Monday, November 1, 2010

National Bank of Kuwait – Related Parties’ Loans Analysis


One of our regulator and insightful commenters, Advocatus, said that there were rumors in the market that NBK was experiencing problems with its exposure to M Al Khorafi and had to extend the loans more than once to keep them from becoming classified as non performing.

An intriguing comment.


Abu Shukri is known as a careful banker, but even Homer nodded from time to time. And sometimes it is very hard to say "no" to a very well connected shareholder. As they say: "Past performance is not a guarantee of future results."


Without access to NBK's internal records, it's not possible to say one way or another. Let's look and see if we can find any signs of difficulties in NBK's financials.


Related Party Information


The first assumption is that loans to MAK or other AlKhorafi entities would be reported in the Related Parties Section. The data below is taken from the Related Party Notes in the Bank's Quarterly financials and is expressed in millions of KD.


QuarterRP LoansCollateral% Cover
1Q07215.1519.7242%
2Q07262.2608.4232%
3Q07294.9634.3215%
4Q07307.3672.6219%
1Q08285.5728.2255%
2Q08295.2742.0251%
3Q08316.6719.1227%
4Q08350.6494.4141%
1Q09278.8451.5162%
2Q09310.4544.9176%
3Q09189.7363.8192%
4Q09219.3343.8157%
1Q10210.7380.2180%
2Q10186.5350.7188%
3Q10183.7413.1225%

  1. Collateral coverage is reasonably comfortable, except for 4Q08. If there was a problem with Related Party loans, it's likely this is when it occurred. Two factors accounted for this change: a very dramatic decline in collateral and an increase in outstandings. 
  2. The significant drop in collateral coverage in 4Q08 coincides with the dramatic decline in market values following the collapse of Lehman. This suggests that the collateral is composed of equities and other marketable securities. 
  3. One would also expect that this would be a time of liquidity and cashflow stress leading borrowers to draw down additional amounts to cover their needs. 
  4. However, there is remediation on the principal side in 1Q09 with a KD71.8 reduction (twice the increase in 4Q08). That's quite remarkable because this was not exactly a "boom" time for Kuwait or the world in general. 
  5. Further declines in 2010 appear to indicate that there is no problem with RP loans. By 1Q10 these were below their 1Q07 level. Collateral coverage remains comfortable and the absolute of loans outstanding is below those in 1Q07. 
  6. I'd guess that Zain shares make up a good portion of the collateral for MAK exposure. But that is just a guess. If so, the Itisalat acquisition should lead to a further dramatic reduction in RP loans.
Renegotiated Loans

Another place to look is for the IFRS #7 Note on renegotiated loans. 
  1. Note 28.1.4 to NBK's 2009 financials state that only KD8.4 million of loans were renegotiated in that fiscal year and nil the year before. I didn't seem similar disclosure in the 2007 financials.
  2. If NBK were having problems with MAK exposure, one might expect to see larger "renegotiated" amounts, though it is possible in this sort of situation for a bank to extend a new loan to repay another short term loan and treat it as a new loan. One would expect that interest would have to be paid in full for the auditors to sign off. I'd note that one's expectations are not always fulfilled.
Conclusion

The financials don't disclose any problems, though as mentioned above this analysis is based on an external diagnosis without benefit of x-rays (details of NBK's exposure to the AlKhorafi Group).

14 comments:

Vanguard said...

I commented in one of your comments sometime ago I believe with something related to this.

My sources tell me that the problem is pending since the real estate crash and that is why Khorafi wanted to offload Zain so that money can be used to pay off NBK loans.

The rumors have it that in the construction boom in Kuwait as well as UAE Khorafi had a lot of construction equipment i.e., cranes etc financed through NBK loans. With the collapse of real estate all those cranes as well as receivables from master developers are worth sh#t. The loan amount to Khorafi was quoted from 300 million to 600 million KD (as with all rumors there might be exaggeration).

This is not all. Raya II tower in Kuwait which was built by Salhya was financed by NBK. Now Salhiya can't payback NBK as no one is willing to take up space in this building due to crisis. So what does NBK do, it occupies upto 40 floors of this building rent free (rent expense adjusted against interest income) and the loan in NBK books remain current.

