Costs of Saudi defaults mount at UAE banks

The UAE central bank told local lenders to take more provisions against potential losses at two Saudi firms, as more details emerged on the biggest financial dispute to hit the Middle East since the global crisis.

Abu Dhabi Commercial Bank booked 613 million dirhams ($166.9m) in provisions for the second quarter of the year compared with 160 million one year ago, according to Reuters calculations based on new data released by the bank on Thursday.

The provisions come after the UAE central bank met with bankers on July 16 to address lenders' exposure to troubled Saudi firms Saad Group and Ahmad Hamad Algosaibi & Bros.

"According to the guidance of the central bank, banks should take provisions of 50 percent over two years on exposure to Algosaibi and 75 percent on exposure to Saad," a banker who attended the meeting said.

The central bank declined to comment.

Ratings agency Standard & Poor's estimates that 30 banks in the region bear about $9.6 billion in exposure to Saad and Algosaibi, calling it "significant but manageable."

The trouble at the two family conglomerates, who most recently took their battle to a U.S. court, has underpinned the need for more disclosure and transparency in the region, analysts say.

It also risks putting to an end the practice of name lending, under which banks would extend loans on the basis of a family reputation.

As a result of the global economic crisis, banks worldwide had to set aside more provisions against a rise in bad loans. The trouble at the two Saudi companies risks complicating the banks' financial distress in the region, as earnings are likely to come under more pressure.

The cost of the crisis continued to mount at other banks.

Another Abu Dhabi-based bank, Union National Bank, on Thursday reported a 36.4 percent drop in second-quarter net profit because it took provisions against losses stemming from the financial crisis.

"It (UNB's results) was a surprise to the market. UNB was always one of the more conservative banks, in terms of lending, in the UAE and Abu Dhabi specifically," said Mohammed Yasin, managing director at Shuaa Securities in Abu Dhabi.

Abu Dhabi Islamic Bank on Thursday declined to comment on whether it had any exposure to Saad and Algosaibi, but said it would continue to take prudent provisions to maintain its balance sheet.

A newspaper reported on Wednesday that ADIB had 245 million dirhams ($66.70 million) in exposure to Saad.

ADIB, one of Abu Dhabi's smaller banks by market value, made the loan to Saad in 2007 to finance an investment in an Abu Dhabi warehousing company that did not become operational, the daily newspaper The National reported.

The bank said it maintained provisions of 664.7 million dirhams from the first quarter which had been "taken to help the bank maintain/go through unforeseen circumstances, particularly losses resulting from customer defaults". (Reuters)

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