The Central Bank has told local lenders to increase provisioning by as much as Dh1 billion (US$272.2 million) to guard against potential exposure to the Saad and Al Gosaibi groups of Saudi Arabia, the latest fallout from a multibillion-dollar saga of fraud allegations that continues to reverberate around the world.
Most UAE banking stocks dipped yesterday after traders learned of the directive.
According to a Central Bank circular, banks were told to increase provisions to 80 per cent, up from 50 per cent, for all outstanding loans related to Saad Group and Ahmad Hamad Al Gosaibi and Brothers. The banks are required to make the provisions by the end of the year.
"All these provisions must be [made] by the end of 2010 and the Central Bank's approval of the banks' annual audited results are conditional on the allocation of those provisions," said the circular, issued by Sultan Nasser al Suwaidi, the Central Bank governor.
The two family-owned firms are embroiled in a complex and drawn-out legal dispute that is estimated to involve loans from international banks totalling as much as US$22 billion (Dh80.81bn).
The Central Bank has said UAE lenders have exposure of $2.9bn. Last year, it told lenders to make provisions worth at least half of their exposure to the conglomerates, but it is possible that some UAE banks have already made provisions for more than 50 per cent.
Raj Madha, a banking analyst with Rasmala, said the Central Bank directive would "add an extra US$250 million or so to the minimum provisioning level, although many banks may have already booked some of these additional provisions during the year".
The order comes as the Kuwaiti daily newspaper Al Qabas on Sunday said the Saad Group had offered Kuwaiti lenders 20 cents for each dollar it owed them. According to the paper, some lenders said they would accept 30 cents on the dollar and others sought 40 cents.
"The Central Bank is considering the worst-case scenario," said Mohammed Ali Yassin, the chief investment officer at CAPM Investments in Abu Dhabi.
A committee of senior members of the Saudi establishment has reportedly been meeting for more than a year in an effort to reach a suitable settlement.
"Banks have tried to recover the money over the last year or so. However, it does not seem that positive," said Sulieman al Mazroui, the chairman of the Banker's Business Group in Dubai. "The Central Bank's role ultimately is to protect the lenders from bad and doubtful debt from those companies."
The circular has also asked banks to maintain their 100 per cent provisions on Awal Bank, and The International Banking Corporation or TIBC, units of Saad Group and Al Gosaibi that were taken over by the Bahraini central bank last year.
Dubai bank stocks fell 1.2 per cent yesterday, with Emirates NBD leading the losses, dropping 4.8 per cent to Dh2.75. Abu Dhabi banks fell 0.9 per cent on average.