By the middle of 2006 there were 209 investment funds in the Kingdom, according to the Saudi Arabian Monetary Agency (SAMA), with assets of SR109 billion provided by 580,000 subscribers. That is down on what had been a steady rise over the past six years. At the end of the first quarter of the year, although there were then fewer funds, total assets were SR138 billion and there were 663,000 subscribers. The drop in assets is in large part due to the slide on the Tadawul and other regional stock markets. Subscribers are thought to have liquidated these assets to fund personal stock market losses. However, like fellow investors elsewhere, Saudis are always looking for lucrative but safe investment havens — and perhaps never more so than now with the Tadawul continuing its downward bumpy ride.
Bahrain is no longer quite the offshore Saudi banking center it was. Many investment banks have come onshore — BNP Paribas, HSBC, Deutsche Bank and JP Morgan among them. But there are still 368 financial institutions in Bahrain, far more than in Saudi Arabia, and most are involved one way or another with the Saudi market, providing assorted investment vehicles for Saudi investors.
One is Ithmaar Bank, the Islamic investment bank which went for an IPO of 58 percent of its stock at the beginning of the year and which is proving to be a highly successful operation. Saudi investors are strongly involved. Earlier this month, it announced record profits for the first nine months of the year of $161.7 million — up a staggering 705 percent on the $20 million in the same period last year.
The bank’s assets are now worth $5 billion, including $1.4 billion investment accounts under management, compared to the year-end 2005 figure of $1.8 billion, inclusive of $1.4 billion investment accounts under management. Total equity also leapt — 289 percent — in the nine months to September, from $253 million to $985 million. Reflecting this impressive performance, the net asset value per share rose from $1.65 at the beginning of 2006 to $2.11 at the end of September.
To some Saudi eyes, Ithmaar Bank may appear a relative newcomer to the scene. In fact, it has a 22-year history and, following its IPO early this year, is now traded on the Bahrain Stock Exchange.
After the IPO, one of the biggest in Bahrain, the bank’s paid-up capital was increased to its present $360 million. In August this year, further major restructuring via a $150 million share swap and sale saw Ithmaar take a 60 percent shareholding in Shamil Bank, its former parent company.
The deal earned Ithmaar $104 million. Shamil Bank joined the bank’s other affiliates, among them its Bahrain-based Islamic insurance company Solidarity and the Faisal Bank in Pakistan. Ithmaar Bank’s restructuring also included the granting of a full private Swiss banking license to Faisal Finance, Ithmaar’s Swiss subsidiary, now branded as Faisal Private Bank.
The new banking license — something the Swiss do not readily grant — was a “phenomenal” move, says Shaikh Salman Al-Khalifa, managing director of private banking at Ithmaar, and a sign of Swiss confidence in the group. In another forward looking move, Ithmaar Bank is recapitalizing the two-year-old equipment lessor, First Leasing Bank, to have paid in capital of $100 million. An as yet unannounced last element in the restructuring plan is expected before the end of the year.
Besides these investments in the banking and financial services sector, there are Ithmaar’s own activities: Its underwriting business (equity and debt), private equity (structuring, participation and portfolio management), project financing, and advisory business (capital market, mergers and acquisitions and project advisory). “We are emerging a lot stronger,” says Al-Khalifa. When Shamil’s earnings hit Ithmaar’s balance sheet, it will reflect “very positively,” he believes; so too will proceeds from First Leasing Bank following its recapitalization. It is a very diversified base which translates into healthy bottom line earnings for Ithmaar.
Every bank, says Al-Khalifa, does commercial and investment banking. “What makes us unique is the insurance element and the leasing element.” It constituted a “more holistic” approach to financial services. It meant that the bank could provide a whole range of products to clients.
The bank is now forming Ithmaar Development Company to oversee three major investment opportunity projects in Bahrain. Work will start next year on the $800 million Al Jazayer beach complex, being developed in cooperation with Bahrain’s Economic Development Board. It will consist of hotels, apartments, restaurants and a retail area, open to the public rather than a closed private club.
The second project is a $1 billion “wellness” city near the airport, catering to the entire Gulf region and providing the latest investigative, diagnostic, surgical and therapy facilities (everything other than emergency treatment) plus hotels in a resort-style location. The third is the $175 million Seray twin-tower project in Manama’s Seef district, one tower a hotel, the other an office block. The project, in partnership with Dubai-based Abraj Capital, is planned as the first in a chain of 5- and 4-star hotels worldwide with an oriental theme and based on Islamic lifestyle (no alcohol, halal food, no casinos or gambling).
Ithmaar see opportunities for investors to come into the management company or into individual projects which could be in Saudi Arabia or elsewhere in the region. Ithmaar is also looking at a partnership deal with Abraj Capital and Deutsche Bank to invest up to $2 billion in infrastructural projects (telecommunications, power, water, transport) worth a total of $20 billion in the wider region, “from Morocco to India, Turkey to Yemen,” says Al-Khalifa. Several other investment projects elsewhere in the world are under consideration.
With its burgeoning portfolio, Ithmaar has attracted significant Saudi investor attention. What is expected to drive this even more forcibly is Ithmaar’s 48 percent stake in First Leasing Bank. It will certainly be surprising if its leasing packages do not also prove highly attractive to Saudi businesses looking to expand and keen to maximize their working capital.
Worldwide, leasing finance is a $600 billion market. But regionally, apart from vehicle leasing, it is in its infancy although First Leasing has already launched in Kuwait, Bahrain and the UAE. “Not for nothing,” says James A. Cracco, First Leasing’s CEO, “is the bank called ‘First’ Leasing.” None of the other financial institutions has moved exclusively into the equipment leasing field. He sees the GCC area as “one of the great untapped” leasing markets. He estimates it to be worth “conservatively” at $10 billion.
First Leasing Bank concentrates on medium-sized asset deals worth between $1 million and $10 million. This excludes consumer vehicles and at the other end of the scale, major project financing. It sees the Kingdom as particularly suited to this area during the current period of growth and diversification.
This could be by “Finance Lease” (more popularly known as lease/purchase, whereby the lessee owns the goods after an agreed number of payments) or “Operating Lease,” effectively a long-term rental. Although almost unknown in the Kingdom, vehicles apart, leasing allows businesses to spread the cost of major equipment — such as large generators or construction or processing equipment — over a period of time rather than having to pay for it all at once; it can have the added advantage of off balance sheet accounting treatment. First Leasing has already concluded leasing agreements for a wide variety of equipment including stevedore cranes, construction equipment, corrugated board manufacturing equipment, telecommunications gear and industrial processing equipment. “None of these purchases would have happened as easily without leasing,” says Cracco.
First Leasing plans to be active in the Kingdom which represents half the potential GCC market. The Saudi market is ready for leasing, says Cracco: “It is a fantastic market, especially for operating leases” — First Leasing could lease equipment such as power generators to a company for only two or three years if that is what the company wants. But although there has already been “a lot” of opportunities “we’ve had to turn them down,” he says.
This is seen, however, as a temporary delay. Developments in the legal environment and First Leasing’s recapitalization following Ithmaar’s decision to increase its shareholding in the bank to 48 percent will, among other things, allow it to build up local Saudi expertise and open the door to an active business presence in the Kingdom. Expertise is seen as vital. “We need people on the ground in Saudi Arabia, preferably shareholders, in order to engage there effectively,” says Cracco.
“The time is right for leasing,” says Cracco. Given the scale of new projects taking place in the region, but particularly the Kingdom, he is almost certainly right.