Saudi Arabia is considering how much banks will be able to lend to local investors to buy shares in Saudi Aramco as the mammoth initial public offering (IPO) threatens to drain liquidity from the Kingdom’s financial sector, reportedBloomberg.
The Saudi Arabian Monetary Authority (SAMA) met banks this week to discuss increasing how much they can lend to domestic stock buyers. Some Saudi lenders are said to be seeking permission to offer greater leverage than what’s currently allowed.
The giant listing, perhaps the largest ever, could be publicly launched on 3 November 2019. The sale will rely heavily on Saudi investors, large and small after international money managers baulked 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 final amount lenders are willing to provide will depend on the valuation Saudi Aramco seeks, with banks likely to be more conservative at higher valuations.
According to Arqaam Capital, the IPO could add as much as $12 billion in deposits as foreign funds buy as much as 30 of stock on offer. Lenders will also be able to cash in on revenue generated from margin loans and brokerage during the offering.
SAMA and government officials are concerned that banks may provide too much leverage to investors. This could drain liquidity from the Kingdom’s banking sector and potentially deprive the private sector of credit.
Saudi Aramco is also exploring ways to reward loyal investors in the IPO to ensure the share sale isn’t followed by a wave of selling. The oil company faces a delicate balance as it seeks to push its IPO valuation as close as possible to $2 trillion—a figure that is been met with scepticism from many professional investors—while making sure it’s attractive to potential Saudi buyers.