Banking on Recovery and Prosperity

Saudi Arabia's stock market has bounced back from the massive collapse of confidence it suffered between February and May this year, when it shed a third of its value – an estimated $350 billion.

Although thousands of small investors lost fortunes, there has been little sign that Saudis have lost their appetite for the financial market.

Initial public offerings (IPOs) continue to be issued successfully.

There is good reason for this enthusiasm. Oil prices are expected to remain high, the economy is booming and, as a result, there is a good deal of liquidity in the market. Furthermore, the kingdom's long-term investors have done extremely well over the years. A basket of shares purchased on the Saudi market in 1999 has risen by more than 700 percent.

Confidence is being strengthened by the substantial financial services reform program which is underway. Steps are being taken to open up the market to foreign institutional investors. This is expected to bring about greater stabilization of the market.

One of the government's goals is to attract American and European investment institutions to the Saudi stock market. With this in mind Saudi financiers could be found in New York in April in earnest discourse with the likes of JP Morgan, Chase, Citibank, Soros Capital, the Bank of NEw York, Goldman Sachs, Lehman Brothers and Morgan Stanley.

“It is vital for Saudi Arabia to attract American investors,” says Mazen Hassounah, chief executive of Rana Investment, one of the kingdom's leading finance houses. “But to do so, the market has to be ready for these investors. It needs to raise the level of transparency and we need clear regulations on money movements in the market.

“The last thing we want is for foreign investors to have bad experiences here because the market is not ready for their involvement.”

The government used IPOs as a way of privatizing public enterprises and spreading the national wealth among its citizens. The process was so successful, however, that many Saudis saw the rash of IPOs as a way of making a quick profit rather than as a long-term investment.

Financial specialists saw the collapse coming.

“It was not a surprise,” says Hassounah. “We were preaching about what was going to happen in the market from September. Now people are beginning to understand what it means to have an over-heated market and how important the need is for fundamental analysis.”

Rana Investment was established in 1986 by some of the most distinguished business families in Saudi Arabia who had liquidated their 25 percent stake in the American financial services firm, Smith Barney. At that time, Rana was the only enterprise, other than banks, licensed to provide investment services.

Since the establishment of the kingdom's Capital Markets Authority, it has been licensed to provide a full range of corporate finance.

The kingdom's Capital Market Authority was created two years ago and is in the process of taking over from the Saudi Arabian Monetary Agency, the kingdom's central bank, the regulation of investment funds, real- estate investment trusts, corporate governance and mergers. Part of its role is to promote greater transparency, encourage more companies to join the market and to educate investors, particularly first-time and smaller ones, in the nuances of stock-market trading.

By the end of this year, the authority is scheduled to begin the privatization of the Saudi Arabian Financial Exchange (SAFX) which will be the first bourse in the Middle East to become a publicly listed company.

Despite the stock market crash, Saudi banks expect their profits this year to be similar to last year, when they recorded record-breaking growth of $7.2 billion – 61 percent above the 2004 figure.

“Profits are strong and the threat from foreign institutions is still not too great,” says Robert Eid, managing director of the kingdom's Arab National Bank. Foreign banks are gradually entering the market, but are not regarded as a threat.

Substantial investment in the banking sector infrastructure is expected with new branches opening, others being modernized and services being expanded. “At ANB we are looking to invest more internally, especially into retail banking where we think we can take a larger stake in the market,” says Eid.

The most profitable Saudi bank last year was Al Rajhi Bank whose net income increased by 92 percent to $1.5 billion.