Kuwait FSSA: Snapshot of Banking Sector

You probably have seen articles mentioning some of the criticisms and recommendations contained in the IMF's recent update of its Financial Sector Stability Assessment for Kuwait.

While I hope to review those in following posts in the not too distant future, I'd like to start by drawing on some of the material to give a macro picture of the Kuwaiti commercial banking sector – both conventional and Shari'ah compliant. This will complement the earlier post on other economic sectors in the country based on Al Joman's analysis.

Let's begin with a look at some macro numbers on the sector. These are taken from Table 5 Page 19. And these are only a few of the statistics there.

Banks' asset composition (Central Bank of Kuwait and IMF estimates). Amounts below are percentages.

Category	06	07	08	09
Trade	11.6	10.1	9.8	8.8
Industry	4.3	5.4	6.2	5.8
Real Estate & Construction	28.7	30.6	31.3	32.2
Agriculture & Fishing	0.2	0.1	0.1	0.1
Investment Companies	8.8	11.7	10.9	11.1
Oil &Gas	0.6	0.4	0.6	1.0
Public Services	0.7	0.4	0.1	0.1
Consumer – Credit Cards	1.5	1.2	0.8	0.6
Consumer –Auto	4.0	2.6	2.2	2.0
Consumer – Consumer Loans	19.9	17.0	15.2	16.4
Consumer – Mortgages	3.5	2.7	2.5	2.2
Consumer – Equity Purchase Loans	10.3	10.1	11.1	10.5
Other	5.8	7.6	9.2	9.1

 
Some observations. 

1. There is significant exposure to Real Estate/Construction, Investment Companies, and Consumer Loans for Share Purchases. Almost 54%.   One might describe these as not primarily productive sectors but derivative sectors feeding off wealth created by other sectors. 
2. By contrast there is relatively little lending to what are usually considered primary productive sectors:  manufacturing, farming and trading sectors.  That reflects lending opportunities by and large rather than lender red lining.
3. Consumer lending is a significant LOB at 39.2%, 33.6%, 31.8% and 31.8%. 
4. Lending for share purchases is 10%+. A particularly tricky business to engage in given the volatility in the KSE and lack of proper supervision/regulation. 
5. Consumer loans are another major segment. In the words of the FSSA "low risks loans since they are guaranteed by salary assignments". This is a mantra you will just about every commercial banker in the Gulf mention. What they don't mention is that at many lenders there are no maximum loan to salary ratios – designed to make sure borrowers have a serviceable debt burden. A reason why the Central Bank of Bahrain established these in a regulation. Or that if a person loses his job (something happening a bit more frequently these days), there is no salary to assign. And what are we to make of agitation in the Majlis Al Umma for the Government to buy up consumer debt, if everything is fine?
   

Some additional metrics, again percentages.

Category	06	07	08	09
NPLs to Total Loans	3.9	3.2	5.3	9.7
NPLs Net of Provisions to Capital	14.3	11.4	26.0	45.7
Large Exposure to Tier I Capital	144.0	129.8	129.5	144.9
ROAA	3.7	3.6	0.9	0.8
ROAE	28.8	29.4	7.7	6.8
Equity Exposure to Shareholders' Equity	53.2	56.9	67.6	68.5

 

More observations. 

1. I think the trends are what are more important. Clearly, the direction of these ratios is not surprising given knowledge of the difficulties faced by the banking sector over the past few years. 
2. The second ratio's dramatic increase is due to an almost doubling of NPLs between 2008 and 2009. There was an equally dramatic drop in provision coverage from 124% in 2007 to 89.4% in 2008 and 68.3% in 2009. 
3. Also note that the last ratio reflects (a) lending for equity purchases and (b) equity taken as collateral for other extensions of credit.
   

Let's look at the FSSA's comments.

1. In its Risk Assessment Matrix, the IMF notes concentrations in exposure to real estate, investment companies and stock prices, commenting that a decline in real estate or stock prices could lead to a major increase in Non Performing Loans ("NPLs"). 
2. It also notes Kuwaiti banks have minimal sovereign risk exposure. 
3. Reasonably good liquidity with liquid assets at 26% of total assets. 
4. Banks' assets predominantly domestic – some 80%. And I'd guess international exposure may be primarily with NBK. 
5. Loan to deposit ratio under 100% at 91% in 2009. 
6. In terms of assessing a severe realisation of a threat sometimes in the next three years, it assigns a medium risk of occurrence (PD) and medium loss (LGD). 
7. Banks could broadly withstand IMF's stress tests (outlined in Appendix IV Tables 3, 4 and 5.

