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Al-Khatib’s appointment comes from the National Commercial Bank and NCB capital where, he worked for fifteen years, most recently as Managing Director and Head of NCB Capital’s Investment Banking. According to media reports, Haddad said, “The Kingdom of Saudi Arabia is a critical component of Citi’s Middle East strategy and is an essential growth market for Citi globally. Wassim is a highly experienced banker with the right expertise to continue driving our strategy of serving our clients and contributing to the Kingdom’s generational transformation.”

Al-Khatib expressed his happiness with the decision saying he is delighted to join a world-class financial institution and he is very proud to lead Citi Saudi Arabia and work closely with our clients in the Kingdom. He hopes to continue delivering the products and services of the highest standards, while fulfilling the role of an effective member of the Saudi financial services sector where he support the economic growth and diversification plans.

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The decision to grant them digital banking licences by the Saudi Arabian Monetary Authority (SAMA) will depend on the value proposition the proposed Saudi Arabian digital banks bring to Saudi Arabia’s banking sector.
Yazeed Alsheikh, director for general of banking control at the Saudi Arabian Monetary Authority recently confirmed the same to the local media.

The names of the two applicants are not yet known.

Last week, the Saudi Arabian Monetary Authority (SAMA) issued new digital banking guidelines to be followed by digital banking players in Saudi Arabia.

According to the central bank, the digital banking guidelines of Saudi Arabia complement its banking licencing guidelines and minimum criteria.

These new digital banking guidelines issued by Saudi Arabia must be considered as additional conditions to be met along with the licensing guidelines for conventional banks, according to SAMA.

In a statement, SAMA said, “The additional guidelines are to keep up with the developments in the financial and information technology sectors and to achieve the objectives of the Financial Sector Development Program (FSDP) and Saudi Vision 2030 by developing the digital economy.”

Last year, the central bank started processing applicants for three new banking licences in the kingdom. Reportedly, two of the new licences were for traditional banks and one for a digital bank.

Recently, SAMA granted a licence to BayanPay-a network brand of Finablr, to provide payment services in the country. Finablr is a Saudi Arabia-based global platform for payments and foreign exchange solutions.

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A significant improvement in credit volumes in the Kingdom, loan growth recovery in Turkey and strong volume in Egypt are contributing factors to UAE banks’ loan growth this year.

Loans might increase by 7 percent in the Kingdom compared to 6 percent last year. Its retail mortgages will continue to fuel credit on the back of 31 percent year-on-year expansion in the third quarter of 2019.

Dubai’s Expo 2020 comprising more than 190 countries will benefit lending in the UAE.  JPMorgan Chase analyst Naresh Bilandani, told Bloomberg in an email, “Expo 2020 is a key catalyst — which can offer a boost to both corporate and consumer spending — and provide impetus to tourism.”

Also, the UAE banks’ regional expansion will help to increase their revenue, especially with a government-led mortgages programme in the Kingdom driving home loans, the media report said.

According to Bloomberg compilation, the UAE’s economic growth forecast is expected to increase to 2.5 percent from 1.6 percent last year.

Last year non-performing loans in the UAE climbed to their highest level in more than five years, despite slowdown in property prices. The slowdown is mainly attributed to the oversupply in the UAE’s property market. Mortgage Finder noted that there has been a 59 percent increase in property enquiries between 2018 and 2019.

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NCB and Riyadh Bank, however, did not mention a reason for their decision to stop the merger talks. Reportedly, the two banks failed to agree on a valuation.

“The boards of both banks have decided to end preliminary merger talks and not to continue with the merger study,” the two banks said in separate stock exchange filings.

The merger between NCB, which is Saudi Arabia’s biggest bank in terms of assets, and Riyadh Bank, the fourth largest in the kingdom, would have created a new entity with $183 billion in assets.

As of September 2019, NCB’s total assets stood at $133 billion. The merger deal with Riyadh Bank would have bolstered the lender’s position as the top bank in Saudi Arabia, ahead of its closest rival Al Rajhi Bank.

Both NCB and Riyadh Bank have a common shareholder in sovereign fund Public Investment Fund (PIF). The sovereign fund holds a 44 percent stake in NCB and a 22 percent stake in Riyadh Bank.

Consolidation has increased in the region in the past two years due to lower profit margins which are a result of lower consumer spending in the face of weak oil prices.

