Judging by the success of the initial public offering (IPO) of shares in the newly established Alinma Bank in April, Saudis are convinced that it represents a viable business proposition. They quickly snapped up SR10.5bn ($2.8bn) worth of shares in the kingdom’s biggest ever IPO.
In the process, they helped create the biggest bank in the region by capital base, at SR15bn, although several other banks in the kingdom subsequently raised new capital to match Alinma. However, the new bank still needs to recruit staff, and lacks a clear business plan or any track record of performance.
The creation of Alinma draws attention to two of the most troubling issues facing the financial sector in Saudi Arabia. First, whether the government’s policy of redistributing wealth through par-value IPOs is damaging the equity market and preventing it from maturing; and second, how the kingdom’s banking sector will manage to recruit and retain experienced staff to complete all the planned deals.
In private, bankers are critical of using capital markets as a vehicle to redistribute wealth. Not only does it perpetuate the dominance of retail investors in the equity markets, but it also downgrades the quality of investment banking work required to list a business.
The head of one local investment bank tells MEED he no longer bids for what he considers lower-quality work that is damaging to the maturity of the stock market. “I bid for the advisory on Alinma, but only because I had to,” he says. “I deliberately bid high so that we would lose. If you look back at the creation of Alinma, it was in the middle of the stock market crash. The whole concept of the bank was to create a firm to do a par-value IPO so that investors could get back some of the money they lost in the last boom and bust.”
The royal decree establishing Alinma was issued in March 2006, but it has taken until now to get the IPO to market. This is not unusual for Saudi Arabia. “Liquidity is very deep, but logistically I don’t think the market has the capacity for the amount of work there is,” says Sameer Nawaz, co-head of corporate finance at Calyon Saudi Fransi. “Because of the restrictions the Capital Market Authority is imposing, which are absolutely correct, it takes a lot longer for companies to get ready to IPO – sometimes years.”
He adds that because par-value IPOs dominate the market, they are almost guaranteed to be successful. “There is a perception that every IPO will be successful, which just makes it easy so any adviser can do it, and that brings down fees,” he says. “So while there is the quantity of work coming through, the work does not have any depth.”
Investment bankers complain that the continued use of par-value IPOs is pushing down the value of the work they do. With a company that has an established track record, bankers have to draw up valuations of the company, its growth prospects, and calculate what an appropriate share price would be. They must then convince investors to buy into the company’s growth story.
One banker describes working on a par-value issue as a simple book-keeping exercise designed to keep the issue price as low as possible. This then allows retail investors to bid up the price and keep the gains.
“The whole allocation formula is geared towards keeping the price down and keeping the retail investors in,” says the investment banker. “This sets a bad precedent as it does not encourage investors to look analytically at the fair value of their investments.”
One way that the government could continue to use the capital markets to redistribute wealth, but encourage a more analytical approach to investment, is to allow foreign participation in the secondary market, but continue to offer IPOs to Saudi nationals. Foreign investors would only trade in the market up to a certain point, which would put a more natural ceiling on share prices.
Another concern is that Alinma itself could depress fees. “One of the big worries is how profitable does Alinma have to be, as it will essentially be a government bank,” says the managing director of one Saudi bank. “If it does not have to be that profitable, it will put a lot of pressure on margins at every bank.”
Chief executive officers (CEOs) at rival banks say creating a bank of such size will cause huge distortions in employment in the financial sector. “The scarcity of talent is a key challenge affecting the industry,” says Abdulkareem Abu Al-Nasr, CEO of National Commercial Bank (NCB). “With the emergence of new competitors and new businesses in the financial services industry, the demand now is even greater.”
Jean Marion, CEO of Banque Saudi Fransi, says Alinma has the potential to be a huge employer. “With the size of capital that Alinma has, it will be a serious competitor for every bank in Saudi Arabia when it is up and running.”
Despite some rivals questioning the ability of Alinma to create such a large bank in a short period of time, Alinma has not changed its ambi-tions. Mohammed al-Awadh, general manager of marketing for the bank, says when it launches, which is expected in the fourth quarter of this year, it will do so with a branch network covering all the major cities of Saudi Arabia, and a full range of retail, corporate and investment banking products. “Getting the right talent is a major difficulty across the region,” says Al-Awadh. “We are targeting not just Saudi talent, but local and international talent as well.”
He adds that the bank has already recruited more than 250 staff.
The managing director says Alinma’s arrival will make the competition for talent even more intense. “Everyone is poaching from everyone else, salaries have gone crazy,” he says. “Having another competitor in the market will only make things worse.”
With the movement of people, client relationships inevitably follow. Alinma has the potential to upset some bank-client relationships by recruiting staff who work closely with large Saudi corporates. But bankers say competition will be tough for the new bank. “I am not worried about competing with it,” says the senior banker. “The involvement of international banks like HSBC, Credit Agricole, ABN Amro and Citigroup has created a very competitive banking sector in Saudi Arabia. For a new bank with no foreign partner and no existing resources, it will be difficult to start making money.”
Al-Awadh says there are no plans to bring in a foreign banking partner.
Despite not having a single product, branch, or customer, Alinma has already had a huge impact on the Saudi banking sector. In addition, the fanfare surrounding the bank’s size and method of creation have brought increased scrutiny of the banking sector. When 2009 comes and it is operational, it will create even bigger waves.