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Middle East Report 2010| pfi| 5


Many institutions were caught out by the freeze in the money markets


third restructuring of 2010. However, anecdotal evidence once more points towards wider problems, with other investment institutions quietly restructuring obligations. Many banks that have publicly got into difficulty have said they are focused on changing their business models to cope with the new financial realities. Arab Banking Cor- poration, for example, said it would switch to become a deposit-taking bank to reduce its reliance on wholesale funding. However, Moody’s has warned that some invest- ment banks might not survive. It calls the challenges that this section of the market faces “severe” and warns, in many cases, that firms “do not possess sufficient franchise depth to cope with the sharply lower private invest- ment activity and depressed regional asset values”. Should they fail, these offshore institutions are unlike- ly to receive any financial help from the authorities, as the number of banks and Bahrain’s limited resources would make a bailout package untenable. While this may be different for a retail bank regarded as highly impor- tant to the Bahraini economy, the way Awal Bank and the International Banking Corporation were put into admin- istration illustrates what would happen to the rest. Elsewhere in the GCC region – Oman, Qatar, Saudi Ara- bia and the rest of the UAE – the banking systems seem to be on much surer footing. This position can be gen- erally attributed to either one of, or a combination of, two factors: a conservative banking culture and large finan- cial support from the authorities. However, even with- in countries, some banks are in a better position than others and some are tackling specific issues.


UAE, Qatar, Oman and Saudi Arabia For the UAE excluding Dubai, most banking activity is cen- tred on Abu Dhabi and these institutions have benefited from significant state resources: Dh16bn was injected into the five biggest Abu Dhabi banks in February 2009 to shore them up against the after-effects of Lehman Broth- ers’ collapse. Combined with the liquidity facilities from the UAE Central Bank and Ministry of Finance, this helped ensure the system remained supported during the worst of the volatility. Now, any problems that face UAE banks concern debt obligations; although some have bigger burdens than oth- ers. For example, in terms of exposure to Dubai World, National Bank of Abu Dhabi stating in its second-quarter results that it had no exposure to the conglomerate and Abu Dhabi Commercial Bank, in its respective Q2 num- bers, said it had around Dh6.6bn. There are also exposures to real estate and personal loans, in much the same way as Dubai banks, that could cause the need for further impairment charges to be taken. However, exposures are generally less significant than in Dubai and are thought to be at levels that are manageable.


For the three remaining countries, their banking systems are looking quite stable. In Qatar, potential issues over real


estate were removed when the government purchased banks’ real estate portfolios worth QR15bn (US$4.1bn) in May 2009. The Qatari authorities have been the most proactive in deploying state capital to nip any potential problems in the bud. In October 2008, the Qatar Investment Authority announced plans to take a 10%–20% stake in the country’s main banks – effectively a capital injection worth around US$5bn – while the government also pur- chased the stock portfolios of banks in March 2009. In Oman, the conservative nature of the banking system and the country’s small economy has meant that few prob- lems have emerged. Some Omani banks have exposure to one or more of Dubai World, Saad Group and the Algosaibi Group . However, these are relatively minor sums. As for Saudi Arabia, while provisioning in the past few quarters has been notable, the system itself has had few shocks due to its conservative nature. While NPLs increased to around 3% in 2009, analysts insist there are few asset quality issues for Saudi banks to contend with and none of the problems with personal loans seen elsewhere. The only real worry for Saudi banks has been in the cor- porate sector, with a few firms running into difficulty. By far the biggest, and most widely publicised, concern has been the multi-billion dollar restructurings at Saad Group and the Algosaibi Group. When their problems sur- faced in the first half of 2009, it was thought they had the potential to cause major damage to Saudi banks; with all thought to be exposed to one or both. However, despite denials from the authorities, it is widely thought that a settlement worth SR9.7bn was reached with Saad Group over its obligations to local banks. Even if Saudi banks have managed to agree a deal with Saad Group, the debts of the two conglomerates are one of the factors that will be seen as a threat to balance sheets going forward. A number of banks in each state are thought to have exposure to either one or both firms, with arguments over repayment of the sums expected to be protracted. Provisioning against all this capital is still to be reflect- ed in results. Some of this has already taken place; the UAE Central Bank, for example, instructed banks in the Emi- rates to make provisions worth 50% on their Saad/Algosaibi debt by the end of 2009. However, there will still be further pain ahead. The problems at Dubai World aren’t the only ones that will be worrying banks, in regards to the Emirate. A num- ber of other GREs are looking to tackle their debt burdens through restructuring; affecting many billions of dollars. Names such as Dubai International Capital and Limitless have already announced plans in regards to specific loan facilities, while advisers are said to be working with Dubai Holding and some of its subsidiaries about reor- ganising their businesses. Therefore, many can expect fur- ther Dubai GRE-related provisioning.


The real estate market is also set to remain in the dol- drums for the foreseeable future; extending the possibility


Elsewhere the banking systems seem to be on a much surer footing.


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