Saudi's IPO changes could cut bank profit

by Reuters Tuesday, 17 April 2007

A book-building system planned in Saudi Arabia to determine the price of shares sold in initial public offerings would cut bank profits and could spread quickly through the region, investment bank EFG-Hermes said on Tuesday.

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Investor demand currently plays relatively little part in the pricing of IPOs in the Gulf Arab region. In Saudi Arabia, a company either sells shares at a nominal value of 10 riyals ($2.67) or at a higher price set with its advisers before the IPO opens, often leading to large oversubscriptions.
"The system of oversubscription allows huge exceptional profits to accrue to the banks," EFG-Hermes said in a note. "Moving to the book-building system should dramatically improve the efficiency of the primary market, and will result in a sharp decline in exceptional profits for the banks going forward."

EFG said it expected the Saudi initiative to "cascade through the other GCC countries fairly rapidly".

The head of Saudi Arabia's regulator was quoted on Monday as saying that the country was introducing a system of book-building to allow investor demand to determine the price of shares sold in IPOs.



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