In June, Saudi British Bank (SABB) and its smaller rival Alawwal Bank completed a merger deal to create the kingdom’s third-biggest lender

Last month, NCB and MasterCard entered into a partnership to roll out a suite of card-based payment products and collaborate to develop and deliver advanced technology solutions for NCB customers.

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Most of the GCC nations are proactively taking steps to create a conducive business ecosystem for foreign investors. A tentative step toward firming up their non-oil economy was the liberalisation of the foreign ownership limit in local companies. On July 2 this year, the UAE cabinet announced that the government would allow 100 percent foreign ownership in 122 business activities specifically in agriculture, manufacturing, and services. Even then, the Department of Economic Development of each emirate has the authority to decide the extent to which a foreign investor can own a proportion of a local business.

The Dubai DED is said to be considering applications of companies with activities in the positive list on a case by case basis.  In a milestone decision, the Saudi markets regulator also announced in June that it was removing a cap on foreign ownership in publicly traded companies enabling foreign investors to take control in sectors from banking to petrochemicals. Even though the Captial Markets Authority has removed the cap, caps placed by other regulators or the companies themselves remain. In banking, telecom, and insurance the authorities still have to approve deals that cross a pre-established threshold. This allows foreign banks to take majority stakes in Saudi banks for the first time since 1970 when foreign lenders were forced to sell their majority stakes in their local operations to Saudi nationals.

In the UAE, the largest banks quickly warmed up to the prospect of welcoming more foreign investors and announced strategic moves to relax their foreign ownership caps. UAE’s largest bank, First Abu Dhabi Bank, increased foreign ownership limit from 25 percent to 40 percent. The bank has been jockeying for a full removal of the cap, although that decision would depend on the regulators.

“The potential for more foreign investment in banks is large in the UAE with existing quotas largely unfilled. For example, In Abu Dhabi Commercial Bank the foreign ownership is only 13.37 percent when compared with the foreign ownership limit of 40 percent, FAB has 11.30 percent against foreign ownership limit of 40 percent, Mashreq Bank at 2.99 percent against foreign ownership limit of 49 percent and for Emirates NBD it currently stands at 5.61 percent.

In fact, on an average 88.55 percent of the foreign ownership limit is unused in DFM listed banks while for ADX listed banks about 83.54 percent of the limit is unused.  The UAE has taken various steps in the recent past to attract foreign investors such as 100 percent ownership in certain sectors and issuance of 10-year visa,” Vijay Valecha, CIO of Century Financial tells International Finance.

More recently, Dubai’s largest bank, Emirates NBD, raised its foreign ownership limit from 5 percent to 20 percent—and had announced its plan to further increase the limit to 40 percent in the future. One benefit from liberalising the limit is the bank’s potential inclusion on the emerging market indices by MSCI and FTSE Russel, which is expected to increase passive inflows. Even with a 20 percent foreign ownership limit the bank could see foreign fund flows of up to $425 million.

“The earlier foreign ownership limits of some banks were very low, acting as impediments to foreign investments. Emirates NBD, the second largest bank in the UAE by market capitalisation had a very low foreign ownership limit earlier at five percent and has been subsequently increased to 20 percent,” MR Raghu, Executive Vice President Research of Kuwait Finance House, tells International Finance.

“The changes in ownership limits are expected to remove constraints for index providers such as MSCI and FTSE to assign higher weightages to the UAE banks in their indices, consequently resulting in higher passive inflows into the UAE banking stocks. A foreign ownership cap of 40 percent would provide the necessary headroom in the medium to long term to attract more foreign investments,” he added.

The Capital Market Authority of Saudi Arabia has developed significant reforms to foster capital market development and boost investor protection since 2014. The reforms that have been implemented can be categorised into four groups: operations, regulatory framework, corporate governance and investor protection. All listed companies in the Kingdom have adopted IFRS.

How attractive are GCC banks to foreign investors?

Standard & Poor in its global rating report GCC Banks 2020 Industry Outlook stated that prominent banks in the GCC countries should remain stable in 2020, with the exception being the influence of any significant increase in geopolitical risks or a drop in oil prices.

GCC banks adopted the International Financial Reporting Standards (IFRS) 9 last year to maintain financial stability. The banks currently demonstrate strong capitalisation by industry standards.  The report said that the average tier 1 capital in GCC banks increased by 100 basis points between 2015 and 2019 owing to various capital boosting initiatives — such as muted lending growth, IFRS 9 adoption rate, higher dividend payout ratios and hybrid issuances.

