x Abu Dhabi, UAEFriday 19 January 2018

The other threat to bank profits

Although Dubai World's debt trouble may often be seen as the single greatest loan worry for the country's banks, UAE lenders have made far greater provisions for exposure to the Saudi entities the Saad Group, and Ahmad Hamad Al Gosaibi and Brothers.

Dubai World's US$24.8 billion (Dh91.08bn) debt restructuring may be grabbing the region's financial spotlight, but another major worry is still weighing on the Gulf's banks as they set aside billions of dirhams to deal with a rise in bad loans.

The complex saga of Ahmad Hamad Al Gosaibi and Brothers and the Saad Group began last summer, when both of the Saudi companies defaulted on financial obligations. The defaults appeared at first to be a coincidence; the result, perhaps, of borrowing too much too fast during the global credit boom that preceded the financial crisis. Bankers began to re-evaluate the age-old practice of "name lending", or making loans to companies on the basis of their reputations alone. They also began to file lawsuits in the Gulf and abroad to recover funds.

The defaults came at an unlucky time for banks already struggling to contain a rise in the number of bad loans. Stung by the financial crisis, consumers and companies found themselves less able to make good on obligations, and with global credit markets largely closed, refinancing troubled loans became nearly impossible. As the lawsuits began, The International Banking Corporation (TIBC), a Bahraini lender owned by the al Gosaibi family, and Awal Bank, a Bahraini institution owned by Maan al Sanea, the head of the Saad Group, were put under administration by the country's central bank.

Lawyers were appointed to run the banks and run investigations to determine what led to their collapse. Late last year, though, the story took a surprising turn when Al Gosaibi group lodged a counterclaim in a suit brought by the Dubai-based Mashreqbank in New York over defaults on foreign exchange transactions. The counterclaim said Al Gosaibi's financial difficulties came from an alleged $10bn fraud committed by Mr al Sanea, the wealthy and powerful chairman of the Saad Group. Mr al Sanea has denied those accusations.

The legal actions have since grown into a tangle of court cases all over the globe. In addition to cases filed by Mashreq against Al Gosaibi and TIBC, Deutsche Bank filed suit in New York against TIBC. Al Ahli Bank of Kuwait took to the New York courts against the Saad Group in September. Cases were also filed in London, and a panel was formed in Saudi Arabia to investigate the allegations. Court suits were also filed in the Cayman Islands and the UAE.

Two legal cases were also filed last year in Bahrain between Awal Bank and Mr al Sanea, according to documents obtained by The National. Those cases continue, according to a source familiar with the matter. As the lawsuits drag on, the Gulf's banks, which Standard & Poor's last year estimated had lent almost $10bn to Saad and Al Gosaibi, are still feeling the pinch of the defaults. Between the end of 2008 and May last year, when Saad and Al Gosaibi started to miss payments, banks in the UAE added $871 million to their provisions, or cash set aside as a cushion against bad loans, according to Central Bank figures.

After the defaults, banks made an additional $2.6bn of provisions in the remainder of the year, a rise analysts say is attributable mainly to the Saudi defaults. The Central Bank last July ordered local banks to make provision for 50 per cent of their exposures to Al Gosaibi and 75 per cent of exposures to the Saad Group by the end of the year. The groups were estimated to owe UAE banks $3bn, suggesting that more than half of the provisioning by banks in the latter half of last year could have been linked to exposures to Saad and Al Gosaibi.

"The bulk would have gone to Al Gosaibi and Saad, but there was other corporate and retail provisioning as well," said Janany Vamadeva, a banking analyst at Al-Futtaim HC Securities in Dubai. "Initially, the Central Bank gave [lenders] two or three years to take provisions, but then they brought it forward and said they had to do 50 and 75 per cent." Some banks, such as Emirates NBD, quickly provisioned for all of their exposures to the groups last year. But others, such as First Gulf Bank in Abu Dhabi, elected to abide by the Central Bank guidelines, Ms Vamadeva said.

Because many lenders did not fully write down loans to the groups last year, the turmoil caused by the defaults is still playing havoc with profits. The strains caused by the saga, in fact, have so far been much greater than difficulties stemming from the better-publicised Dubai World debt restructuring. The banks have yet to take any write-downs on Dubai World loans because the conglomerate is continuing to make scheduled interest payments as it works towards a debt deal.

In the first quarter of this year, the UAE's four largest banks together added more than Dh2bn to their provisions, and more may be on the way. "So far, the Dubai World exposure is not reflected in the numbers," Ms Vamadeva said. "When that is, all of the banks will be dealing with Saad, Al Gosaibi and Dubai World at the same time." @Email:afitch@thenational.ae