Mission statements and declarations of commitment are almost obligatory on company websites these days. The HSBC-SABB website is no exception. HSBC Saudi Arabia, it says, is committed to “be the preferred choice for Corporate Financing Services (initial public offerings, mergers and acquisitions and private placements).”
Despite the hype, it looks as if it is succeeding.
Since the beginning of 2005, there have been 14 IPOs in the Kingdom. Of these, six have been lead managed by HSBC Saudi Arabia — over 40 percent. This year alone, it has lead managed half of the eight so far announced. That makes HSBC the biggest player in the IPO lead management business in the Kingdom — and with some 70 others planned in the next year or two, HSBC will remain a major player. It is already busy working on a number of them, including Malath Insurance — one of the 13 insurance companies licensed by the government last month; all have to go for an IPO in the next year or so.
HSBC Saudi Arabia, owned 60 percent by London-based HSBC Group and 40 percent by SABB, itself 40 percent owned by HSBC Group and 60 percent by Saudi shareholders (shares are traded on the Tadawul), was licensed by the Capital Market Authority (CMA) in late 2005. It is still the only major international bank licensed by the CMA to conduct securities and advisory business and provide investment and related banking services. All the major Saudi retail and commercial banks, such as Samba, NCB, Al-Rajhi and Saudi Hollandi, and investment newcomers, such as BNP Paribas, Deutsche Bank and JP Morgan, are licensed under the old dispensation by Saudi Arabian Monetary Agency (SAMA). But they have to have a CMA license in place by the end of June if they are to continue in the business of investment banking. That is the deadline under the 2003 Capital Market Law.
The split between HSBC and SABB is that while the latter deals with commercial, corporate and retail banking (including Islamic products), HSBC deals with investment banking activities such as corporate financial services, project finance, capital market issuance (including bond and sukuk issues) and asset management; it also deals with brokerage and securities services on behalf of SABB.
In addition to IPOs, other areas of HSBC activity are also growing strongly. Five years ago, the main area of investment banking business in the Kingdom was syndicated loans. The explosion of activity in all direction is a reflection of the growing sophistication of the Saudi market. Thus, in the past year HSBC has managed a euro-denominated Eurobond for SABB.
One notable sector of strong growth is in Islamic products and financing. HSBC trailblazed the field in lead managing the first domestic sukuk in the Kingdom, for Saudi Basic Industries Corp. (SABIC), in July. Worth SR3 billion, it was also the largest sukuk ever issued in the region. Originally planned as a conventional bond, it was changed to a sukuk both in deference to the local market and also because it was thought it would attract more investors. It is listed and traded on the Tadawul.
More sukuk are going to come. “The domestic market will be a sukuk market,” said one veteran Saudi economy watcher. All the evidence points that way. Earlier this month Riyad Bank revealed plans for a $1 billion sukuk by Saudi Aramco and ConocoPhillips to help fund construction of their $6 billion joint venture 400,000 bpd refinery at Jubail. For its part, SABIC is already on record saying that next year it plans to raise SR6 billion to fund new plants and SABIC Vice President (Corporate Finance) Mutlaq H. Al-Morished, is on record saying that the corporation is committed to promoting Islamic financing. The SR6 billion figure includes funding for its affiliate, Saudi Kayan Petrochemical Company for a $3 billion petrochemicals plant in Jubail. In fact, SABIC has already appointed BNP Paribas, Arab Banking Corporation and Samba as financial advisers and lead arrangers for a $4.8 billion loan for the Saudi Kayan project; it may be that, like the SABIC instrument, it too is converted to a sukuk.
Even if not and even if other banks are getting a growing slice of the action, this all adds up to good news for HSBC. With its specialist Amanah Finance Division, it has considerable experience in Islamic banking and products. It won Euromoney Magazine’s award as “Best International Provider of Islamic Financial Services and Best International Sukuk House in Asia and the Middle East” in 2004, “Best Islamic Wholesale Bank” in 2005 and “Best Islamic Project Finance House” in 2006. As with IPOs, there are going to be a lot more Saudi corporations beating a path to its door to arrange their future sukuk.
Meanwhile, HSBC is heavily involved in project finance for the Saudi power and water sectors, advising on the Shuaiba 3, Shuqaiq 2, Ras Azzour and other upcoming independent water and electricity projects, on privatization and petrochemical plants and more. The SR9 billion Shuaiba 3 water and electricity production project, 110 km south of Jeddah and due to be operational in 2008, was awarded to a Saudi-Malaysian consortium — Saudi-Malaysian Water and Electricity Company — to build on a build-operate-transfer (BOT) basis, but the plant will be owned and run by the recently established Shuaiba Water and Electricity Company (SWEC), the first private Saudi company for the production of water and electricity. It is 60 percent owned by the consortium, 32 percent by the Public Investment Fund and eight percent by SEC. Initially, credit support is being provided by the Ministry of Finance but an IPO is planned.
These, together with its lead in IPOs and the sukuk market, have established HSBC as one of the leading investment banks in the Kingdom, possibly the leading investment bank; Euromoney named HSBC Saudi Arabia as “Best Investment Bank in Saudi Arabia” for 2006. It is all extremely good for business. HSBC is reported to have seen rapid growth in most of its operations despite the effects of the stock market slide on the brokerage and the asset management business. But being in a leading position is never easy, especially in the present highly bizarre climate of economic boom and stock market bust. The competition in the Saudi investment banking sector is already intense — and set to become more so as other investment advisers move in, attracted like bees to an overflowing financial honey pot.
The big plus for all, HSBC included, is that in an economy that is growing exponentially, with as much a $1 trillion to be spent on mega and industrial projects in the next 13 years, there is plenty of business for all.
