Abu Dhabi Commercial Bank (ADCB) saw first-half profits fall 44 per cent as it set aside Dh892 million (US$242.8m) in provisions against losses on bad loans. ADCB is estimated to be owed about $500m by the Saad Group and Ahmad Hamad Al Gosaibi and Brothers, whose billions of dollars in debt to regional banks have become a major factor in second-quarter bank earnings.
Other banks in the UAE, including First Gulf Bank and Union National Bank, have set aside cash that would otherwise have been booked as profits to account for exposures to the firms. Profit dropped to Dh657m compared with Dh1.17 billion in the first half of last year, the bank said. ADCB said it had set aside Dh892m in provisions during the first half, partly to cushion itself against losses on loans to Saad and Al Gosaibi, two Saudi conglomerates that have defaulted on their debts.
Were it not for the provisions, ADCB said the second quarter was "probably the best quarter" ever for the bank in terms of raw profits before provisioning. Second quarter revenue increased 8 per cent from the same period last year to Dh1.3bn. Deposit growth, which rose by 6 per cent during the first half, outpaced loan growth, which jumped 5 per cent. ADCB also said it reduced its costs 10 per cent from the second half of last year.
Earlier, the Central Bank told lenders to increase reserves to cushion against possible losses on loans made to the two Saudi conglomerates. The Central Bank met with lenders and instructed them to set aside cash amounting to up to 75 per cent of the value of the loans they had made to the Saad and Al Gosaibi, according to a Reuters report. The firms owe billions of dollars to international and regional banks after defaulting on loans. Both are undergoing sweeping debt restructurings.
HSBC recently estimated that Saudi banks alone are owed between $4bn and $7bn. Standard and Poor's yesterday said a sampling of 30 banks in the region showed they were owed $9.6bn. According to a document circulating among bankers in the region, banks are owed $7.42bn in syndicated loans. "According to the guidance of the Central Bank, banks should take provisions of 50 per cent over two years on exposure to Al Gosaibi and 75 per cent on exposure to Saad," a banker who attended the meeting, held on Thursday of last week, told Reuters.
"Basically, banks are required to take 25 per cent provisions on Al Gosaibi and about 37 per cent provisions on Saad this year and the same next year," the banker said. The extent to which banks across the region are exposed to Saad and Al Gosaibi has become an important question, both for central banks that are keen to ensure the stability of the banking system and for the banks themselves as they work to recover from the global financial crisis.
The family firms were stalwarts of the region's business community and banks had considered them two of the Gulf's safest borrowers. This summer, however, it became clear that the conglomerates had borrowed too much during the boom times, leading to a string of bad news and commercial disputes. The bank accounts of Maan al Sanea, the chairman and founder of Saad, were frozen in May, and Al Gosaibi recently sued Mr al Sanea in New York, alleging he defrauded the company of $10bn.
As the Saad and Al Gosaibi groups restructure their debts and try to stay afloat, banks are increasingly putting aside some of their profits as a buffer. When it reported second-quarter results this week, First Gulf Bank, an Abu Dhabi-based lender, said it had set aside Dh480 million in provisions in the first half of this year, partly to account for exposure to the conglomerates. Many other banks in the region have taken similar steps because of their dealings with the firms. The Saudi British Bank, HSBC's Saudi affiliate, said it had put aside 129.7m Saudi riyals (Dh127m) in the second quarter.
Banque Saudi Fransi made 119.85m riyals in provisions for the quarter and the Samba Financial Group in Saudi set aside 97.29m riyals. Banks in the UAE could take Dh1.2bn in charges in the second quarter as they write off bad loans to the troubled Saudi conglomerates and retail customers who are unable to pay back personal loans, according to a report yesterday. These charges would be about one third higher than in the same period last year, when the eight largest banks set aside Dh883m in provisions, HC Securities and Investment said.
"We maintain our bad loan charges of Dh1,189m in 2Q09 due to the uncertainty surrounding the exposure to troubled Saudi companies, until official clarifications are out," HC said. The brokerage also expressed concerns about consumers defaulting on personal loans taken out during the boom times before September last year and backed solely with salaries as collateral. The high number of loans to expatriates makes banks particularly vulnerable because employees who lose their jobs may decide to leave the country without paying off their debts.
"We reiterate our concerns regarding non-performing loans arising from retail exposure, which most of our banks secure large stakes in, especially with personal loans which carry salaries as their only collaterals," HC said. It was uncertain when the banks would book provisions related to Saad and Al Gosaibi. Some of the provisioning may take place as late as next year, it said, when most of the groups' loans matured.
Several banks, including Abu Dhabi Commercial Bank, Mashreqbank, First Gulf Bank and Union National Bank, have disclosed they lent money to Saad or Al Gosaibi, or both. Union National Bank, which is owed $20m in a syndicated loan to Al Gosaibi, yesterday reported a decline of 36.4 per cent in second-quarter profits to Dh271.3m. The bank said it had a "limited credit exposure" to Al Gosaibi and no exposure to Saad and had taken "adequate provisions".
Abu Dhabi Islamic Bank, which is owed $40m in syndicated loans to Saad in addition to a Dh245m direct loan described in a report on Wednesday by The National, said in a statement to the Abu Dhabi Securities Exchange yesterday that it was continuing to set aside money to deal with exposures to the firm. It already had booked Dh664.7m in provisions, it said. * with Reuters afitch@thenational.ae uharnischfeger@thenational.ae mjalili@thenational.ae