According to an S&P report published in 2017, banks across the GCC are expected to maintain robust capital levels till at least 2019. A Saudi Arabian Monetary Authority (SAMA) report also said that growth in capital levels are positive in the Saudi banking system as it succeeded to increase capital during a period of negative credit.

“The UAE and the Kingdom of Saudi Arabia banks are robust, fundamentally strong and command high capital levels. Improved disclosures, higher level transparency of operations and better corporate governance measures would entice foreigners to invest in the UAE and the Kingdom of Saudi Arabia’s banks,” Raghu said.

The Kingdom’s recent efforts to remove the cap on foreign ownership are expected to benefit domestic banks in the long term despite the threshold barrier. “The Kingdom’s move to remove the cap on foreign investment by strategic investors is a positive step for the long term as it allows foreign investors to increase their exposure to Saudi banks and acquire strategic stakes that was previously not possible,” Raghu said. Foreign banks are already strategic investors in some the Kingdom’s listed companies. Some of the examples of foreign strategic investors in the Kingdom’s listed companies include HSBC, Royal Bank of Scotland, and Credit Agricole.

So who are the foreign investors likely to be interested in investing  in the banks in the UAE and Saudi Arabia? “The valuations at which the UAE and the Kingdom of Saudi Arabia banks trade are attractive compared to their Emerging Market (EM) peers. Now that the foreign ownership limits are relaxed, we could expect them to be included in various indices and attract capital inflows into their stock. This presents an opportune moment for investors to consider increasing their exposure. We expect global fund managers, insurance firms, pension funds and endowments to be interested,” Raghu explains.

Saudi, UAE banks will benefit form foriegn investment

The removal of the foreign investment limit is expected to enhance the due diligence process for foreign investors who demand operational transparency and additional disclosures specific to strategy and long-term goals.

GCC banks are already making moves to bring governance at par with global standards. According to Valecha, financial institutions in the region are already making progress in implementing blockchain enabled technologies, digitisation of documents which enable standardisation, reusability, and monetisation of data, vital to strengthening the internal systems and client experience. For example, the Kingdom has introduced an electronic investor protection system to promote investor interest.

The GCC countries believe that a broad range of investors will boost their banks’ liquidity and strengthen the pool of industry expertise. “Increased foreign investment into domestic banks offer manifold benefits for the institutions concerned. Foreign investors, especially those with management expertise can help improve the risk management practices and increase transparency, thereby leading to better corporate governance standards. They also bring in specific domain knowledge which helps in improving the skills of local management,” Valecha explains.

If the foreign investment cap in the UAE banks is removed it will impact the knowledge transfer and reskilling of the workforce. “The presence of a foreign strategic partner like a bank will enable in increasing the product diversity and deepening the financial market. Most are motivated by profits and they tend to promote M&A’s, if it leads to a better cost to income ratio for the banks. Increased foreign investment is beneficial for the UAE in the form of economic development, employment boost, improved productivity, knowledge transfer and facilitation of international trade. Moreover, it will strengthen the UAE’s image as an international trading hub that is friendly to business,” Valecha says. Foreign strategic investors can also introduce specific domain knowledge in the Saudi Arabia’s banking sector to improve local management skills.

The regulators and the banks have got their timing right

The timing of the Saudi regulator lifting the foreign investment cap and the UAE banks raising their foreign ownership limit is apt, especially with the trade war looming and the economic uncertainty that comes along, Valecha explains. “While Long drawn out trade wars uncertainty surrounding it is certainly damaging to those in conflict, this creates opportunities for investments in other jurisdictions. Due to its strategic location between the East and the West, and being the link between MENA, Asia, Africa and Europe—the UAE offers easy access to investors from all around the globe. Most of the foreign investments in UAE and Saudi Arabia in the past have been from countries like India, the USA, the UK, Thailand, France and Spain and this is expected to continue in the future. Large financial institutions and wealth funds seeking income or dividend growth coupled with capital advance will be particularly enticed to invest in the UAE and Saudi banks.”

Kuwait Finance House’s Raghu shares similar views on the timing of the banks’ and regulators’ moves to remove the cap on foreign investments. “The relaxation of ownership limits to attract foreign investments is a step in the right direction at the current juncture. It also aligns with several other structural reforms introduced by the UAE government in recent times to improve foreign trade and capital inflows,” he said.

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