Referring to the stress tests there were three: a base case, an intermediate case and a severe case.  And the test was for yeat 2010.

1. Baseline Case:  All 10 banks have Capital Adequacy over 12%.  No problems with liquidity.
2. Scenario 1(Intermediate):   1 bank has capital less than 8%, 4 between 8% and 12% and 5 over 12%.  Of the Top 5 banks, 3 are in 8 to 12% category and 2 above 12%.  No liquidity problems.  Recapitalization of banks below 12% threshold requires 1% of GDP.
3. Scenario 2 (Severe):  1 medium size bank loses all its capital, 4 banks are below 8% but above 0%, 2 banks in the 8% to 12% range, and 3 banks above 12%.  Of the Top 5 Banks, 3 are in the 0% to 8% range, 1 in the 8% to 12% range, and 1 bank only exceeds 12%.  (Presumably Abu Shukri).  No liquidity problems.  Recap amount here is 3.8% of GDP. 
   

Bank Stress Tests in the GCC?

Bank Run 1933  USA National Archives  (In the Public Domain)

Tom Arnold over at The National reports that "Gulf governments have been urged to follow the EU and introduce stress tests of regional banks’ capacity to withstand financial shocks."

With some not unexpected remarks about the need for "transparency and disclosure"

“Stress tests would be welcomed but critical to their success would be having correct systemic inputs to make sure the assumptions going into stress-testing were sensible,” said Raj Madha, a senior banking analyst at Rasmala Investment Bank.

“We need fuller disclosure for stress testing to be independently verifiable.”

As usual, let's take a closer look.

Before my usual joyous descent into the details, an uncharacteristic exploration of the relevant meta topic. Framed as a question.  Just what do serious minds out there think these tests are designed to do?  If the national banking system is insolvent and unsafe, do they really expect the national regulator to start a bank panic or crater the economy by publicly announcing this?  Exercises like this are designed to reassure markets not disrupt them.  Purpose - as they say - informs practice.

Now to the details.  

There are three key areas in stress tests:

1. The definition of stress
2. The test methodology
3. The interpretation of the results

First and foremost is the definition of the stress.  

As the Grey Lady reported regarding the US stress tests:

But analysts say the administration’s worst projections, which it describes as unlikely, are not much more dire than what many private forecasters already expect.

As the less than politically correct folks over at EurActiv put it about the EU tests:

"Some scenarios that should be included will not be included, at least in what will be publicly revealed, which will be sugar-coated to avoid market panic," according to an informed source close to policymakers.

Putting aside for the moment the goal of the exercise (reassurance), there is a very tricky "technical" problem here.  It is possible to define stress so that no bank passes or all pass.  With a very broad range of outcomes "in between".  

Just what is the right scenario - particularly when it will have policy implications (the need for banks to raise additional capital, for the authorities to "rescue" or shutter banks or some combination thereof) and market reactions (exuberance or panic).  There is no easy answer.  

No doubt regulators weigh carefully the potential implications of their choice of scenarios.  Use of a dire scenario may be taken by the market as the authorities' assessment that that outcome is likely.  And thus  become a self fulfilling prophecy.

Then there is the test process itself.

Given what might be described by some uncharitable souls (but definitely not AA) as "soft ball" downside scenarios, the banks are asked to grade themselves by coming up with projected loan and other losses.   Much better than an "open book" test.  

The banks could I suppose base their answers on the same internal models that served them so well prior to the subprime crisis.  Models whose worth has been tested and proven.  Well, if not exactly proven,  certainly tested!

A much surer method is to send in a team of flinty-eyed no nonsense examiners to each bank and do the work oneself.  An assurance of consistent methodology and standards as well as the opportunity to look closely at individual portfolios.  And strictly confidential.  This methodology is not applicable here as this is really not the purpose of the stress tests. 

Then there is the grading of results.

The "pioneer" of national stress tests after the Subprime or global Financial Crisis (Yes, it's still lower case "g") was of course the USA.   As the Washington Post reported:

"Some major banks managed to wrest concessions from the government in closed-door negotiations over their "stress tests" that helped them put the best face on their results, financial analysts, industry officials and sources said."

As the article notes, various mechanisms for remedying capital deficiencies were concurrent with the announcement.   Recognition of to-be-concluded sales, conversion of rescue "loans" to equity, and on and on.  All announced so that the impact of negative results would be muted.

