RIYADH, 8 March 2005 — Saudi banks, hungry for longer term funding, will be cheered by the competitive pricing of Saudi British Bank’s (SABB) ground-breaking Eurobond and could soon follow suit, economists in the Kingdom predict.
SABB’s $600 million five-year issue, the first Eurobond by a Saudi bank, was launched on Friday and was priced at LIBOR plus 37.5 basis points, with a re-offer spread of 41 basis points. “Forty-one basis points is quite low considering you’re talking about a first issue from a bank in a country which never had this kind of issue before,” said Riyad Bank Chief Economist Khan Zahid.
With demand growing for long-term lending to help finance a raft of power, water and mining projects in Saudi Arabia worth tens of billions of dollars, banks may have to issue bonds to address a mismatch on their balance sheets. “Most banks’ funding comes from very short-term sources,” Zahid said. “This is a question all banks are looking at, including bond issues to eliminate or reduce the mismatch”.” In terms of the balance sheet, the liabilities are where they have to focus - mostly now it’s deposits which are very fleet-footed,” he added.
The strong performance of the stock market and a booming real estate market have led many customers to draw funds from bank deposits, he said. SABB raised its net profit by 30 percent last year to SR1.64 billion. Ratings agency Standard and Poor’s granted it an A- long-term and A-2 shorter term credit rating in February. Like other banks and major industrial firms, SABB has been reaping the benefits of higher oil prices that have drawn cash into the economy of the world’s biggest crude exporter.
But it also expects Saudi Arabia’s economic reforms and ambitious water, petrochemical and power projects over the next decade to put greater demands on private sector financing. “With the amount of business coming up in the Kingdom, SABB felt it prudent to get some longer maturing funding on its balance sheet,” an SABB source added. “Certainly (the pricing) looks competitive. Other banks will be interested,” said Said Al-Shaikh, chief economist at the Jeddah-based National Commercial Bank (NCB).
“Given the demand on long-term lending, and with the current mismatch between assets and liabilities of the Saudi banks, the Saudi banks will have to go through that route to provide funding for long-term projects,” Al-Shaikh said.
He said the amount of US currency deposits in Saudi Arabia was small and would push the banks to dollar-denominated bonds. “Some of those projects in the pipeline require funding in dollars — the petrochemical or power projects — because they rely on imports,” he said. “The pool of dollars in the Kingdom is not large enough to accommodate the demand, so banks will have to issue in dollars.”
SABB’s bond attracted strong interest in Europe, which contributed 53 percent of the funding. Another 25 percent came from the Middle East and 22 percent from Asia.
The bank said Saudi Arabia’s relatively high credit quality in the region, the rarity of the product and the fact that SABB is 40 percent owned by the HSBC group, all helped attract investment in the bond. “There was Middle East interest, but there was a conscious desire by Saudi British Bank to diversify and gain new investors,” an SABB source said.
SABB’s Eurobond issue came two months after Saudi Hollandi Bank announced a SR700 million fixed rate seven-year note, which was limited to a maximum of 60 investors holding a minimum stake of SR1 million each. Petrochemical giant SABIC has announced plans for a domestic bond worth up to SR1 billion this year. “SABB has established a new pricing benchmark for the Kingdom, so I think we will see some of the corporates trying to get rated and go into the international market,” the SABB source said.
