Goldman Sachs lured by KSA boom

Investment banking giant Goldman Sachs Group signed a strategic cooperation agreement with local National Commercial Bank (NCB), also known as Al-Ahli Bank, in a move set to give the US company access to Saudi Arabia's booming economy.

Goldman Sachs International is the latest in a number of international institutions attempting to gain entry into the Saudi market. Merrill Lynch has taken the slightly different route of applying directly to the Capital Market Authority for a licence to operate independently under its own name, while Morgan Stanley recently signed a joint venture agreement with Riyadh-based The Capital Group (TCG).

The Saudi economy is seen as presenting lucrative opportunities for international banks. The kingdom posted impressive growth in 2006 with a budget surplus of $70.9bn. Despite heavy losses on the stock market, as the Tadawul All Share Index (TASI) lost more than 50% over 2006, high oil prices ensured that virtually every other sector of the economy grew. This in turn has enabled the government to allocate some $103bn of the 2007 budget for overall spending, with focuses on large infrastructure projects, the health and education systems, the military and the energy sector.

Rather than looking to western markets, as has historically been the case, observers are expecting Riyadh to develop domestic equity and bond markets. The exercise has, however, been hampered by a relatively immature market with few sophisticated investment vehicles and mechanisms. This, coupled with an inexperienced investment mentality, is seen as a principle factor leading to the market's crash in February 2006.

Notwithstanding the TASI's dismal performance over the last twelve months, the economy remains extremely buoyant. One Riyadh-based analyst told the Oxford Business Group that, "with such huge liquidity, it is hardly surprising that giants of the financial world, like Goldman Sachs, are queuing up for access".

A 2004 decision by the Saudi Arabian Monetary Authority (SAMA) requires all banks to separate their investment and securities business from their commercial and retail banking activities. This regulatory shift, and the need for experienced investment houses, no doubt lured by the potential rich pickings available, has led some local institutions to seek international partners as a way of more effectively developing their business.

HSBC was one of the first heavyweights to enter, signing an agreement with the Saudi British Bank (SABB) in 2005, which allowed it to set up its investment operations in the kingdom as a stand-alone entity.

Not all the details of the Goldman Sachs deal with NCB, Saudi's largest lender, have been made public, partly due to the fact that NCB Capital is still under formation. Its creation came as a response to the SAMA's directive and as such, it will house all of NCB's securities and investment operations. It is understood that Goldman Sachs will look to cooperate "in a broad spectrum of investment activities", overseeing its Saudi operations from its office in Dubai. Additionally, the US investment bank will acquire a stake in the investment-banking subsidiary of NCB, though it is likely to be a minority share. The agreement awaits various approvals from Saudi authorities.

Abdulkareem Abu Alnasr, the chairman of the newly formed NCB Capital, told the local media, "NCB Capital is the first subsidiary of a local bank to be licensed by the Capital Markets Authority. And now, with the proposed transaction with Goldman Sachs International, NCB Capital is poised to confront the challenges of a very vibrant market, shoulder to shoulder with the world's premier investment bank. I see a very promising and exciting future ahead of us."

Abdullah Bahamdan, chairman of parent company NCB, echoed the benefits of an agreement with a more experienced player. He said the combination of NCB's presence and experience with Goldman Sachs' expertise would provide the local company with  "the strongest possible support".

It would appear to be a mutually beneficial agreement, as Goldman Sachs will have one of the principal banks in Saudi Arabia and the kingdom's largest lender as its partner. Lloyd Blankfein, chairman and CEO of the Goldman Sachs Group said the deal showed his company's commitment to the kingdom and the development of its financial markets. 
 
(C) Oxford Business Group - www.oxfordbusinessgroup.com

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