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HSBC Boosts Role as Saudi Banker -- WSJ

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06/14/2019 | 02:47am EDT

By Rory Jones in Dubai and Margot Patrick in London

When Saudi Arabia wanted to demonstrate it was open again for global investors after the killing of journalist Jamal Khashoggi, officials turned to a longtime banker to the kingdom: HSBC Holdings PLC.

In April, the British bank helped arrange a $12 billion bond deal for Saudi Aramco, the kingdom's crown-jewel oil company, attracting $100 billion in orders and cooling talk of any investor boycott over human rights.

Two weeks later, HSBC Chief Executive John Flint attended a financial conference in Riyadh and waxed lyrical about the country's economic program, saying "it's wonderful to see the kingdom of Saudi Arabia take control of its finances."

HSBC has arguably become Saudi Arabia's most important bank as the kingdom tries to turn the page on the killing of Mr. Khashoggi at the Saudi Consulate in Istanbul in October and its effect on the historic opening to Western money that its leaders are attempting.

The bank says it is Saudi Arabia's biggest foreign investor in financial services and is its biggest fee earner from investment banking this year and in 2018, according to data firm Refinitiv.

HSBC has been the top book runner for debt deals in Saudi Arabia over the past four years, during which the kingdom has issued $70 billion in international bonds, according to Dealogic.

Mr. Flint, who lived in Saudi Arabia as a child when his father was a teacher there, has said his bank is in the kingdom for the long term.

The reason: a potential gold rush of fees. Bankers have flocked to Saudi Arabia since 2016, when Crown Prince Mohammed bin Salman announced the overhaul of his oil-dependent economy. The bonanza hasn't materialized just yet, as some changes, such as an initial public listing of Aramco, have slowed.

But the potential for growth has spurred a competition for business from the world's biggest banks. JPMorgan Chase & Co. has worked in Saudi Arabia for longer than HSBC, Citigroup Inc. is trying to make a comeback after exiting from the kingdom in 2004 and Goldman Sachs Group Inc. is rapidly becoming a force in Saudi equities trading, handling 19% of stock trades by value in May, according to Saudi stock exchange data.

HSBC and others are navigating a delicate political landscape. Beyond Mr. Khashoggi's death, Saudi Arabia has drawn fire from human-rights groups over civilian casualties from a war in Yemen and the arrests of women's rights activists.

In the weeks following Mr. Khashoggi's death, Mr. Flint, like most Wall Street executives and senior European bankers, shunned a flagship conference, the Future Investment Initiative, sometimes called "Davos in the Desert." The discontent was short-lived. The HSBC boss and other international bank CEOs such as Goldman's David Solomon returned this spring to court officials.

With competition looming, HSBC is maneuvering to stay in a leading position. Its retail bank there, Saudi British Bank -- 40% owned by HSBC -- is expected this month to merge with Alawwal Bank and become the country's No. 3 lender by assets, though HSBC's stake would be diluted to 29%.

HSBC also in April increased its stake in its local investment-banking arm, HSBC Saudi Arabia, to 51% from 49%, according to a regulatory filing.

HSBC launched its Saudi operations in the 1950s, riding the early years of the kingdom's oil boom. The bank worked with expatriates and local merchants when there was little financial infrastructure."Through nearly 70 years of uninterrupted presence in Saudi Arabia, together with our shareholding in SABB, HSBC has built strong relationships supporting economic growth and social development, and is connecting international customers to the kingdom who are increasingly engaged with the country's ambitious economic reform agenda," said an HSBC spokesman.

The kingdom became a key posting for HSBC executives gaining international experience, and they fostered a close relationship with the government to win business financing infrastructure and developing the economy.

Part of its strategy has been to train the next generation of bankers at Saudi British Bank and HSBC Saudi Arabia and draw elite applicants to its programs for new university graduates. Some staff have gone on to important positions in the government.

The Saudi government "is looking for talent," according to John Sfakianakis, a former adviser to the kingdom's finance ministry and now chief economist at the Gulf Research Center in Riyadh, a privately funded think tank. "The only bank that has the local element and the international is HSBC," he said.

Economy Minister Mohammed al-Tuwaijri headed up HSBC's Middle East operations when he got a call in 2016 to work for the government. He left the bank within days, according to people familiar with the matter. Known in HSBC as "Mat" because of his initials, Mr. Tuwaijri is spearheading many of the kingdom's economic policies.

He sits on the board of Saudi Aramco and the kingdom's sovereign-wealth fund, Public Investment Fund. HSBC helped PIF raise an $11 billion syndicated loan from banks last year and has counseled the fund on some investments.

The Saudi official in charge of the country's recent debt spree, Fahad al Saif, previously ran capital markets at HSBC Saudi Arabia and SABB. An HSBC Saudi Arabia veteran, Rayyan Nagadi, also is running Saudi Arabia's massive privatization program, selling off government ports, power plants and other state assets. HSBC has been appointed to handle some of the sales.

Mr. Tuwaijri, who also previously headed JPMorgan's operations in the kingdom, declined to comment through a spokesman. Messrs. Saif and Nagadi didn't respond to requests for comment.

HSBC isn't always on the right side of Saudi authorities. In 2014, Saudi Arabia's Capital Markets Authority suspended HSBC Saudi Arabia from conducting some asset-management activities and investigated whether it inflated the valuation of a construction firm's listing, The Wall Street Journal reported.

PricewaterhouseCoopers produced a 200-page report for the CMA that found HSBC Saudi Arabia relied on SABB to conduct due diligence on many of its clients, and wasn't complying with HSBC's group-wide anti-money-laundering standards. HSBC at the time said its minority stake meant it couldn't compel the unit to comply.

HSBC Saudi Arabia set aside $43 million to pay anticipated penalties, according to bank filings.

Write to Rory Jones at rory.jones@wsj.com and Margot Patrick at margot.patrick@wsj.com

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