Saudi's Al Rajhi Capital plans sukuk push, sees better year for IPOs

* Corporates look to diversify from bank financing

* Firm will concentrate this year on deploying existing funds

* Regulators want to develop equity markets

The investment banking arm of Saudi Arabia's top listed lender, Al Rajhi Bank, plans to expand its sukuk business, its chief executive said, tapping into heavy demand for sharia-compliant products in the Gulf's largest economy.

Issuance of sukuk, or Islamic bonds, in Saudi Arabia has surged on the back of increased liquidity and comparatively low borrowing costs, and as corporates look to diversify their funding sources from the traditional mode of bank financing.

Corporates and state-owned entities in Saudi Arabia raised the equivalent of $15 billion from the sale of sukuk in 2013, compared with $11 billion in 2012 and just $2.8 billion in 2011, Gaurav Shah, chief executive of Al Rajhi Capital, said in an interview at his Riyadh office.

Saudi's state airports operator last year printed the largest-ever local currency sukuk deal worth the equivalent of $4.05 billion, and other well-known names including construction giant Saudi Binladin Group and dairy firm Almarai completed riyal issues.

Shah said his firm, which has one of the largest asset management and brokerage businesses in the kingdom, planned to play a central role in underwriting, arranging and investing in sukuk.

"We see developing our sukuk capability across our businesses, and specifically investment banking, as a key priority. You cannot have a narrow telescopic view of the sukuk business," said Shah, who joined the firm from Swiss lender Credit Suisse in 2009.

Riyadh-based Al Rajhi Capital, formed in 2008, manages about 30 billion riyals ($8 billion) in its asset management business, a five-fold increase from 2009, Shah said, adding that the business focused on large institutions in the kingdom such as endowments and insurance companies.

In 2014, the firm will concentrate on deploying existing funds rather than planning new fund launches, he said. It raised 678 million riyals last year from the launch of its second real estate income-generating fund.

"There is not much purpose in launching a flurry of products since we already have covered the main asset classes. At the end of the day, if you have a good product, it will sell."

IPO RECOVERY

Al Rajhi expects initial public offers of shares on the Saudi Arabian bourse to pick up pace in 2014 as equity markets recover and valuation multiples improve.

Saudi Arabia's benchmark index rose 25.5 percent in 2013 on the back of improved economic performance and increasing risk appetite among investors.

Despite this, IPO activity in Saudi Arabia dropped last year. There were just five offers in 2013, raising $506.6 million, compared to the previous year which saw seven initial share sales worth $1.4 billion.

Saudi Arabia's Al-Hokair Group, one of the largest entertainment and hospitality firms in the Middle East, plans to list on the Riyadh bourse in 2014, Reuters reported in November.

Health care and hospital chains in the kingdom are also lining up to go public, tapping into heavy demand in the sector.

"Increased investor appetite for equities, and the fact that regulators want to further develop the equity markets, could make it a better year for IPOs in 2014," Shah said.