Increasing IPO activity in Mideast spurs banks’ financing

Noor Bank is one of the receiving banks for the latest IPO launched by Dubai Parks and Resorts to raise $689 million from the market.

Dubai: The Middle East banks are back in financing business due to growing activity of initial public offerings (IPOs) in the region and the same trend will continue in the coming months, according to a senior banker.

“We are expecting about 10 to 12 IPOs over the next 14 to 18 months. Some four to five companies are looking at raising capital from the primary market, and have already set the ball in motion,” Renoy Kundukulam, head of Priority Banking, Noor Bank, told Khaleej Times during an interview.

Noor Bank is one of the receiving banks for the latest IPO launched by Dubai Parks and Resorts to raise $689 million from the market.

The bank is offering its priority banking segment customers [existing and new] a chance to invest in an IPO of Dubai Parks and Resorts to avail five times leveraging, to buy more shares for this IPO as well as upcoming offerings.

“Our global transaction services (GTS) and cash management teams are working towards being named the ‘collecting bank’ for most of the upcoming IPOs,” Kundukulam said.

“At Noor, each IPO is assessed by a ‘market risk’ team and the certified relationship managers assess the client’s suitability and offer the right financing, with a dedicated service team that manages the process end-to-end to ensure the delivery of best-in-class customers’ experiences,” he said.

“This means that Noor Bank priority customers will be given an opportunity to enhance their wealth and be part of the larger Dubai growth story.”

Investor appetite

Kundukulam said the GCC markets have been generating good profits for investors as compared to other emerging markets and investor appetite has assured and motivated businesses to tap into equity markets to raise funds through IPOs.

“Banks, due to their high liquidity status and good product proposition — for both clients and banks, have opened up again to provide financing for IPO subscription — while adopting a measured approach this time,” he said.

Elaborating, he said currently banks are flush with liquidity. Financing, especially over short tenor, primarily includes IPO financing that typically lasts for a period of 30 to 40 days and is always viewed positively. Liquidity can be put to effective use with more control and comfort due to limited risks as compared to long-term financing to businesses.

“The reason for the cautious approach is the underlying asset class, ‘equities’. Equities are a high risk category, but given the very short timeline, the banking sector generally views equities favourably.”

“Yes. IPOs give banks that are willing to finance an opportunity to take a short-term position focusing on new customers as well as increasing the wallet share of existing customers. Noor Bank is keen to welcome more priority banking customers into the fold,” he added.

Currently, with the trend of oversubscription, he said the clients get a very low level of allotment. “For instance, if the IPO is 20 times oversubscribed, the clients get a five per cent allotment. However, this can be enhanced by up to five times with the IPO financing option. Financing helps enhance returns by primarily offering customers higher allocation.”

Customers’ feedback

About the customers’ feedback to recent IPO activity and its comparison to past peak levels seen in 2006-07, Kundukulam said customer response can be gauged from the success of Emaar Malls and Amanat, which reportedly was oversubscribed many times over. Few banks offered financing to their clients. The inclination of banks to offer financing for IPOs has certainly improved, given their current liquidity position.

“Banks, as compared to 2006-07, have been more cautious in selecting the IPOs for funding and have increased the due diligence and criteria for financing.

“Unlike 2006-07, the deposit rates are too low and fixed-income segment is at its near peak; hence customer appetite for equities has grown over the last cycle due to the fewer avenues for investments and opportunities currently available,” he said.

Money is the key

In reply to a question how the increased IPO activity benefited the banking sector, Kundukulam said circulation of money is the key. For banks, it affects both sides of the balance sheet positively.

“Financing enhances the asset side of the balance sheet. Once the IPO allocation is done, the customer’s refunds due to over subscription come back to the client’s current account, which positively affects the liabilities side of the balance sheet for the banks.”

About the risk factor in IPO financing, he said there is always an element of risk in financing. Secondly, financing for a high risk asset enhances the risks further.

“Strong due diligence will be done both on the customers as well as individual IPOs that we will participate in. We have also put in place a robust assessment process prior to financing that helps us mitigate the risks involved to a large extent.

“The risk that customers take would primarily include the listing price being lower than the par value. This risk can be mitigated by the client holding the shares for a duration long enough for the equity markets to perform.”

Priority banking

Kundukulam said Noor’s priority banking segment focuses on enhancing client wealth and experience.

“With the Expo 2020 and growth surrounding Dubai’s ambitious plans, we offer best-in-class investment products. It’s part of our effort to offer our clients a share in Dubai’s growth story

“We are also in the process of rolling out brokerage services with one of the largest brokerage firms in the UAE.”

Regarding options to utilise the excessive liquidity holding by banks, he said apart from traditional financing products such as home finance and personal finance, Noor Bank has added financing solutions to wealth products as well.

“To start with, we have enhanced our financing to investment products like sukuk and structured deposits. Secondly, we also offer Islamic Covered Drawings to clients that wish to draw money against their existing investments. With IPO financing, the prospects for short-term financing add to our kitty on the wealth financing proposition,” Kundukulam concluded.

muzaffarrizvi@khaleejtimes.com