Patience is the name of the game in Saudi Arabia

Patience appears to be the key approach by investment banks doing business in Saudi Arabia, the Middle East's largest economy and the world's biggest oil producing country.

Most investment banks have long had a limited presence in the kingdom but, over the past two years, many - including UBS, Merrill Lynch, Deutsche Bank and JPMorgan - have been granted licences to open offices as the sector has been liberalised.

There has also been recent pressure on international institutions to boost their business in emerging markets, including the Middle East, to counter slowdowns elsewhere and help offset the hits they have taken from the subprime crisis.

However, in spite of the influx of global investment banks, the extent of new business the groups have been able to attract in Saudi Arabia is questionable. While merger and acquisition (M&A) activity has picked up, most deals are relatively small and margins are not great.

There has been a spate of initial public offerings (IPOs), but the new entrants face stiff competition as institutions scramble for business and groups bid aggressively and offer knockdown rates, bankers say.

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

That can make it tricky for Saudi-based operations to compete for groups' resources with offices doing deals in Europe or the US, bankers say.

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

Endurance pays

Since opening an office in April 2006, Deutsche has completed a couple of private placements and has two or three more it is looking at between now and mid-2009, Kishi says. It has also launched more than 35 funds but has yet to be involved in an IPO. The bank does, however, have one it will be the adviser and book-runner for, although Kishi did not give further details. "I think anyone who would have expected a massive splash in the market upon entry is mistaken," he says.

"We are successful, but it's a challenge. If you talk about local peers, they don't have that challenge because their resources are only present here. We are a global player and we look at the entire world and obviously apply transaction acceptance criteria that are global in nature."

The market, he says, is becoming more sophisticated and he sees opportunities in advising other financial institutions, family-run entities and in M&A activity. There is also potential for asset management for institutions and wealthy private clients, Kishi says.

Different strategy

Other international banks have a mixed record of attracting business.

HSBC, which began its operations in the kingdom in November 2005, has been involved in seven IPOs since 2007, four M&A transactions and acted as an adviser on a number of debt deals and project finance transactions.

It also has about $6.5 billion under management in mutual and discretionary funds, benefiting from its relationship with SABB Bank, a local group that provides it with a retail distribution network.

Morgan Stanley, which entered into a joint venture with Saudi house, The Capital Group, giving it the advantage of gaining immediate access to resources and local contacts, has handled two rights issues and seven IPOs, while JPMorgan was involved in the IPO of Ma'aden, the state mining company, and a follow-on transaction for Mobily, a mobile phone operator.

Both those groups started operations in Saudi Arabia in 2007. Merrill Lynch hopes to have its full licence at the end of this year.

Yorick van Slingelandt, head of corporate finance for the Middle East at JPMorgan, says the banks are betting on the long-term potential in a country with a young and growing population.

"Smaller companies, industrial companies which are offshoots of the oil companies, will start to play a bigger role and family businesses will go through a transition from a first or second generation to something that is more professional," he says. "At some point in time these companies will realise they want some form of capital, either as finance or to bring in skills that they don't have today."

Still, he expects there to be "winners and losers" among the international banks investing in Saudi Arabia as the competition heats up.

"More than any other country, this is about relationships, real on-the-ground presence, contacts and consistency," he adds. "It requires significant staying power and I'm not sure everybody has that staying power."