Prodded by Spain, the EU will be releasing the results of its stress tests.  Unlike the US's tests, these will be "pass/fail"  (no quantification of capital shortfalls).  An innovative adaptation of one of the more remarkable advances in the theory of higher education. 

So, now that we're clear on the process, hopefully there's a bit more understanding of what stress tests for GCC banks would mean.  And more importantly what they would not.   

This takes us full circle back to the introductory calls for  شفافية  in any GCC stress tests.  An apparent sign of some concern about the integrity of the process in the GCC.   It's unclear if that is a relative or absolute judgment on the GCC as compared to the USA or the EU.   In any case, I'm fairly confident that the GCC will be able to match the "developed" world closely enough for it not to affect the purpose of the exercise.

Credibility will be another matter.  Short of declarations of financial Armageddon,  local regulators announcements are likely to be dismissed as less than  كلام  شريف .   Which in itself poses a rather fundamental problem.

And for those who haven't had their fill on this topic, a link to papers at a 2006 IMF Experts Forum on the topic of bank stress tests.

AlBashayer Investment Company - Focused on Women

ABIC will target wealthy women in the Abu Dhabi.

UAE Banks Seek to Change Liquidity Measure - Not A Smart Idea

This sounds like a bad idea.

The fundamenal business of commercial banks is borrowing short and lending long.

If customers suddenly want their deposits back or if interbank money gets hot, it can cause  a world of trouble for an unprepared bank.

So a safety margin needs to be maintained.  

Trusting bankers to do the sensible and prudent thing has been proven false so many times that it should be clear that regulations are required.  On this issue and many others.   And that many times the regulations  will restrict business to prevent bankers from getting themselves into trouble.

What's even more at issue here is that in aggregate UAE banks are already over lent in comparison to core customer deposits.   

Here's Kamco's report with some statistics.  

Also note the very high compound annual growth rate in loan portfolios - a sign of credit distress to come.  Another reason for prudence on this issue.

New IMF Report on "Topography" of GCC Banking System

Available here.

IMF Report: Impact of the Global Financial Crisis on GCC Countries and Challenges Ahead

May Khamis and Abdelhak Senhadji co-ordinated a team comprising Maher Hasan, Francis Kumah,  Ananthakrishnan Prasad, and Gabriel Sensenbrenner to prepare this report - which is well worth a read.

As I've mentioned before (and am likely to do in the future), reports like this are not only interesting "autopsies" but can serve as diagnostic tools for investors and lenders during underwriting stage as well as later during the all important monitoring phase.  The second best thing to knowing whether to get into an investment is knowing when to get out.  Not in the sense of calling the market top, but recognizing when the car is racing towards the brick wall.  Studies like this can provide some useful (and very common sense) warning indicators.

Here's the link to the study.

And here are my comments on early warning indicators.

1. Page 10 - "Non Productive" Sector Lending.  When bank loans are being excessively funneled into construction, real estate and securities purchases, you know that there are problems ahead.   Particularly if this continues for more than a year to two.
2. Page 11 Figure 7 - Excessive Credit Growth.  Growth above the growth in GDP.  Amounts over  12 to 15% per annum for more than a couple years.  Also Figure A3 on page 55.
3. Page 15 Figure 14 - Leverage.  As companies take on more debt, they have less flexibility in a downturn. When the "boom" is caused by lending to non productive sectors, to finance punting in securities, when the downturn comes it's going to be a hard landing.
4. Page 26 Figure 24 - Increased Reliance on Foreign Banks for Financing.  This is a double edged sword.  Usually this financing is denominated in foreign not local currency.  When the downturn comes the borrowers are even more hard pressed to replace or refinance as foreign investors are generally the first to turn tail and run.  With GCC currencies generally pegged to the US Dollar the issue of replacing foreign currency borrowings is less than say it would be in Argentina.
5. Page 55 Figure A4 - High Loan to Deposit Ratios.  A clear sign of a lack of real liquidity in the banking sector and a vulnerability to depositor withdrawal or failure of lenders to provide financing.

And some interesting slides.

1. Page 31 Box 2 highlights the vulnerabilities of neighboring labor exporting countries on declines in the GCC markets as well as potential changes in labor needs.  You'll see that Yemen and Jordan are particularly exposed as remittances are a significant portion of their GDP from remittances - 7%.
2. Page 33 - Kuwait Investment Companies on and off balance sheet assets represent 100% of GDP and 56% of Kuwaiti banks capital.  A rather scary thought given the profound distress in the investment company sector.
3. Pages 49-52 Annex I - GCC Country policy responses.
4. Pages 59-65 Annex II - A rather "optimistic" view of the state of regulation in the GCC.

