Why Saudi banks don’t find overseas buyers
riyadh — Saudi Arabia is about to cast off its oil-dependence, build brand-new industries and open its economy to foreign investment, according to the government. That might make it a good time to buy into a Saudi bank. And substantial stakes in two of them are up for sale.
But in both cases, it’s international lenders who are seeking to get out — and there are no bigname global banks eager to buy, according to analysts and people familiar with the transactions; what interest there is comes from local or regional groups. That reflects concerns about prospects under Saudi Arabia’s ambitious reform program, as Deputy Crown Prince Mohammed bin Salman cuts back the government spending that’s traditionally buoyed the economy.
One result of austerity is the worst growth since the world recession of 2009, and it’s forecast to slow further this year. New construction projects are scarce, and payments to builders got held up last year. That’s hurting banks that lend to them, including the two on the market. Royal Bank of Scotland Group Plc has reportedly been seeking for years to sell its 40 per cent stake in Alawwal Bank, while Credit Agricole SA is considering a sale of its 31 per cent stake in Banque Saudi Fransi, according to people familiar with the matter.
Control of the banks isn’t on offer, and that’s one issue for buyers. But another is that banking is “basically the final stopping point you find of all the risks in the Saudi economy,” said Crispin Hawes, London-based managing director at Teneo Intelligence. “They all crystallise in the loan books of domestic banks.”
So, even if there’s a “very good case” for investment in some industries, that’s less true in banking, Hawes said.
Among the world’s major finance companies, from Goldman Sachs Group Inc. to Citigroup Inc, there’s plenty of interest in Saudi Arabia — it’s just not directed toward retail or commercial banking. Prince Mohammed’s plan is unleashing a flurry of fee-generating activity. The proposed initial public offering of state oil company Saudi Aramco, which may end up being history’s largest, is just one example.
The 31-year-old prince’s blueprint for a post-oil economy was announced with much fanfare last year. It also includes creating the world’s largest sovereign wealth fund, improving the business environment, and gradually opening up a conservative society where religious police enforce an austere interpretation of Islamic law. It’s drawn both acclaim and skepticism from the start.
Whatever the longer-term prospects, “it’s going to be a tough couple of years coming up,” said Jason Tuvey, Middle East economist at Capital Economics in London. The powerful religious establishment could resist reforms, while slow growth is likely to keep credit subdued and could deter bank buyers, he said. Lending by Saudi banks to
31% stake sale by Credit Agricole SA in Banque Saudi Fransi
the private sector was expanding rapidly as recently as last year, and now it’s stalled: In February, annual growth slowed to 0.3 per cent, the lowest figure since 2009.
Alawwal Bank, which used to be known as Saudi Hollandi, reported that net income fell by half in 2016, to 1.07 billion riyals ($285 million). Banque Saudi Fransi’s profit of 3.51 billion riyals was down 13 per cent. Both banks — which primarily lend to business, not consumers — reported that non-performing loans to the construction and building industry more than tripled over the same period.
Authorities say they’ve cleared the backlog. The finance ministry said in December that 100 billion riyals ($27 billion) of delayed payments had been settled, and promised to speed up processing so that no contractors have to wait more than 60 days. Still, “given the dominance of the state in the economy in general, that raises a question of the quality of the loan books in Saudi banks,” Hawes said.
While there has been interest from Asia in the stake RBS is selling, the most likely deal will be with a group of local investors, according to people familiar with the matter. There’s a clear preference among the Saudi authorities for a buyer from outside the region, yet such potential acquirers have been put off by the fact that the minority stakes for sale don’t offer control, and that competition in the sector is intense, the people said.
RBS declined to comment. Credit Agricole, Alawwal and Banque Saudi Fransi did not respond to requests for comment.