Saudi Arabian Bank NCB Readies Plan to Divest $38 Billion

National Commercial Bank, the Saudi Arabian lender planning an initial public offering, probably needs to divest about $38 billion of assets to meet a goal of becoming fully Shariah-compliant in five years.

About two-thirds of the bank’s 435 billion riyals ($116 billion) of assets conformed to Islamic law at the end of June, according to an e-mailed statement from the bank on Oct. 16. The Jeddah-based lender pledged to dispose of all non-Islamic bonds after a review by the bank’s board of scholars.

“We have seen other banks promise to convert all their assets to be Shariah-compliant in a certain timeframe and then finding it very hard to stick to,” Asim Bukhtiar, a vice president and head of research at Riyad Capital, said yesterday by phone from the city. “Five years could be optimistic.”

The bank is seeking to mitigate controversy within the kingdom over whether Muslims can participate in the $6 billion IPO - only open to Saudi nationals - because certain assets don’t conform to Islamic principles. Senior clerics have questioned the share sale in speeches on Saudi state television.

NCB declined to comment further on the process.

‘Removing Barriers’

The kingdom is removing barriers to one of the world’s most restricted financial markets, where foreigners are barred from buying and selling primary local debt. Saudi Arabia is talking to rating agencies and market participants about rules to give foreigners access to the country’s riyal-denominated debt market and also plans to open its stock market next year.

The nation’s CMA last month proposed rules allowing foreign investors to hold as much as 10 percent of the nation’s $534 billion equity market starting in 2015.

Subscription for the IPO opened on Oct. 19 and runs until Nov. 2. The bank will sell 500 million shares at 45 riyals each, with the sale of the 25 percent stake valuing the bank at about $24 billion. About 300 million shares will be allocated to individuals and the rest to the Saudi Public Pension Agency.

The IPO had attracted 824 million riyals of investor money as of the end of the second day of subscription and was 6.1 percent covered, the bank said today in an e-mailed statement.

“I am saddened to say to Saudis that it’s un-Islamic to subscribe into the bank’s shares but I have to,” Sheikh Abdullah Al-Mutlaq, a senior cleric, said on state television. “I can’t say that it is Shariah compliant when it’s not.”

Al Mutlaq was joined by other senior religious figures including Sheikh Abdullah al-Manea and Sheikh Abdulazaiz al-Fozan in saying that the IPO was un-Islamic. The statement from the bank’s shariah committee last week that the IPO was indeed Islamic caused a controversy on Saudi social media.

Shariah Compliant

Only three of Saudi Arabia’s 12 banks are fully Sharia compliant, while some lenders that have said they will become so have struggled to complete the process, Bukhtiar said.

Advisers working on the share sale will receive about $6.7 million in fees, or about 0.1 percent of the 22.5 billion riyal offering, according to the deal prospectus on NCB’s website. HSBC Holdings Plc and Gulf International Bank Bsc are financial advisers to the lender and will share the fees with eight other banks, three accountancy firms, and a media agency.

The deal will be the Middle East’s largest, surpassing the $5 billion raised by Dubai’s DP World Ltd. in 2007, according to data compiled by Bloomberg. The offering trails Alibaba as the year’s largest, while ahead of Citizens Financial Group Inc.’s $3 billion September IPO, the data shows.

The IPO will be the country’s biggest since the government raised $2.8 billion from the 2007 IPO of Alinma Bank.

“The issue of Sharia compliance should have been addressed much earlier on,” Bukhtiar said.

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