इब्राहीम

Provisions hit Saudi banks
By Abeer Allam
Published: February 18 2010 02:00 | Last updated: February 18 2010 02:00
While the global financial crisis unfolded, Saudi Arabia maintained its conservative monetary policy had in effect shielded local banks from the effects of toxic foreign debt instruments.
Then defaults by the Saad Group and Ahmad Hamad Algosaibi & Brothers , two large family-owned Saudi conglomerates, revealed debts of $20bn were owed to international and local lenders. Saudi banks were estimated to have an exposure of $5bn-$7bn.
Officials again played down the importance of this, but fourth-quarter performance suggests the full magnitude of troubled debts, not just those of the two families, is beginning to be felt. Collective profits of 11 listed banks declined 8.6 per cent to SR22.22bn ($6bn) in 2009, with many citing credit provisioning and sluggish lending, according to National Commercial Bank. Analysts estimate non-performing loans at about 3 per cent in 2009.
The Saudi Arabian -British Bank (SABB), HSBC's Saudi affiliate, reported a 96 per cent plunge in profits to SR26m in the fourth quarter on provisions and slow lending. Net profit for 2009 declined to SR2.2bn, the lowest in five years.
Saudi Investment Bank, 7.4 per cent owned by JPMorgan International Finance, and the Al Bilad Bank, posted fourth-quarter losses of SR109m and SR299.5m respectively.
Riyad Bank, the third largest in Saudi Arabia by market value, bucked the trend, reporting an increase in net profits of 72 per cent to SR912m. "The high provisions suggest there must be more than just Al Saad and Gosaibi," says Hisham Abu Jamee, chief investment officer at Bakheet Investment Group. "They [the banks] have been not been transparent and the results are surprising and disappointing."
Analysts say most banks will book more provisions in the coming two quarters, especially those that did not report them fully last year.
Observers say several family-owned companies are restructuring debts, particularly in the steel and retail sectors, where large conglomerates expanded aggressively in the good times, then saw declining earnings as the economy slowed and metal prices dropped. After a lending spree in 2007 and 2008, banks put a break on lending last year, increasing borrowing costs, which, in turn, affected profits.
In spite of the results, analysts say Saudi banks are well capitalised and liquid. The country's 10 main commercial banks remain among the highest rated in the Gulf by Fitch, the ratings agency, which said in a report published in January that Saudi banks' performance should improve in 2010, although not to the same levels of profitability as seen in 2008.
"Banks wanted to clean up their balance sheets before extending new loans, and the private sector also became more risk averse, postponing projects and paying back loans," says John Sfakianakis, chief economist at Banque Saudi Fransi. "Toward the end of this year, lending will pick up again."
That view is echoed by Mohamed al-Jasser, governor of the Saudi Arabian Monetary Agency, the central bank, who says: "I am very comfortable about the stability and robustness of our banks. What they need to do now is to lend more."
In the absence of banks' willingness to lend, however, the authorities are doing their best to stimulate the economy.
The government plans to spend a record SR540bn this year to spur economic growth. Growth eased to 1 per cent last year, from 4.3 per cent in 2008. But without active participation from private businesses, the government is likely to have a hard time creating the jobs necessary for its 23m people, 65 per cent of whom are aged under 25, while official unemployment hovers at about 10 per cent.
Private sector growth slowed to 2.5 per cent in 2009 from 4.7 per cent in 2008, according to government data. Many companies attribute the sluggish performance to the difficulty in obtaining credit. In a business confidence index published by Banque Saudi Fransi, nearly 60 business leaders registered their disapproval of the lending attitude of banks.
"We are concerned about the high cost of financing and tight supply," Mohamed al-Madi, chief executive of petrochemical giant Sabic, says. "The current situation can't be sustained. It will limit investment to only the biggest companies with the strongest income statements.''
But banks shrug off the criticism, citing the global credit crunch and stricter lending policies after they came under scrutiny last year.
For years, banks have granted loans based on the reputation and family connections of borrowers, some of whom used the same collateral to obtain multiple loans from different banks.
Khaled Olayan, chairman of SABB, says that, given the current situation, banks have little choice but to tighten up.
"The banks are selective," says Mr Olayan. "Whenever we lend, we require proper security and collateral. In the past, lending might have been a picnic, but now, banks require more transparency and risk assessment.''
To spur lending, Sama has slashed benchmark lending rates by 200 basis points over the past year and lowered bank reserve requirements, but so far, the moves have done little to expand credit.
"If we had viable small and medium businesses, a lot of credit could be allocated to that sector, but banks keep giving credit to the same big names,'' says Mr Sfakianakis.