Commercial Bank of Kuwait 2009 Profits KD0.154 Million

AlQabas reports that the Central Bank of Kuwait has approved Commercial Bank's 2009 financials.  Net profit is reported as being KD154,000 after heavy (but unquantified) additions to provisions.  The Bank reported net profit of KD100.7 million for 2008. 

However, this year earnings have been "subdued" as the Bank has built provisions starting in the Second Quarter.  At 30 September 2009, it reported a net loss of KD1.6 million.   So this is not big news if you've been paying attention.

Group to Make Offer for Kuwait International Bank

AlQabas reports that a local group of investors is ready to make a bid of KD0.500 per share to the major shareholder (BuKhamseen Group) for its 33% share in the bank as a prelude to securing majority control through purchases on the KSE.  The offer is conditioned on obtaining Central Bank of Kuwait approval.

KIB is the old Kuwait Real Estate Bank which now operates as an "Islamic" Bank.  For the past week or so its shares have been trading in a range of KD0.228 to KD0.248 per share.  So the offer represents a substantial premium over the market price.

As reported earlier here and here, there are some potential financial troubles plaguing Mr. Jawad BuKhamseen, who is the owner of the major shareholder.  I wonder if any of the old shareholding group who left after a falling out with Jawad might be staging a comeback?  The investor group is described as being composed of investment companies, manufacturing companies and individual investors.

Here's a link to KIB's page at the KSE.

Banks at DIFC Legally Barred From Charging Assets in UAE

Emirates Business 24/7 reports that banks operating out of the DIFC are legally incapable of taking a charge on collateral to secure their loans because only banks regulated by the Central Bank of the UAE may do so.  Banks within the DIFC are not subject to Central Bank of UAE regulations.  Rather the DFSA regulates them.

Presumably authorities will be keen to encourage lending and therefore will expand the law to allow banks regulated by the DFSA to register/perfect charges on collateral.

As to the second constraint, this is not uncommon.  There are restrictions for example on "Wholesale Banks" in the Kingdom of Bahrain in terms of deposit taking from residents of the Kingdom.

GCC Monetary Union: Meeting to Discuss Unified Banking Regulations and Supervision

Officials from Bahrain, Qatar, Kuwait and Saudi Arabia met in Riyadh today to discuss plans for unified banking regulations and supervision in the GCC states adhering to the Gulf Monetary Union.  At present Oman and the UAE have "excused" themselves from participation in the GMU.

Hopefully this process will lead to a raising of standards and supervision in some countries rather than bringing down the leader in that field to a lower level.

What's Next for Global Banks?

The McKinsey Quarterly claims to have found the answer.  Artilce available here.  Note:  you may have to register with McK to obtain access.

Three words: tough times ahead.

1. More capital needed.  US$600 billion over the next five years for the 25 banks in McK sample - some 40 to 45% of global industry assets.
2. Higher funding costs for long-term funding. McK sees banks lengthening tenors and avoiding shorter term markets which dried up in the Subprime Meltdown thus exacerbating liquidity problems.
3. Tighter regulation.
4. Overall lower ROE's.   
5. Better prospects in Asia.
6. Emerging market giants will outperform developed-market universals.

Two observations.

Like any industry facing regulation, the banks are beside themselves  issuing  jeremiads about the dangers that will be done to the world economy from hasty regulation.  As responsible corporate citizens, they are most decidedly not opposing these measures because they would harm their profits, but rather for the damage that would be done to the world's economies and thus to the innocent average citizen.

McK sees a bright future for Asia.  If McK is focused on the PRC, they may be a bit too optimistic.  There are a lot of unresolved economic issues in the PRC that could affect the health of the banking sector there.  So while they will have pride of place for size, the question is the future of their ROA and ROE metrics.   

For those wondering about the Middle East, I don't think there are any "giants" here.  The largest bank in the ME would be a nice sized regional bank in the USA.

Retail Loan Exposure and NPLs: Emirates NBD Bank

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Almost all of the media coverage of loan problems in the GCC is focused on the commercial market. Scarcely a day goes by without an article on AlGosaibi, Saad, TIBC, Awal, Investment Dar or Dubai World.  It's not just the paid media but also blogs like this.  There's a natural fascination. The story of the average Joe or Abdullah is harder to follow.  The amounts are smaller.  Therefore, the drama seems less.

