At least three major lenders in Saudi Arabia have made significant provisions against non-performing loans, including their exposure to contractor Saudi Oger, which has affected their year-end and fourth-quarter profitability.

Alawwal Bank, Banque Saudi Fransi and Saudi British Bank (Sabb) are the three banks, that have allocated significant amounts to cover the outstanding debts to the contractor, according to sources familiar with matter, who asked not be identified because the information is private. The combined exposure of the three lenders amounts to between SR800 ($213m) and SR900m ($240m) to Oger, which is struggling to pay its creditors back despite having received some of the long-held payments from Saudi government, they said.

Spokesman for Alawwal Bank, Saudi Fransi and Sabb did not reply to emailed request for comments.

Riyadh-headquartered Alawwal bank was the hardest hit by the rise in credit losses and provisions for bad loans as it swung to a fourth quarter net loss.

The lender, formerly Saudi Hollandi Bank, reported a loss of SR249.34m for the last three months of the 2016, down from a profit of SR451m reported for the same period in 2015. Its full-year income also slumped 47.35 per cent to SR1.06bn, according to the lender’s statement to Saudi Stock Exchange, where its shares are traded.

“Losses were due to higher total operating expenses, which increased by 181.54 per cent, mainly due to increase in impairment charge for credit losses and general and administrative expenses,” Alawwal said in the statement, without elaborating details of its exposures to individual clients.

Net income for the last three months of 2016 plunged 60.6 per cent to SR374m for Banque Saudi Fransi, which also reported a full year bottomline contraction of more than 13 per cent. Fransi cited 101.8 per cent jump in operating expenses, primarily, on the back of higher impairment charges for credit losses, as the reason for the fall in profits.

Saudi British Bank also recorded a 35.4 per cent decline in fourth-quarter net income to SR607m and 10.1 per cent slide in 12-month period of 2016. Operating costs climbed more than 70 per cent as credit losses and impairment of other financial assets spiked.

It is not known, what the other banks have provisioned for their outstanding receivables to the contracting sector, especially, Saudi Oger.

Banking exposure

Most of the lenders in Saudi Arabia are heavily involved in financing the construction sector, which was among the fastest growing segments of lending in the kingdom until a couple of years ago. A fall in oil prices from mid-2014 peak of $115 a barrel to below $30 a barrel at the beginning of 2016, led to Riyadh cutting spending and stopping payments to contractors, which created severe cash flow issues and subsequent defaults on bank loans and payments to trade creditors.

Thousands of jobs were lost in construction sector including at the biggest contractor by turnover Saudi Binladin Group (SBG) and Saudi Oger. Both companies were at the forefront of the government’s drive to build mega infrastructure projects across the kingdom.

Saudi lenders had a combined estimated exposure to Saudi Oger of about SR13bn. National Commercial Bank (NCB) has outstanding loans of up to SR3.5bn, Samba about SR1.5bn and Sabb about SR1bn, a banking source told MEED on 25 August last year. In November, Oger approached banks to freeze repayments on its debts

The amount SBG owes to the banks is closer to SR25bn, a banker told MEED at the time. The firm is close to getting an extension of up to two years on a SR10bn shariah-compliant facility, secured for construction work on the Grand Mosque in Mecca. It has already put in in a formal request to extend the payment date until the end of 2019, banking sources said earlier in January.

The government in October raised $17.5bn through its debut bond and released $28bn in overdue bills to Saudi contractors, rating agency Moody’s said in its latest report, adding that it has resulted in resettlement of the some of the loans owed to the banks. However, finance minister Mohammed Al-Jadaan said in December that the government has repaid more than SR270bn owed to contractors after halting payments because of the slump in crude, according to news agency Bloomberg report.

“With SBG it is a different story as the company is winning work and is also getting new credit facilities from the banks. The problem is with the Oger where banks have to take prudent actions and make provisions for their debts,” according to a Riyadh-based banker, who asked not to be identified.

The restructuring of construction sector loans is the kingdom could be the largest in the country since the fallout from the 2008 global credit crunch.

However, Saudi central bank governor Ahmed Alkholifey, without naming any company, said any defaults in the construction industry won’t be “systematic” as the “exposure of the whole banking sector to the construction sector is less than 8 per cent of total loans.”