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Lessons from the National Commercial Bank IPO

The overwhelming retail demand for the Saudi bank’s $6 billion listing raises questions about how the country’s equity market will respond to its opening up to foreign investors.

 National Commercial Bank

How’s that for a reception? Saudi Arabia's National Commercial Bank attracted $82.9 billion of orders for its $6 billion IPO, which completed at the beginning of this month.

That’s an almighty level of oversubscription for the world's second-biggest flotation this year, behind only Alibaba – the more so when you consider that the deal took place on an almost entirely domestic exchange that won’t open to direct international capital until next year.

But what does that really tell us? Is a 24-fold oversubscription (in the retail tranche) for a domestic deal a good thing? Or does it point to a deal that has been underpriced by underwriters GIB Capital and HSBC Saudi Arabia?

Answering that question requires a little local context. The sale was for 25% of the company’s shares; 15% was a retail tranche available only to Saudi citizens, and 10% went to the Public Pension Agency. This partly explains the deliberately low price: it is not uncommon for big state listings to be used as a method of distributing wealth among ordinary Saudis, and giving such a large stake to the national pension fund at a price that should imply plenty of upside offers a further gift to the nation’s population.

But will this approach still make sense when foreigners are active in the market? QFIs – the term for qualified foreign (that is, non-Gulf) investors – will be permitted to hold up to 10% of the Saudi stock market, and that’s just a starting point. Will the state be as happy to enrich foreigners as it is Saudi people when it comes to pricing an IPO?

To put that question the other way around, if the arrival of foreign capital creates greater opportunities for Saudi companies to raise money, does that also imply a shift towards a more international pricing discipline? And how will Saudi’s local investors react to that, bearing in mind that 85% to 90% of all turnover in Saudi Arabia is from individual investors, chiefly retail ones?

These are some of the issues that will have to find resolution when Saudi Arabia does open the door to foreign investment in the stock market.

It’s interesting, too, to note that most of the subscription for the deal didn’t take place until a Shariah committee for NCB pledged that the bank would turn itself fully Islamic within five years, and that therefore investing in the deal was consistent with Shariah principles.

A leading scholar had previously said that the deal was, in fact, un-Islamic; the resulting controversy meant that of that vast oversubscription, 90% of the orders were not submitted until the last day.

No other market has individuals so intent on investing in a way consistent with their faith as Saudi Arabia; this, too, is something that foreign participants in the market are going to have to become familiar with as the country’s stock markets open up. 

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