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Saudi Arabia 2015 | FINANCE | VIP INTERVIEW

TBY talks to Yasir O. Al-Rumayyan, CEO of Saudi Fransi Capital, on the IPO scene, the prospect of foreign participation, and oil prices.

Overall, 2015 is expected to be a big year for Saudi initial public offerings (IPOs). What pending IPOs is Saudi Fransi Capital handling?

Saudi Fransi Capital currently has a good number of IPOs in the pipeline. We have a significant number of companies shaping our IPO plan. Most of the IPOs we are offering are of medium to large size, as we think that investor appetite is healthy and that companies will continue tapping the Saudi stock market. After all, this market is valued now at a much higher rate than it was back in 2007 and 2008, and even in previous years. Saudi Fransi Capital will continue to be a major player in the equity capital markets, the fields of IPOs, rights issues, and other related transactions. We attribute our current status to the strong relationships we hold with our parent company Banque Saudi Fransi. In retrospect, 2014 was much better than 2013, and we should use 2014 as our benchmark. Therefore, we think that 2015 will be a very successful year.

The Saudi Stock Exchange (Tadawul) is set to open up to foreign institutional investors in 2015. How do you see this affecting Saudi Fransi Capital and the sector?

This development will definitely have a positive impact on our sector at large. Coincidently, we have established an office in Dubai. Through this office, we are targeting international investors wishing to invest in the Saudi market. Initially, this office was established for our asset management projects and the discretionary portfolios for mutual or real estate funds. We anticipated that the market would open up, but we were not able to predict when at first. Today, we believe that trading volumes will see an increase within this open market environment. I believe there are going to be large amounts of funds coming into the country. Reuter's quoted that $30 billion to $60 billion would be coming in, depending on our admission to the MSCI Emerging Markets Index. Those numbers, if admitted, will be really small. They will have an impact, as they will encourage more rational trading. I think that the Saudi market is one of the least volatile markets in the world; it is less volatile than the US market, and most other emerging markets. The standard deviation in the Saudi market is very low. For us, the opening up of the market will facilitate matters and bring more business for our company.

It is unusual for a Saudi bank to have overseas branches. Do you think this could be a new trend as the market continues to open up?

Currently, the subsidiaries of Saudi banks do not have much of a presence abroad, especially for investment activities. The biggest winners with the opening up of the market will be the large international banks, because they already have their clients and they will channel their clients' business to their offices here. We do not have a lot of international clients at present. However, we can increase this client base through our major shareholder, Crédit Agricole, yet we know that this base will not be as large as the client bases of our peers Merrill Lynch or JP Morgan. We have limited access to customers. So for us, opening up a subsidiary in Dubai would serve as our starting point, and we would begin to get more foreign institutional investors into the country.

“We are continuously working on strengthening our infrastructure, our systems, and our processes."

What opportunity does the Kingdom offer for equity investors in 2015 and what products does Saudi Fransi Capital offer potential investors?

In July this year, the Saudi Arabian authorities announced that they will open the $550 billion Saudi equity market to direct foreign participation from 2015. This is the first time in history that this development has been seen in the Saudi market. This is a landmark development, especially in light of the fact that Saudi Arabia is one of the world's 10-largest emerging markets and will constitute approximately 4% of the MSCI emerging markets index if included today, or 60% of the MSCI Frontier Markets index. By market capitalization, the Saudi equity market will be larger than the markets of Russia, Mexico, Malaysia, and South Africa. The average daily traded value in the first 10 months of 2014 was $2.3bn and the market has 167 listed companies across 15 sectors. These companies provide investors with broad access to various investment themes within the economy. The market currently trades at an estimated forward FY15 P/E of 14x with a projected earnings growth of 13% for 2015. Saudi Fransi Capital is part of the Credit Agricole S.A. Group. We provide Saudi equity brokerage access through an online platform and a team of 30 brokers. This team is supported by an equity research and advisory team providing market-leading coverage of listed companies. Additionally, our asset management division has an enviable track record of outperforming its Saudi equity benchmarks in 11 of the past 12 years and we provide investors access to managed portfolios and funds within Saudi equities and physical Saudi real estate.

What effect, if any, do you see falling oil prices having on the Saudi stock market or on the Saudi financial sector in general?

If this becomes a continuous trend, it will be a cause for concern in the future. The question is whether or not there will be a continuous decline in oil prices. However, in the short to medium term this trend is going to be a cause for concern, because the government is the main player in the Saudi economy. It is seen as the main driver or engine. We have backlogs of three to five years on most governmental projects, which means that we should be okay in the coming three to five years, even if oil prices plunge further. Of course, some sectors, particularly the petrochemicals industry, will suffer if oil prices continue to decline. I think that the sectors that we recommend to our clients, such as retail and consumer products, will not be impacted in any way. Oil prices will also have little impact on healthcare and construction materials sectors.

Beyond your IPOs for 2015, what are your other short-term priorities?

We are continuously working on strengthening our infrastructure, our systems, and our processes, and that is something that we never slow down on. We have not been active in the field private equity, and this is an area that we are moving into. Our board of directors has given capital for this activity, and we are now in discussions with some companies to become involved in physical equity-related activities. We are active in the debt capital markets and sukuk, but not as active as we are with the equity capital markets and IPOs, and we want to strengthen the team there and be more competitive in that market. We are continuously enhancing our website and trading platforms for our clients, and we are now providing more services. We currently have six different models to offer our clients, and we also want to improve our institutional sales team's capabilities as the market opens further—and we need more talent to join that team. Our focus for 2015 is to increase our sales team and management through positive performance in the current funds and the introduction of new funds.

© The Business Year - December 2014