The stranglehold of Saudi Arabian banks on the market for initial public offerings may be about to ease.
Foreigners will be allowed to invest in the kingdom’s IPOs on a “case by case” basis starting next month, according to Mohammed Al Jadaan, head of the country’s Capital Market Authority. Saudi Arabia is easing rules on IPOs as part of plans to open its $560 billion stock market to foreign investment.
Global banks see the new rules as an opportunity to win more IPO mandates by offering Saudi companies access to a wider investor group. In the past, sales were mostly targeted at local retail investors, with orders handled online or through bank branches. This favored local lenders with large retail networks, such as Banque Saudi Fransi or Samba Capital.
“IPOs are to a great extent a local product at the moment and many international banks have struggled to make significant inroads,” Rayan Fayez, senior country officer at JPMorgan Chase & Co., said in an interview in Riyadh. “The opportunity for international banks to play a much greater role in the origination side will increase.”
Saudi Arabia has the Middle East’s largest stock market and its most active IPO industry, raising almost $10 billion since 2010, compared with $5.5 billion in the United Arab Emirates, according to data compiled by Bloomberg. National Commercial Bank sold $6 billion of shares in the world’s second-largest IPO in 2014 after Alibaba Group Holding Ltd.
While the opportunity may be apparent, a greater obstacle is the culture of low fees. Banks and advisers working on the $6 billion National Commercial Bank IPO received about $6.7 million in fees, or about 0.1 percent of the offerings value. Credit Suisse Group AG and Morgan Stanley took about 1.2 percent of proceeds on the Alibaba sale.
“Global banks in Saudi Arabia have been pitching for IPOs for a long time, and not always successfully,” Jamal Al Kishi, chief executive officer at Deutsche Securities Saudi Arabia, said in an interview in Riyadh. “That’s partly because the fees aren’t always attractive.”
Saudi stocks have typically been offered at a nominal value and not priced according to demand, as a way for the government to redistribute wealth to the public. National Commercial Bank’s shares were sold at 45 riyals each. They rose 45 percent in the first four days after listing on Nov. 11.
The country’s benchmark stock gauge, the Tadawul All Share Index, has gained 16 percent this year.
HSBC Holdings Plc has made some inroads into the Saudi IPO market. It’s the second-biggest arranger in the country since 2010 and the only international bank to appear in the list of top 10 arrangers for that period, in part because it operates a joint venture with Saudi British Bank.
Morgan Stanley and Bank of America Corp. are set to work on the first share sale in the kingdom managed by a U.S. bank since 2008. The two are about to be hired to advise on the IPO in the malls unit of Fawaz Alhokair, Muhanad Awad, chief executive officer of FAS Capital, the company’s financial arm, told Bloomberg in February.
“Over the last few years international banks have started pitching more aggressively,” Abdulaziz Bin Hassan, managing director and chief executive officer of Credit Suisse Saudi Arabia, said in an interview in Riyadh. “Allowing foreign institutions to participate as anchor investors plays to the strength of international banks and we hope to capitalize on that in time.”