Saudi economic reforms, and the fees they’ll generate, draw a pack of hungry investment bankers

▶ Saudi Arabia’s economic reforms have bankers looking to cash in ▶ “Banks are seeing a big wallet to go after” in the Middle East

When news broke in January that Saudi Arabia was considering an initial public offering of its stateowned Saudi Arabian Oil Co., or Saudi Aramco, the first reaction among Wall Street’s top brass was shock. Then the calls began pouring into Dubai—the Middle East’s financial hub—from eager bankers in London and New York.

Investment bankers around the world are clamoring to get in on what promises to be a bonanza of fees—and not just from the Aramco IPO, which the Saudis are hoping values the company at upward of $2 trillion. The kingdom is planning to sell hundreds of smaller state assets to bolster its finances and reduce its dependence on oil. That includes selling as much as $15 billion of bonds.

“It’s going to be a fees feast for investment banks,” says Riyadh-based John Sfakianakis, head of economic research at the Gulf Research Center. “No one else in the Middle East, and maybe even emerging markets globally, is embarking on such deep reforms.”

The Aramco IPO alone could generate at least $50 million in banking fees, according to an estimate from New York-based research firm Freeman & Co. With investment banking in a slump across much of the world, Saudi Arabia looks even more promising. “Saudi Arabia is close to the top, if not at the top, of the agenda for banks,” says Christopher Wheeler, a London-based analyst with Atlantic Equities. “Where else is there at the moment?”

Fees paid to banks in Saudi Arabia jumped by almost a third, to about $100 million, in the first five months of the year, according to Freeman. While that’s a fraction of what investment banks generate in the U.S. and Europe, the work of diversifying the kingdom’s economy is just getting started.

International banks elbowing for position are increasing head count, dispatching top executives to Riyadh, and promoting Saudis to senior roles to gain influence. Among the biggest banks, HSBC and Jpmorgan Chase appear to have a head start. Both banks, along with Citigroup, have been tapped to arrange the kingdom’s first international bond sale later this year, according to people familiar with the selection process. HSBC is already working on the privatization of the Saudi Stock Exchange, as well as the potential breakup of Saudi Electricity, say people with knowledge of the matter. Stuart Gulliver, HSBC’S chief executive officer, visits the kingdom regularly, according to someone familiar with his schedule.

Jpmorgan advised Saudi Arabia’s Public Investment Fund on its $3.5 billion investment in Uber this month. It also has an advisory role on the Aramco IPO, people familiar with the matter said in April. Jpmorgan set out at the beginning of the year to increase its Saudi Arabiabased staff of 65 by about 10 percent, says Bader Alamoudi, CEO of its local investment-banking unit.

The big banks are vying not just with one another but also with smaller companies. Verus Partners, a London-based boutique firm, in April helped Saudi Arabia secure its first loan in 15 years, when the government raised $10 billion from banks. That same month, Bloomberg reported that Michael Klein, the former Citigroup investment banker who runs his own firm, is advising Aramco on its IPO. He’s providing strategic advice to the government, while Jpmorgan is working on preparations for the IPO and may be among the banks that underwrite the offering.

To reduce the importance of oil to the economy, Deputy Crown Prince Mohammed bin Salman wants to build the sovereign wealth fund into the world’s largest and increase the proportion of its overseas investments to half, from 5 percent—an enormous shift that would generate enormous advisory fees. Still, bankers typically earn less on deals in Saudi Arabia than on similarly sized transactions elsewhere. On the IPO of National Commercial Bank, bankers, lawyers, and accountants split 25 million Saudi riyals ($6.65 million), or about 0.1 percent of the deal’s

size. That compares with an average of 2.7 percent for banks underwriting IPOS in Europe, the Middle East, and Africa in 2014, data compiled by Bloomberg show.

The country’s rigid interpretation of Sunni Islam, including a strict segregation of men and women and a ban on alcohol, can be off-putting to expatriates and make it harder to put qualified bankers on the ground. Still, the opportunities are too attractive to pass up. “Banks are seeing a big wallet to go after, and they won’t want to miss out,” says Wheeler of Atlantic Equities. “With oil unlikely to return to historical highs, there will be a consistent stream of business coming out of Saudi Arabia for years to come.”

The bottom line Bankers are flocking to Saudi Arabia, where the IPO of Saudi Aramco could generate at least $50 million in banking fees.