to be involved in an initial public offering.

- Financial Times