BackA Saudi stake in Credit Suisse isn’t just another bank rescue
It reveals Riyadh’s ambitions in the sphere of wealth management
PremiumAs Credit Suisse Group AG is overhauled, Saudi royals have swooped in to help. But the Swiss bank may end up playing its own rescue role, too. The troubled lender, beset by scandals and losses, is striking deals to raise capital from outside investors and going back to its wealth-management roots. Saudi National Bank (SNB), majority-owned by the kingdom’s Public Investment Fund and its largest lender, has committed to $1.5 billion to become a new strategic investor and take a 9.9% stake in Credit Suisse, subject to approval by existing shareholders.
With Saudi Arabia’s newfound swagger, SNB’s move isn’t just another bailout by a deep-pocketed Gulf investor. The country’s de facto leader Crown Prince Mohammed bin Salman, or MBS as he’s often called, has bolder plans. As he cleans house, tightens purse strings and tries to make his grand Vision 2030 economic blueprint a reality, the banking system and financial plumbing are increasingly crucial.
While there’s plenty of money in the hands of Saudi’s richest citizens, the country remains heavily reliant on foreign wealth managers and banks to deploy capital. SNB itself was created earlier this year through a merger of National Commercial Bank and Samba Financial Group. The combined entity, overseeing almost one-third of the country’s banking assets, is a mash-up of a large retail bank and commercial lender. Flexing their financial muscle, SNB Chairman Ammar al-Khudairy has said that the investment in Credit Suisse is a “manifestation of the new Saudi Arabia."
SNB developing an investment banking operation to raise money overseas for projects at home would be extremely useful in realizing MBS’s vision, which includes a $500 billion high-tech metropolis in the desert called Neom. (Saudi Arabia is working with Lazard as it considers how it will pay for Neom, Bloomberg News has reported). But where the Saudi bank ought to focus first is on using local money better and offering it more of a reason to stay. That’s probably where a stake in Credit Suisse comes in.
Wealth management is a profitable business with steady, repeatable revenues that should be attractive for a bank like SNB. The annual returns on allocated equity in the global wealth businesses Swiss institutions Julius Baer Group Ltd and UBS Group AG, for example, are currently more than 30%, according to Morgan Stanley analysts.
Credit Suisse’s wealth-management returns have reached only 15% in the past couple of years, according to Morgan Stanley, as its long-brewing scandals and problems managing the bank hurt its operations broadly. But in the years before the covid pandemic, its International Wealth division was hitting average returns of nearly 30%
Credit Suisse’s wealth management know-how and technology could prove extremely valuable to the Saudi bank (and for MBS’s plans). Technology that saves costs has become much more important in recent years because lower investment returns and growing transparency have put pressure on fees. At the same time, even the most complicated clients increasingly want to use their mobile phones or other digital devices for their finances. SNB could definitely use some help to develop those kinds of things more quickly.
The wealth business also promises growth. The Middle East and Africa has a relatively small market with only about one-tenth of the assets of North America. But the Middle East could grow by nearly 5% annually over the next five years, which is better than all regions apart from Asia Pacific and Latin America, according to estimates by the consultancy Oliver Wyman.
Saudi Arabia also faces growing local competition in finance. The financially savvier UAE has gone big on drawing in banks, global asset managers and talent to build a centre of expertise. Dubai and Abu Dhabi are creating investment bases and showing that they can potentially diversify and pivot their economies to be more than just dependent on oil and trade. And, that they know how to use their own money well.
Meanwhile, Saudi Arabia, counted as among the fastest-growing economies in the world this year, hasn’t quite gotten itself known as a shrewd financial investor despite the heaps of capital it sits on or invests globally.
MBS has pushed hard to bring in foreign bankers, investors and lawyers and deepen the country’s financial system. With the Credit Suisse move, he has more access to a damaged but still sophisticated knowledge base. He also has Michael Klein, the star banker and Middle East specialist, who is due to become head of Credit Suisse’s quasi-independent investment bank CS First Boston, on his side.
If Saudi Arabia can get the most out of this expertise, MBS’s Vision 2030 might actually have a chance. ©bloomberg
Anjani Trivedi & Paul J. Davies are, respectively, Bloomberg Opinion columnists covering industrial companies in Asia and banking and finance.
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