Saudi default recovery to be 'way higher than usual'

Defaults by Saudi Arabia's two family-owned conglomerates, the Saad and Algosaibi groups, are a fraction of the assets of regional banks and will not have any perceptible impact on their profitability, analysts told Emirates Business.

"Family businesses have substantial assets and, therefore, recovery ratios will be way higher than the usual industry norm," said Mohamad Hawa, Head Mena Equity Strategy and Financials, Credit Suisse.

"The lending pool of expats isn't any less risky than name-lending. Actually in name-lending, there are personal guarantees and, often, pledging of some assets. The recovery ratio in the case of name-lending [to GCC family businesses] will be higher than usual," he said.

While Hawa acknowledged that the assets might have lost some of their value owing to the regional real estate and stock market crashes, he insisted that the recovery rate would be substantially higher than the norm.

"The recovery isn't going to be 100 per cent, but it is going to be way higher than the industry norm for corporate default recovery, which is 40 per cent during good times and 20 per cent during bad times," he said.

"For all banks combined, they have a syndicated loan exposure of around $13 billion [Dh47.68bn] to these entities [Algosaibi and Saad groups]. Even if there is another [between] $6bn and $7bn exposure by way of bilateral exposure, we're talking about $1bn or so exposure of Saudi banks by way of syndicated loans.

"So, with a recovery ratio of 50 per cent, that is a loss of $500 million on a combined balance sheet of $400bn," Hawa added.

For UAE banks, some analysts maintain an exposure of $3bn. With a combined asset base of $405bn at the end of June 2009 (Central Bank statistics), and factoring in a 50 per cent recovery rate, that works out to less than half a per cent of the total asset base.

Sankar Krishnan, Middle East Managing Director of Alvarez and Marsal, the company tasked with advising Lehman Brothers, the largest corporate bankruptcy in the world, said: "In general, the capitalisation levels of banks in the UAE and the region are reasonably adequate and the central banks have been focused for some time on building up the capital adequacy ratios.

"The Saad/Algosaibi saga is just unfolding so it may be premature to assess the actual loss impact for the regional banks… [but] regional governments have taken several measures to assist the banks in the recent past. The Ministry of Finance deposits that were converted into Tier 2 capital for the UAE banks is one such measure."

Krishnan maintained that dealing with the downturn still remained the regional banks' biggest challenge. "The challenge for all banks in the region is how to deal with the severe economic downturn; the history of both banks and bankers in the region is largely based on the 'good times'," he said.

"I also see loan-to-deposit ratios continuing to remain under stress and the retail defaults being a source of concern for the foreseeable future," he added.

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