The major corporates give us exciting amounts with larger than life villains, once proud tycoons now humbled, disconcerted and angry bankers.  The plot lines and therefore the excuses are even more elaborate.  One doesn't excuse a mistake on granting a credit card by recounting the legend of "Big Foot" and the "implicit guarantee".  The BBA doesn't write a letter to the Shaykh to complain that Abdullah is behind on his personal loan.  Sadly, financial journals do not thunder about the irresponsibility of Sanjay in Dubai who skipped a payment or two on his car loan.  Or call on the Shaykh up the road for a bailout.

Yet, all these small loans can add up to one big headache. And the usual pattern of transmission of financial distress is that large commercial firms are hit first with the shockwaves being transmitted to smaller commercial firms and then the public.  

If this pattern repeats itself,  Gulf banks are in for a second wave of NPLs.  What's perhaps more to the point is that since much of the consumer lending in the GCC was done with manifestly weak underwriting standards, this wave may be quite high.  Since I've posted before on this topic, I think I'll just hum the first few bars. You already know this song.

Yesterday again I posted a similar comment.

Today let's look at some data.

60 second summary:   EmiratesNBD's retail NPLs have jumped to 11% of the retail portfolio from approximately half that the year before.

While EmiratesNBD has yet to release its 2009 financials (pending CB UAE approval) it has released a 26 page presentation on 2009.  Though my intent is to focus on retail loans, I will discuss commercial and "Islamic" loans as well to provide a context.

The key pages are 13 and 14.

Slide 13 Asset Quality Loans Receivables and Islamic Financing 

Absolute amounts of NPLs:

1. Aggregate NPLs have increased from AED1.976 billion to AED5.041 billion (155%).
2. Corporate NPLs from AED0.464 billion to AED1.674 billion (261%)
3. Retail NPLs from AED1.305 billion to AED2.685 billion (106%). Note that the retail portfolio is 20% of the corporate portfolio.  Yet, the absolute NPL increase here is larger than the increase in the corporate portfolio NPLs.  That is both a distressing sign and a sign of distress to come.
4. "Islamic" NPLs from AED0.207 billion to AED0.682 billion (229%).

Relative percentages NPLs/Portfolio 2009 and (2008):

1. Corporate 1.3% (0.37%)  This level seems low given the existing level of problems.  I'd guess that 5.0% might be a more realistic absolute minimum for the corporate sector.   And that is likely to be low  unless there are cosmetic "extend and pretend" adjustments or a financial miracle.
2. Retail 11% (5.3%)  - A very large jump.  Admittedly, there is some "noise" here.  During 2009 ENBD made a long overdue switch in definition of a retail NPL from an unrealistic/unbelievable 180 days past due to a more conventional 90 days.  Regardless of how much of the year on year increase is due to the accounting change, the key point is that 11% of the retail loan portfolio is non performing.
3. Islamic 3% (0.94%)

Note 2008 percentages are estimated using 2009 loan data and relative percentages as these do not appear to have materially changed from 2008.  Thus, this should give a rough approximation of the change.

Slide 14 Asset Quality Retail and Corporate Loans and Receivables

Corporate and Sovereigns

1. 96% of exposure is to UAE to "top tier" names with whom the Bank has long standing relationships.  Not sure what that means in terms of creditworthiness measured by the old fashioned yardstick of ability to pay.  I rather doubt that ENBD has a lot of exposure in Abu Dhabi.  Concentrations to obligor groups (Dubai Inc and Dubai Government for example) may be problematical.
2. Loan renegotiations in 2009 did not involve any sacrifice of interest or principal.  Apparently, only extension of payment terms.   Sometimes this is all that is required.   A bit of breathing room for the borrower and then one gets repaid.  Other times it is the first step in "extend and pretend" scenario that turns out less rosy in the end.
3. Real estate "selective financing".  With the existing exposure to Dubai World, this must refer to a  break from past underwriting standards.  Financing  is now restricted to Dubai and Abu Dhabi.  Presumably, with limits suitably scaled for risk.  
4. 55% of the real estate portfolio is due for repayment in next three years.  Given the depressed state of the real estate market, this may not be a particularly robust season for loan repayments.

