Rising provisions weigh on Saudi banks outlook

By Souhail Karam

RIYADH, Oct 28 (Reuters) - Saudi banks have more than tripled provisions against loan losses this year, raising fears that some could face further turmoil after a high profile corporate scandal further slowed lending.

(For a table on provisions made by Saudi banks during the first nine months of 2009 please double-click [ID:LS663973])

Saudi banks made provisions for loan losses worth 6.04 billion riyals ($1.61 billion) in the nine months to end-September against 1.58 billion riyals a year earlier.

Because of limited transparency among Saudi banks, it was not clear whether the increase was tied to concerns over the solvency levels of heavily indebted Saudi conglomerates Saad Group [SAADG.UL] and Ahmad Hamad Algosaibi & Bros (AHAB) which started to surface in June.

"These increases in provisions for loan losses show that Saudi banks are not reassured and that more private firms and traders could face difficulties in reimbursing debt," said Hesham Abu-Jamee, head of asset management at Bakheet Investment Group, a Saudi investment bank.

The country's biggest bank by assets - National Commercial Bank (NCB) - joined other Saudi lenders in announcing sharp hikes in provisions and its third-quarter contingency was the highest since the Saad Group/Algosaibi concern broke.

The two firms are at the centre of an estimated $22 billion debt restructuring which has further dampened slowing lending activity to the private sector.

Unlisted NCB's third-quarter provision brought to 1.9 billion riyals ($497.5 million) the total made during the nine months to end-September, a near nine-fold increase from a year ago. [ID:nL4596130]

SECRECY

NCB lifted its third-quarter net earnings although many Saudi lenders which posted increases in third-quarter earnings did not have to set aside as much in provisions.

Uncertainties that surround the exposure of Saudi banks to firms like Saad and Algosaibi are weighing on shareholders and investors.

"It's a big headache especially when you see Saudi banks taking different directions on provisions while posting mixed earnings through much of the three quarters of 2009," said a Dubai-based industry analyst who asked not to be named.

Unlike peers in many countries in the world, Saudi banks have not disclosed the level of their exposure to Saad and Algosaibi.

Saudi central bank governor Muhammad al-Jasser said in September the financial troubles of two private conglomerates posed no systemic risk to the nation's banking system. [ID:nL1723013]

He has also said that Saudi banks will make sure they have made enough provisions to cover any exposure to bad debts. [ID:nLH487455]

An official at the International Monetary Fund (IMF) said on Tuesday that Gulf Arab banks may still face an increase in bad loans but tests showed a large capital injections may be needed only if volumes of bad loans rise sharply. [ID:nLR604393]

Last month, a Saudi government panel brokered a deal between Saad Group and Saudi creditors but details of the agreement have not been disclosed. [ID:nLH595763]

"Generally, banks achieved good earnings during the third quarter and that's why they made too high provisions to cover their back during the fourth-quarter and start 2010 with the cleanest possible slate," Abu-Jamee said.

"This should not stop them from stepping forward and disclosing their exposure not only to Saad and to Algosaibi but also to other firms facing difficulties to reassure shareholders". (For related stories please double click [ID:nLR457199] [ID:nLS610087] [ID:nLO578403] [ID:nLD709234] [ID:nLH476863] [ID:nLC428825] [ID:nL3553018] [ID:nLA624406])

(Editing by Natsuko Waki and David Cowell)