Saudi doubles the amount that banks can lend for Aramco IPO

Saudi Arabia’s central bank doubled leverage limits for retail investors looking to buy shares in oil giant Saudi Aramco, according to people familiar with the matter, part of an effort to boost local demand for what could be the world’s largest initial public offering.

Banks will be permitted to give leverage to retail customers at a ratio of 2 to 1 for every riyal they put toward buying Aramco shares, up from the normal limit of 1 to 1, the people said, asking not to be identified because the decision isn’t public. Lenders will be allowed to give corporate and institutional customers higher leverage ratios based on each customers creditworthiness, the people said.

Samba Financial Group will offer retail investors 2-to-1 leverage to invest in Aramco shares, CEO Rania Nashar said in an interview with Al Arabiya TV on Monday. The Saudi Arabian Monetary Authority, as the kingdom’s central bank is known, didn’t respond to requests to comment.

Saudi banks are seeking to cash in on the IPO after years of falling loan growth and a decline in the pace of economic expansion. Lenders will gain from revenue generated from margin loans and brokerage. Saudi Arabia on Sunday set a valuation target for the IPO well below Crown Prince Mohammed bin Salman’s $2 trillion target and pared back the size of the offering — easing pressure on the country’s banking sector.

“The lower government valuation means reduced risk from IPO mispricing for the bank,” said Dubai-based Bloomberg Intelligence analyst Edmond Christou. “Our scenario analysis shows that a fully-funded float from the local market may worsen the statutory loan-to-deposit ratio to 84 per cent compared with 79.14 per cent as of September, but it’s still a comfortable level versus the regulatory threshold.”

Deposit boost

The country’s 30 lenders held SAR1.9 trillion ($507bn) in weighted customer deposits at the end of September, according to Bloomberg calculations based on central bank data. Banks are allowed to lend as much as 90 per cent of that, but had only used about 79 per cent, leaving about $50bn on the table.

With a $1.7 trillion valuation and 1.5 per cent listing, Arqaam Capital estimates between $2.75bn and $3.45bn in new deposits could be added to Saudi banks from foreign inflows as Aramco is included in major benchmarks by MSCI Inc. and FTSE Russell.

“This could be further enhanced by leverage being provided by the banks, which should also boost overall credit demand in the country given the sheer size of the offering,” said Jaap Meijer, head of research at Arqaam.

Still, any windfall for the kingdom’s banks also comes with risks — any jump in lending could be brief — as investors receive only a portion of the shares they bid for — and borrowers are at risk of defaulting if the deal turns sour. Aramco will offer bonus shares for retail investors who keep hold of the stock to ensure the IPO isn’t followed by a wave of selling.

The Saudi Arabian Monetary Authority and government officials are concerned that banks may provide too much leverage to investors, Bloomberg News has reported. This could drain liquidity from the banking sector and potentially deprive the private sector of credit.

The Aramco offering is expected to rely heavily on local demand. Plans to market the deal in the US, Canada and Japan were dropped, although foreign investors registered in Saudi Arabia will still be able to buy shares. The kingdom’s richest families, some of whom had members detained in Riyadh’s Ritz-Carlton hotel during a so-called corruption crackdown in 2017, are expected to make significant contributions to the IPO.