Risk of IPO financing is relatively low for banks as most of this lending is collateralised with banks having claims on shares allotted to customers until the loan is fully repaid. Image Credit: Ahmed Ramzan/Gulf News

Dubai: UAE banks are witnessing a surge in lending and deposit growth following the opening of the DEWA IPO on March 24. The IPO subscriptions by both individual and institutional investors have seen a flood of liquidity flowing into the banking system and, at the same time, a surge in high-yield lending to investors who are keen on IPO subscriptions.

UAE banks that have a significant share of funding (more than 60 per cent) through current and savings account (CASA) deposits are reaping the benefits as investors park their savings in banks for subscribing to DEWA and other IPOs that are in the pipeline. Bankers said they have seen customers moving savings from their offshore and overseas accounts to local banks. In addition, the IPO demand from GCC and expatriate investors is also bringing in large inflows of deposits.

Low-cost funding

CASA deposits are the cheapest funding source after Islamic deposits for UAE banks. These deposits offer zero or marginal yields to depositors, while banks deploy these at rates ranging from 5 to 10 per cent in short-term IPO (leverage) financing. Although a part of these deposits are likely to flow out after the IPO share allotment and listing, bankers say a good portion will likely remain with the banks.

“Although deposited for a special purpose, we expect some of these deposits to be sticky as investors want to be prepared for future IPOs,” said the chief financial officer of a local bank.

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High-yield lending

A surge in IPOs is expected to give a big boost to the loan margins of banks as they stand to benefit from low-cost deposits being deployed in high-yield and low-risk short-term loans. Risk of IPO financing is relatively low for banks as most of this lending is collateralised with banks having claims on shares allotted to customers until the loan is fully repaid.

Myth of co-investing

Financial experts say investors should be fully aware of the risks of leveraged investing in IPOs and capital market instruments. Often these facilities are offered in the guise of co-investing, where investors tend to believe the bank is a partner in such investments. The fact remains that banks are just lending against shares and their risk is fully covered and usually these loans come with high interest rates.

In the event of an IPO’s valuations plunging after listing, investors could face margin calls from banks if the value of the shares they hold does not cover the collateral requirements.

Steady IPO flows

In recent months, companies such as Acwa Power and Saudi Telecom have both gone public on the Tadawul, and the listing of Fertiglobe, Adnoc Drilling and Abu Dhabi Ports on the ADX have added to the confidence of bankers. Dubai’s efforts to list 10 state-owned entities on the Dubai Financial Market have come as a big boon to UAE banks at a time when they have been finding it hard to deploy high liquidity while funding costs of funds are edging up in tandem with rising interest rates.

Last year the growth in aggregate loans and advances increased by about 25 bps to 1.7 per cent, while aggregate deposits grew by 6.7 per cent with the aggregate loan-to-deposit ratio (LDR) falling to 82.1 per cent from 86.2 per cent in 2020, as deposits grew at a higher pace compared to loans.

“The IPO boom has come at the right time for banks to deploy their excess funds in secure lending opportunities and manage liquidity without major asset-liability mismatches,” said a local bank’s CFO.