The white elephant Al Hamra tower is also financed by NBK and still under construction and rumor has it that first 20 floors will be occupied by NBK.

But creative accounting can only get you that far.

Advocatus said...

I heard about the power generators that Kharafi had bought ahead of contract being awarded. They borrowed Euro 400-500 million from NBK to purchase. The project then got cancelled by the Kuwaiti Government. Kharafi at some point told NBK to keep the generators as they were not going to repay the interest or the loan!

Advocatus said...

I heard about the power generators that Kharafi had bought ahead of contract being awarded. They borrowed Euro 400-500 million from NBK to purchase. The project then got cancelled by the Kuwaiti Government. Kharafi at some point told NBK to keep the generators as they were not going to repay the interest or the loan!

Anonymous said...

FT: Zain deal motives under scrutiny

By Robin Wigglesworth in Abu Dhabi

Published: February 19 2010 02:00 |
....

The net worth of Mr Kharafi, who went to university in Liverpool in the UK, dropped to $8.1bn last year from about $14bn in 2008, according to the Forbes Rich List. Bankers add that, like many Gulf merchant families, the Kharafis overextended themselves in the boom years before the global recession hit.

"Kuwaiti families are more trading oriented than most in the Gulf, and took a lot of risk with local equities and real estate, and when you do that with a lot of leverage you are in for a tough time," says a top private banker in the Gulf. "A lot of families are licking their wounds now."

In addition to impairments on the Kharafi's large portfolio of companies, observers say that two investments in particular have proved problematic: turbines and an Egyptian resort.

In 2007 Kharafi National, an engineering subsidiary, bought 20 gas turbines from General Electric to supply Kuwait with 2.5GW of power, only to see the government cancel the $2.8bn contract, according to Zawya Projects, a data provider.

Moreover, the Kharafis are building Port Ghalib, a vast residential and tourist resort on the south coast of the Egyptian Red Sea that will cost an estimated $5bn. The first phase of the project formally opened with a concert by Beyoncé Knowles, the US singer, in November 2009, but the timing of the resort's construction was unfortunate.

The financial crisis has stunted demand for expensive, off-plan resorts and projects - leaving the Kharafis with a potentially large exposure to the project and onerous loans, bankers say.

Mr Kharafi denies that the family empire has been under financial pressure from the investments.

"We are negotiating to sell the turbines, and we are paying all our loan instalments and interest fully and on time," Mr Kharafi says. "Sales of land and apartments at Port Ghalib have been delayed by the crisis, but we expect it to pick up when conditions improve. It's still the best project in Egypt."

However, last summer, under pressure from the Kharafis and against the wishes of its management, there was an attempt to sell a controlling stake in Zain's African assets to Vivendi of France.

The French group eventually withdrew its offer, and the Kharafis then tried to arrange a sale of 46 per cent of the entire company to an Indian-Malaysian group for $13.7bn. That deal fizzled out amid doubts over the consortium's ability to pay for the deal.

Bharti Airtel has now agreed to snap up the assets in a $10.7bn potential deal. Zain says it will keep up to $5bn of the mooted African asset sale proceeds, presumably to pass on to shareholders through dividends or share buy-backs, and using the balance to repay some company debts.

The Kharafis would not be the only Gulf merchant family wrong-footed by the financial crisis. In neighbouring Saudi Arabia two bluechip family conglomerates - Saad Group, owned by billionaire Maan al Sanea, and Ahmad Hamad Algosaibi & Brothers - have both defaulted on debts estimated at over $20bn. Across the Gulf other families are quietly rescheduling their loans with local banks.

"Of course we have been affected by the crisis, but less than others, and we are still making operational profits," says Mr Kharafi. "And things are improving every day."

Anonymous said...

FT: Zain deal motives under scrutiny

By Robin Wigglesworth in Abu Dhabi

Published: February 19 2010 02:00 |

The decision that was announced this week by Zain, the Kuwait telecoms company, to sell its prized African assets to Bharti Airtel, is a volte-face by the company which not long ago yearned to be a global player.

