Saudi Arabia Considers Increase in Lending for Aramco IPO
Saudi Arabia Considers Increase in Lending for Aramco IPO
(Bloomberg) --
Saudi Arabia is considering how much banks will be able to lend to local investors to buy shares in Aramco as the mammoth initial public offering threatens to drain liquidity from the kingdom’s financial sector.
The Saudi Arabian Monetary Authority met banks this week to discuss increasing how much they can lend to domestic stock buyers, people with knowledge of the matter said, asking not to be identified because the information is private. Some lenders are seeking permission to offer greater leverage than what’s currently allowed, they said.
The giant IPO, perhaps the largest ever, could be publicly launched on Sunday, according to Saudi media reports. The sale will rely heavily on Saudi investors, large and small, after international money managers balked at the $2 trillion valuation sought by Crown Prince Mohammed bin Salman.
The regulator wants to ensure banks can maintain enough liquidity in the local financial system, while still guaranteeing there are sufficient loans available to support investors in the IPO, the people said. The final amount lenders are willing to provide will depend on the valuation Aramco seeks, with banks likely to be more conservative at higher valuations, they said.
Cashing In
Saudi banks are gearing up for what’s set to be the world’s biggest share sale after years of falling loan growth and a decline in the pace of economic expansion. The IPO could add as much as $12 billion in deposits as foreign funds buy as much as 30% of stock on offer, according to Arqaam Capital Ltd. Lenders will also be able to cash in on revenue generated from margin loans and brokerage during the offering.
Still, any windfall for the kingdom’s banks will also come with risks.
SAMA and government officials are concerned that banks may provide too much leverage to investors, one of the people said. This could drain liquidity from the kingdom’s banking sector and potentially deprive the private sector of credit, that person said.
The IPO “will be a great opportunity for Saudi banks to earn excellent fee income by lending for two-to-three weeks,” said Mohammed Ali Yasin, chief strategy officer at Abu Dhabi-based Al Dhabi Capital Ltd. “The risks are acceptable, but will increase if share allocations to subscribers are higher than they can afford, and if the share price declines after listing.”
Aramco is exploring ways to reward loyal investors in the IPO to ensure the share sale isn’t followed by a wave of selling, Bloomberg News has reported. The company faces a delicate balance as it seeks to push its IPO valuation as close as possible to $2 trillion -- a figure that’s been met with skepticism from many professional investors -- while making sure it’s attractive to potential Saudi buyers.
Margin Loans
Although the kingdom’s banking sector would be able to support a 2% listing at a $2 trillion valuation before breaching the regulatory loan-to-deposit ratio limit of 90%, “there is still a risk the shares could be valued lower in the secondary market, resulting in mark-to-market losses on margin loans from the banks,” according to Dubai-based Bloomberg Intelligence analyst Edmond Christou.
Bloomberg Intelligence: IPO Mispricing Is a Risk Banks Should Be Aware of
To be sure, institutions have plenty of room to lend. The country’s 30 lenders held 1.7 trillion riyals ($453 billion) in customer deposits at the end of September, according to central bank data. Banks are allowed to lend as much as 90% of that, but had only used about 79%, leaving about $50 billion on the table.
“There could be a drain on deposits,” said Mohamed Damak, the head of financial institutions for the Middle East and Africa at S&P Global Ratings. “We currently assess the liquidity of Saudi banks as adequate and we don’t think that this might change because of the IPO alone.”
SAMA’s meeting with banks Tuesday was part of the periodic meetings the central bank holds with lenders, a representative for SAMA said in an emailed statement. Aramco, officially known as Saudi Arabian Oil Co., declined to comment.
--With assistance from Sarah Algethami and Javier Blas.
To contact the reporters on this story: Archana Narayanan in Dubai at anarayanan16@bloomberg.net;Matthew Martin in Dubai at mmartin128@bloomberg.net;Arif Sharif in Dubai at asharif2@bloomberg.net
To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net;Ben Scent at bscent@bloomberg.net
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