After 12 years since selling its Samba stake and eventually exiting Saudi Arabia, Citigroup Inc. is gaining more high-profile deals in the kingdom and is planning to do for more.
According to sources familiar with Citigroup’s plans, the bank has prepared a company-wide task force to target opportunities in Saudi Arabia and holds weekly calls to organize matters regarding their strategy.
“Citi’s exit from Saudi put some strain on their activities there, but they have worked hard to get back into the kingdom," said Emad Mostaque, a strategist at Ecstrat Ltd.
Citigroup has been selected not just as one of the three advisors for the nation’s first international bond sale, but is placed as Saudi Arabia’s lead adviser. The bond sale could fetch over $10 billion as soon as October and Citigroup should witness its investment banking business in the kingdom begin to prosper as the region is going through unprecedented structural reforms. Saudi Arabia also has plans to create the world’s largest sovereign wealth fund and sell shares of Saudi Arabia Oil Co. in an initial public offering (IPO).
Why Return: Two Factors for Growth in Saudi Arabia
In specifics, there are also two catalysts that will drive long-term business growth for Citigroup in Saudi Arabia. The first catalyst, which is already ongoing, is the market’s insight that the world has stepped into an era of low interest rates, evident as central banks around the world have been cutting rates. This event has come as a good opportunity for the country, and here’s why.
The waning crude oil price over the past two years has made the government of Saudi short on cash and on the verge of desperation to borrow. However, with the budget deficit growing and capital pouring out of the region, it turned gradually tough for the government to access capital—until Brexit. Investors figured that a Fed rate hike was unlikely when Britain left the European Union, and began pushing money back into high-yield markets such as that of Saudi Arabia’s, taming down borrowing costs and accelerating loan growth. The International Monetary Fund estimated that budget losses in the Middle East will hit $900 billion by year 2021, and Saudi Arabia will account for a large portion of this. The government will be looking to borrow for the coming years, and rates in developed markets are expected to stay low for a long time.
Overall, this first catalyst should lead to additional funds flowing into the kingdom, further driving loan growth and guaranteeing business for Citigroup.
The second catalyst lies on the kingdom’s idea to reform its economy and privatize industries—a plan which is dubbed as “Saudi Vision 2030”. The general idea of this plan is to decrease Saudi Arabia’s dependency on crude oil by turning the country more attractive and receptive to foreign investment, which should aid other industries to develop.
Vision 2030 “could translate into a fantastic wallet for the investment banks,” Omar Iqtidar, Citigroup’s investment banking head in the Middle East, said in a May interview in Dubai.
Saudi’s decision to open its doors to foreign investment is a key reason low interest rates, as explained, could be a catalysts for spurring loan growth and IB business. Privatizing businesses will include selling shares in government-run firms, and the increased IPO activity can be a boon for Citigroup. As part of Saudi Vision 2030, the government intends to sell a 5% stake in Saudi Aramco, the public oil company assessed to be the most valuable business in the world.
Even if Citigroup has been out of the kingdom for over a decade, the bank is certainly better situated than many of its domestic peers to profit from the prospect in Saudi Arabia due to its diverse global operations.
Quitting Saudi Arabia was described as a “mistake” in 2007 by Mohammed al-Shroogi, the bank’s then-managing director for the Middle East. In the prevailing years, Citigroup executives have continued to visit the kingdom and expressed interest in returning. Citigroup may have lacked the licenses required to participate in IPOs but it has kept its presence in the region, a vital factor in helping it secure a place in Saudi Arabia's first international bond sale.
In addition to its return to Saudi Arabia, the bank also became the last of the big US banks to agree to allow customers to send instant payments by mobile phone over an industry network that is competing with upstart Venmo on Wednesday.
Citigroup is also planning to shut nearly 10% of its branches in India to expand digital banking, in answer to customers mostly switching to the bank’s digital banking platform to carry out their transactions. During Q2 2016, the bank reported a 13% year-over-year drop in consumer banking branches in Asia, bringing down the count to 461.
At these news announcements, Citigroup ended the session prior with a 1.08% or 0.50 gain to 46.88. In afterhours trading, the gain has lessened to 0.04 points but still remained in the green. On the chart below, the Bollinger bands are seemingly arching and are headed lower. Citigroup is currently in a narrow trade, which limits the range of the price movement. However, the major trend still remains bullish and robust.
Citigroup, along with other major banks, are taking defensive measures. Citigroup also currently carries a Zacks Rank #3 (Hold). In a similar sentiment, while we do see a good chance to buy the stock, further caution is as well suggested for a stock gaining a neutral outlook, especially if we are looking at technical indicators.
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