Banks’ writedowns for bad debts increase year on year

10 November 2009

Listed institutions to write down more debt than the SR5.3bn recorded in 2008

Saudi banks are expected to write down more debts this year than they did in 2008 as the economic slowdown continues to dent the profitability of the country’s banking sector.

In the first nine months of 2009, the 12 Saudi banks listed on the Saudi stock exchange (Tadawul) made provisions of SR4.9bn ($1.3bn) against bad debt.

Analysts now expect Saudi banks to make a further round of substantial writedowns in the fourth quarter of the year, which they will announce in January.

Analysts say these writedowns  will drive up the total for the year to more than the SR5.3bn made in 2008. “Usually there is a spike in provisions for debt in the fourth quarter as banks try to prepare their accounts for the next year,” says Sophia el-Boury, banking analyst at UAE bank Shuaa Capital.

Analysts say bank exposure to two Saudi conglomerates, Saad Group and Ahmad Hamad al-Gosaibi & Brothers, will inflate the anticipated writedowns.

In May, an Al-Gosaibi subsidiary in Bahrain, The International Banking Corporation, defaulted on its debts. At a meeting with creditors on 24 June, representatives of the Al-Gosaibi family revealed that the conglomerate owed $9.2bn to 120 banks worldwide, and that the group’s assets fell far short of the size of its debts.

Unless there is government intervention to ease accounting rules, Saudi banks will have to continue writing down loans to both companies into 2010.

“There has been no clear guidance from the Saudi Arabian Monetary Agency [Sama] about how to make provisions for loans to these two firms,” says El-Boury.

Despite two years of high provisioning, however, most Saudi banks remain well capitalised.

“The Saudi banks are not in desperate need of being recapitalised, and most are well positioned to start expanding their loan books again when the economy recovers,” says Deepak Toolani, banking analyst at UAE investment bank Al-Mal Capital.

The 12 Saudi banks’ third-quarter results show that most of them have enough capital to continue lending.QUOTE - “Most [Saudi banks] are well positioned to start expanding their loan books again when the economy recovers” - Deepak Toolani, analyst, Al-Mal

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