Gulf banks' exposure to Saad and Algosaibi, significant but manageable - Standard and Poor's survey

The two prominent Saudi Arabian groups recently ran into severe and unexpected difficulties and have entered debt restructuring discussions with their respective creditors.

"Total exposure net of tangible collateral to the two groups is significant but manageable for sampled rated GCC banks,"

said Standard & Poor's credit analyst Goeksenin Karagoez.

Information related to each individual Gulf bank's exposure is confidential, and as such can not be disclosed by Standard & Poor's--but our survey enabled us to arrive at various opinions:

Exposure to the groups varies significantly among the sampled GCC rated banks, from no exposure to net exposure of more than 20% of a few banks' adjusted total equity.

Surveyed banks in Saudi Arabia and the United Arab Emirates represent almost two-thirds of the total net exposure of the sampled banks.
GCC rated banks in the sample have taken what appears to be material levels of tangible collateral, in the form of cash and listed shares, against these loans, which covers about 30% of their gross exposure.

Syndicated loans, sukuk, and working capital loans accounted for a large portion of the debt owed to GCC rated banks. From the data, these exposures appear to be mainly to nonbank entities of the groups. Noncash exposure (mainly through letters of credit) forms the rest of the exposure.

As part of its surveillance on rated bank credits, Standard & Poor's receives detailed information on the banks' largest exposures. The Saad and Algosaibi restructuring discussions, in our view, suggest that high levels of concentration within GCC banks' loan portfolios create significant credit risks for these banks, mitigated by GCC banks' high earnings capacity, good capitalization, and high level of loan loss reserves.

Standard & Poor's believes that it is premature to assess the level of ultimate losses that creditors will face on their exposure to these two groups. We anticipate that only a few banks are going to allocate provisions against these exposures in the second quarter of 2009.