The Saudi government's plans to launch a large bank in the next year with a huge share offering is causing concern in the local banking industry, which is already facing foreign competition in a crowded market.
Analysts say the new Development Bank's size will help it muscle in on lucrative corporate and government business, while the IPO is expected to generate popular appeal that will benefit its retail banking.
"The IPO will give Development Bank a huge popularity boost," a senior manager at al-Rajhi bank said. "The size of the capital will allow a rapid expansion of its branch network. It will have a huge impact on the current retail banking landscape."
The government has said it plans to float 70 percent of Development Bank's capital of 15 billion riyals ($4 billion), making it larger by far than any of the 11 banks operating in Saudi Arabia, a country of some 24 million.
The new bank will have almost the combined paid up capital of the top two banks - state-owned National Commercial Bank and private al-Rajhi bank.
"It will lead Saudi banks to lose in terms of market share in the retail sector... The size of its capital will appeal to corporate clients too," said Angus Blair, chief executive of financial consultancy MENA Financial.
The launch was initially planned this year but authorities are reviewing their plans, according to sources from the Saudi Public Investment Fund (PIF) and the General Pension Organisation.
"I don't think we will finalise the business plan, get the management team and the flotation ready before the end of this year," a source from PIF told Reuters. "At the current pace of things, the first quarter (2007) seems as an optimistic target."
PIF, the General Pension Organisation and the General Organisation of Social Insurance (GOSI) will each hold 10 percent stakes in Development Bank.
Whether it happens this year or next, the IPO will be the biggest ever on the Arab world's largest exchange, which has been in turmoil after a crash that halved its value in 3 months.
"This flotation will virtually allow every Saudi to become a shareholder in the bank," a Riyadh Bank manager said.
The bank is expected to offer 1.05 billion shares at 10 riyals each in the IPO. Only Saudi nationals, some 17 million people, are allowed to take part in IPOs, which have in the past attracted up to half of the population.
Riyadh is also opening the door to foreign banks, having joined the World Trade Organisation in December, and international players are scrambling for a share of an economic boom fired by record oil prices.
Saudi authorities have granted licences to HSBC, French BNP-Paribas, Credit Suisse and plan to award another to Japanese broker Nomura.
"I don't see the advantages of setting up an immense bank like this, which would undermine their banks' profitability nothing will prevent Saudis from opening accounts in this bank," said Philip Smith, senior director of financial institutions at Fitch Ratings.
The government has yet to say what business the new bank will focus on, but analysts expect it to push into the financing of major infrastructure development projects.