Gulf counts cost of US bank collapse

19 September 2008
Local finance houses face losses on billions of dollars worth of exposure to Lehman Brothers.

Gulf finance houses are sitting on billions of dollars worth of exposure to Lehman Brothers, the US investment bank that filed for bankruptcy on 15 September.

Sources in the region tell MEED that local banks are exposed to Lehman Brothers on several fronts, via US bank bonds, derivatives trades where the bank acted as a counterparty, and through investment products structured by the US institution.

“There is exposure in the bank through fixed-income investments and derivatives products,” says one source at Bahrain’s Arab Banking Corporation (ABC). “I am sure that total exposure in the region will add up to billions [of dollars].”

Institutions including Bahrain’s Gulf International Bank (GIB), ABC and Qatar Insurance Company have exposure either to Lehman Brothers or to troubled US insurance company American International Group (AIG), according to sources at the companies.

On 18 September, the Central Bank of the UAE asked local banks to report any exposure to Lehman Brothers. Larger investment banks are expected to be among the most exposed in the region, although even some retail banks are understood to have exposures running into tens of millions of dollars.

“We have seen Lehman Brothers actively marketing its products in the region for some time now, and we politely declined because we do not invest in those sorts of products,” says one Qatar-based syndications banker. “But I know other banks are not so fortunate.”

Institutions that do have exposure to Lehman Brothers are in the process of trying to evaluate if any losses could arise from their positions. “We think there are many banks in the region with exposure to Lehman Brothers,” says a banker in the treasury department of one major Saudi bank. “There is a huge portion of deals in the region that involved Lehman Brothers in some way.”

He adds that because Lehman Brothers acted as an intermediary between banks on some trades, there could be deals where banks will be able to work directly with each other to minimise the risk of losses.

Other direct exposure will be more difficult to mitigate. A $250m deal by the UK’s Barclays to buy Lehman Brothers’ investment banking and capital markets operations in North America, announced on 17 September, could provide security to some banks on the deals they have done with the US bank. “At the moment, it is difficult to see if the exposure will result in losses,” says the source at ABC. “Until it becomes clear what Barclays’ position is with some of these trades [we will not know].”

He adds that ABC is holding on to its exposure, although some other banks say they are trying to unwind their positions with the troubled banking giant.

Khalid Hamad, executive director for banking supervision at the Central Bank of Bahrain, conceded on 17 September that banks in Bahrain could be carrying exposure to Lehman Brothers, but said assessing the significance of that exposure would take time.

His position is in contrast to that of the central banks of the UAE, Saudi Arabia and Qatar, which have insisted that no exposure exists in their markets.

Abdul Majeed al-Shatti, head of the Kuwait Banking Association, has also said he does not think there is any exposure in Kuwait.

Banks in other parts of the world have already begun announcing the extent of their exposures to Lehman Brothers via their investments in the bank’s bonds. The Industrial & Commercial Bank of China (ICBC), the largest bank in the world by market value, has revealed exposures totalling $151.8m. Icici Bank, India’s largest bank, has announced exposures of $81m in Lehman Brothers’ senior debt, and has made provisions of $12m against these investments.

Other regional investors outside the banking sector are also trying to ascertain how the fallout from Lehman Brothers’ collapse will affect them.

“I have some clients in the region that we are trying to sell our investment products to,” says one source at Gulf Finance House. “But they are hesitant at the moment while they try to work out what their exposure is and if they will suffer any losses.”

Others say bonds are now worth just a fraction of their original value. “Lehman Brothers bonds are trading at about 40 cents on the dollar, so for every dollar invested that is potentially a 60 cents loss,” says another source at a major Dubai-based bank.

If the trades with Lehman Brothers do result in losses, it will be further bad news for GIB and ABC in particular, which earlier this year confirmed they had the largest exposures in the region to assets that had dropped in value because of the sub-prime crisis and subsequent credit crunch.

ABC and GIB did not respond to requests to comment by the time MEED went to press.

Other banks in the region say they have limited or no exposure to Lehman Brothers, including Emirates NBD, Qatar National Bank, First Gulf Bank, National Bank of Kuwait and Abu Dhabi Commercial Bank.

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