The proposed sale ends Zain's dream, outlined in 2007, to have 150m subscribers, annual earnings of $6bn and be among the 10 largest telecoms companies in the world by market capitalisation by 2011. It has also fired speculation about the motives of one of its main shareholders, the Kuwaiti Kharafi family.

http://www.ft.com/cms/s/0/56e233ea-1cf6-11df-aef7-00144feab49a.html

Abu 'Arqala said...

Vanguard

Thanks for your comment.

I'd expect that the loan amounts you and the other posters mention would show up in NBK's financials as related parties - if the Bank extended them.

But from the data in the quarterly financials on RP loans, they don't seem to be showing up. And if I remember correctly, NBK says that it has some 20+ related parties to whom it has extended loans.

Any idea where the loan amounts are and why they're apparently not in the RP disclosure?

I should also have been a bit more careful to note that there were no signs of serious problems in NBK's loan portfolio. Not that there were no problems.

I'm sure that NBK has its share of bad loans. And has no doubt at time engaged in some "sharp" practices.

My comments reflect the relative situation. From my analysis (and note the caveat) NBK appears to better than other Kuwaiti banks in terms of NPL creation and exposure. And from my limited experience ethics.

And there's a bit of history there - the other Kuwaiti banks are serial offenders.

Abu 'Arqala said...

Advocatus

Interesting story.

If NBK took the generators in satisfaction for the loan, wouldn't they have had to bump up other assets? Which should be thus increased if they are holding on to the generators?

Or if they sold the generators then taken a loss on the remaining balance of the loan?

Or is the belief that NBK is cooking its books?

Abu 'Arqala said...

Anonymous

Clearly, MAK is having problems.

When the Zain sale was first mooted, I noted that Al-K and at least one other major shareholder were both cash strapped and intent on extracting value from their holdings in Zain.

First through the Vivendi sale to be followed by a whopping dividend. And when that dream evaporated by the sale of their own shares.

Unfortunately, as sometimes happens, the investor sells the wrong asset. He unloads the good asset to bail out an asset with no future. Pan American Corp selling Intercontinental Hotels and their NY HQ building to bail out the airline.

FIT said...

Abu 'Arqala :do you think "alqabas" your trusted source would write somthing about this, I doub it.

Advocatus said...

NBK never took the generators - the loan was rolled over. I understand all the Kuwaiti banks use a very narrow definition of Related Party to reduce disclosure (Name Lending!).

I sent you the latest S&P report on NBK that notes their Investment company exposure as a % of loan book and equity. I seem to recall NBK claiming previously that they had no exposure to such customers.

Also of interest Al Shaya were recently approaching other Kuwaiti banks for loans, they traditionally only bank with NBK. Apparently when asked for financials Al Shaya refused on the basis that their "name" alone should be sufficient. I understand that they got shown the door at one bank at least - changed days in Kuwait?

Abu 'Arqala said...

FIT

Thanks yours.

Nope, nor am I looking for a hard hitting expose on KOTC and a certain nautical branch of the ruling family in AlWatan.

Nor for that matter am I expecting to find the NY Post taking a pro Palestinian stand.

AlQabas has a fairly well known political tendency.

I quote them a lot here because of the papers I look at in Kuwait they often deal with the most interesting news items. So they're a source but not necessarily highly trusted.

Abu 'Arqala said...

Advocatus

Thanks for the material.

As you might guess from the paucity of posts here recently, I am very busy at work. So I haven't had a chance to look at yet.

Just to reiterate, I don't intend to convey the impression that NBK is without blemish. My comments about quality are relative to their local peers.

As to AlShaya, very interesting. Sounds like NBK cut them off from new loans.

And if other banks are refusing to lend them if they won't provide financials, bravo!

On the RP issue, sounds like the CBK needs to sharpen the definition. I would have thought after the GB derivatives fiasco, the CBK would have come down with both boots on RP transactions. But apparently not.

It seems for each "bravo" situation there is an equal and opposite one. AA's law of the conservation of Kuwaiti banking "standards".

Dubai Real Estate said...
This comment has been removed by a blog administrator.
Kiefer said...

they are spending too much and now everything is on lease!