Gulf banks face bad loan fallout

Gulf banks with exposure to bad property loans could be forced under or require government funds to survive, according to the company that is restructuring Lehman Brothers. Alvarez and Marsal, which is advising on Lehman, the world's biggest bankruptcy, expects local lenders to face increasing exposure to property-related distressed debt this year.

The Gulf has so far been immune from the bank failures that swept across North America and Europe in the wake of Lehman's bankruptcy last year."Whatever happens, the lenders here will be getting a haircut. It's inevitable," said Sankar Krishnan, the managing director of Alvarez and Marsal Middle East. "We believe there will be banks that will fail. Some will either be consolidated or bailed out depending on what kind of serious trouble they're in. The banks that are involved in real estate, and a lot of them are, they are in the toughest position. A lot of them don't have visibility as to what's happening on the projects they are involved with."

The warning comes as banks across the Gulf prepare to report second-quarter earnings that are widely expected to contain more provisions on bad loans made on stalled or cancelled property projects. Increased provisions on personal lending, together with flat loan growth and exposure to the troubled Saad and Al Gosaibi family trading groups in Saudi Arabia are also likely to hurt earnings. Stimulus measures from regional authorities, such as the recent bond guarantee by the UAE Government or the purchase of banks' property assets by the Qatari government, are unlikely to be reflected in second-quarter earnings.

The Central Bank has introduced a series of measures to ensure that UAE banks are sufficiently capitalised and that their loan books are covered by deposits held in their vaults. Al Mal Capital expects average net profits of the UAE's five main banks, Abu Dhabi Commercial Bank, Emirates NBD, First Gulf Bank, National Bank of Abu Dhabi and Union National Bank, to be 9 per cent below their first-quarter results. This would be 27.5 per cent lower than profits in the second quarter of last year, when the economy was still running at full steam.

"The sizeable drop in expectations is a factor of a tougher economic environment and continued buildup in provisions in 2009," says Deepak Tolani, Al Mal's banking analyst. Saudi banks should fare slightly better. They are expected to show flat profits compared with the first quarter of this year and a 10 per cent decline from the same period last year. "We continue to expect [Saudi] banks to be risk-averse and their reluctance to originate loans to the private sector is reflected in the negative loan growth in 2009," Mr Tolani said.

Qatari banks are likely to report the best earnings in the region. Sofia el Boury, a banking analyst at Shuaa Capital, said: "Despite being affected by a liquidity shortage like the rest of the GCC, Qatari banks are likely to display less risks on their balance sheets, especially following recent government moves." The Qatari government put aside US$4.1bn [Dh15.06bn) to buy local banks' property portfolios after buying listed shares in their investment portfolios earlier in the year.

QNB, Qatar's largest financial institution, last week posted a net profit of 2.1 billion rials (Dh2.12bn), up 11.3 per cent on the same period last year.Most analysts expect banks to delay the big write-offs for non-performing loans in the property and personal sectors until the second half. "The big question mark is the write-offs. We won't see the bulk of provisions in the second quarter, but only feel the full effect in the second half," Mrs el Boury said.

Islamic banks may also be carrying excessive investment exposure to property investments according to a report from Unicorn Investment Bank of Bahrain and Doha Islamic published yesterday. The over-reliance of many Islamic investment banks on property means that the underlying values of their portfolios have declined, too, the report says. [e-mail] [e-mail]