Banking giants race to Riyadh as MBS steps up pressure campaign

WHEN Deutsche Bank last month brought back its former CEO for the Middle East and Africa, the reappointment came with a twist: Unlike his prior stint at the German lender, Jamal Al Kishi will no longer be based in Dubai, the region’s traditional business hub known for swanky villas and expat comforts. Instead, he will be based in a far less glamorous Middle Eastern city – Riyadh.

Germany’s largest lender is also ramping up headcount in the Saudi Arabian capital, one of the few places it is doing so globally. The changes reflect how the conservative city – where alcohol is banned  – is gradually emerging as a financial hub. Taking a carrot-and-stick approach, Crown Prince Mohammed Bin Salman has made it easier for foreign firms to operate, but a new law is also forcing them to set up headquarters in the country or risk losing business from government entities sitting on billions of US dollars in oil wealth.

The move is intended to lure business from international financial centres such as Hong Kong and Singapore and particularly nearby Dubai. And bankers say Saudi pressure to expand on the ground goes beyond the new law: During discussions, senior Saudi officials persistently ask if executives plan to spend more time in the kingdom or expand existing offices, while offering to fast-track licenses for those committing to live with their families in Riyadh. Government representatives did not respond to a request for comment.

The efforts are working partially. Few international banks have set up regional headquarters in Riyadh, although the trend is clear. Rothschild & Co recently opened its new office in the Saudi capital’s US$10 billion financial centre, pledging to relocate bankers from Dubai and elsewhere. Staffing levels at HSBC Holdings’s investment bank and JPMorgan Chase & Co have reached levels comparable to Dubai, according to officials at both banks. Lazard, meanwhile, has outright picked Riyadh as the main base for its regional advisory division. US financial services firm Northern Trust last year established its regional headquarters in Riyadh.

Still, although Riyadh is abuzz with change and activity, expats point to lingering problems finding quality health care and schools. Some also describe difficulties operating in a country where officials are demanding of their financial advisers, often taking key decisions at night and expecting bankers to be present on a whim. None of that has been enough to slow the rush into Riyadh.

“You can look at Saudi as a sleeping giant who has finally woken up with a great deal of pent-up energy striving to catch up with and overtake those around him,” said May Nasrallah, founder and executive chairwoman of boutique advisory firm deNovo Partners, which recently received a provisional license to establish their local operations. “Lots of pressure is being applied in particular on international firms and organisations to domicile their regional headquarters in Saudi,” she said, adding that this “comes with the promise of significant economic benefit to these organisations with large lucrative mandates being awarded to those who complied”.

Nasrallah said she believes Saudi Arabia will in time bridge the gap between itself and other financial centres, yet “the challenge remains that to date the overall infrastructure and surrounding ecosystem is still not at the same level as other hubs”. She cited shortages of housing, schooling and services as the main challenges for families wanting to move to Riyadh and pointed to the dearth of local talent for international firms expanding on the ground.

With European and Asian economies facing greater uncertainty, building up in Riyadh allows banks to gain proximity to some of the most deal-hungry entities in the world, including a sovereign wealth fund that’s injecting billions in local projects and diverting money flows into global deals from the US to Asia.

At the same time, bankers say the fees earned in the kingdom – as well as the rest of the Gulf region – still remain below expectations given the size of the economy and deals. In some recent Saudi IPOs, the fees were only a fraction of what can be earned elsewhere.  For instance, Saudi Aramco Base Oil paid 85 million riyals, or 1.7 per cent in fees, for its US$1.3 billion offering in recent years.  In the US, the average fee can be about five times that.

That’s meant the Saudi deal boom has not always translated into a fee bonanza for banks.

How to interpret the regional headquarters law also remains open to discussion for the international banks. Some argue that the law is not intended for them to begin with but more for multinationals such as international manufacturing companies.

The Ministry of Investment and the banks have been working with consultancy Bain & Co to streamline the process or to resolve any unclarity around the regional headquarters issue.

Some expats who have chosen to move to Riyadh point to the benefits of a safe and family-friendly lifestyle. The city is making some strides in building quality hospitals and other infrastructure, even though those are not as extensive as prominent financial capitals elsewhere. The crown prince has also loosened many social restrictions, but the nation still draws criticism from human rights organisations for its regular crackdown on dissidents. Meanwhile, Saudi business leaders are also demanding of their bankers. One Dubai-based banker who asked not to be named discussing private business matters said his Saudi client warned him that if he continued to fly in and out of the kingdom, he would not be retained as an adviser anymore.

While Deutsche Bank has said Al Kishi – a Saudi national – will travel regularly to nearby Dubai and even Europe, it’s emphasised the importance of have working operations in Riyadh.

Having a substantial on-the-ground presence also forges long-lasting relationships with people who could one day become senior leaders. Banks such as JPMorgan and HSBC, which have operated for decades in the kingdom, hold annual alumni events that attract Saudis who have become important officials at some of the largest state entities.

Although global banks are expanding in Riyadh, they are relying heavily on hiring local talent because many expats are still reluctant to move. Many foreign executives continue to shuttle between Dubai and the Saudi capital in order to avoid relocating there. Flights between Dubai and Riyadh have also become more expensive and are often booked weeks in advance, forcing senior bankers to fly coach rather than in business class.

Wall Street and European banks also have to walk a regional tightrope between Riyadh, Dubai and even Abu Dhabi which are all locked in a race to attract financial firms. Dubai still dominates as the Middle East’s largest financial hub, while several gigantic sovereign funds in the neighbouring emirate of Abu Dhabi are the main draw. Rushing into one regional hub at the cost of another could be detrimental to the investment banks’ long-term relationship building.

In recent days, BlackRock obtained as much as US$5 billion from Saudi Arabia’s sovereign wealth fund to invest in the Middle East and build a Riyadh-based investments team. By having blue-chip names firmly rooted in their financial centres, the Saudi government is also seeking to gain greater influence in the world of high finance, deepen their capital markets, attract foreign money and underline the country’s importance. But the reluctance of many foreigners to live long-term in Riyadh despite the prospect of higher salaries continues to undermine the government’s efforts to draw foreign investment.

Saudi Arabia’s regional rivals are not standing still either. Abu Dhabi has stepped up efforts to lure financial firms, and heavyweights including Morgan Stanley, Deutsche Bank, JPMorgan and Rothschild are all ramping up there, while Dubai remains the place to be for many financial professionals who laud the city’s wide range of restaurants, safety and flight connections to the rest of the world.

“There’s a lot happening in Saudi Arabia, which people underestimate,” said Alexander von zur Muehlen, a Deutsche Bank board member and CEO of Asia-Pacific, Europe, Middle East & Africa, and Germany. “Bottom line is whether it’s Saudi or other places, we are very local. But that is not to say that it is easy,” he said. BLOOMBERG