 Retail Loans

1. Delinquencies are stabilizing across categories and only trending downwards on 33% of portfolio (personal loans).  While it's good they are not increasing, the issue is whether they are stabilizing at high levels.  I suspect this is the case as typically distress in the consumer sector lags that in the corporate sector.  If a business recovery is protracted in Dubai (my  view), then  consumer difficulties are likely to persist and may not yet have hit bottom.  If so, the retail NPLs will continue to increase in absolute and percentage terms.
2. 44% of value of retail loans to UAE nationals and greater than 60% to government employees.  It would be interesting to see the breakdown of NPLs between these categories and "all other" to see if the problem is concentrated in one customer segment.  If government employees (which presumably includes almost all of the nationals) are having financial problems, that would be a sign of very wide distress.
3. The bank is controlling unutilized limits on credit cards.  Not sure I follow this.  Isn't the point of a credit card to have an unused limit?  Is this a reduction in limits not frequently used?  That is,  underutilized limits?  If so, then it would seem the bank is expecting more consumer distress as it is trying to prevent cash strapped consumers from using their credit cards as "last resort" financing.   Though to be fair bankers are usually pretty good at figuring out they should close the corral gate after the horses have bolted.  So it may be a bit of retroactive underwriting - which usually hits largely the good customers.  It would also be interesting to see how many cards were either max-ed out or nearly so.  That could be a sign of more potential bad loans.
4. Like firms who "downsize" instead of 'fire" workers, ENBD has "de-grown" its car loan portfolio.  A good de-offensive move.
5. Mortgages have an average 75% loan to original value.  With the decline real estate prices, it would seem highly likely there are a lot of "under water" mortgages on the books.  Offsetting this ENBD claims that  90% of its customers are "high income"  though I wonder if US$82,000 or thereabouts is really high income in high cost Dubai.  Expect more mortgage problems.

  Other Information

1. Slide 10 with an analysis of the net interest margin.  An 89 basis increase in loan spreads (primarily corporate) and a 25 basis point increase in treasury profits (I'm guessing primarily from loan  benchmark pricing definitions and some gapping) offset partially by an increased cost of funding -  roughly 50 basis points. 
2. Slide 16 with some funding data.  Debt maturity profile: over the next three years the bank has to refinance 79% of its AED24.1 billion debt with 30% due this year.  Offsetting that the bank states it has AED18.5 billion in unused liquidity facilities.
3. Slide 36 has a quarterly review of 2008 and 2009 with asset quality credit metrics. Here you can track the quarterly movements.

There's probably no ultimate credit worry here.  The UAE is not going to let a bank the size or importance of ENBD fail (Oh, did I just glimpse the shadow of an "implicit guarantee"?  Perhaps just an imagined "keepwell").  Probably the major concern is stock performance.  And for term lenders, credit re-rating risk.  It would be unfortunate to prematurely lock in a margin which suddenly becomes too low for the risk.  

Gulf Bank NPLs' Predicted to Soar in 2010

As per Dubai's Khaleej Times, both S&P and UBS are predicting a rough 2010 for Gulf banks due to increased non performing loans ("NPLs").  Kuwait, Bahrain, and the UAE are expected to be the hardest hit with Saudi and Qatar banks enjoying better fortunes.

UBS estimates that currently 12.2% of HSBC UAE's loans and 9.5% of Standard Chartered UAE's loans are non performing.  It also predicts that for UAE banks as a group NPLs will reach 15%  and remain high during the next three or so years.

On the other hand, the CB UAE sees the NPL ratio climbing to 6.4% (up from 4.4%) in 2010.

Clearly, both scenarios can't be right. 

I'm betting on an increase - fueled by the knock on effects of the Dubacle on the corporate sector as well as personal loans.  There is a time bomb in the GCC with the latter.  Banks have been imprudently lending to consumers and allowing them to pile on unsustainable amounts of debt. 

Majid Saif AlGhurair Resigns from RAKBank

Here's the press release.

Anyone who knows why please post.

If you know what "Final Greetings" are, please also post on that.  It sounds rather ominous.  Sort of like a "final warning".

NBAD Requests Cancellation of Approval to Buy Back Shares

 

A rather curious announcement over at the ADX.  The UAE SCA agreed to NBAD's request to cancel its previously granted permission to buy back up to 10% of its shares.

Why is this strange?

NBAD had obtained permission earlier from the SCA to re-purchase its own shares.  The decision whether to purchase shares or not was entirely in NBAD's hands. 

In other words, it needed no official sanction not to purchase it shares.  And therefore did not need to obtain cancellation of the authorization.

As you'll recall, the IMF had expressed some concern about the capital levels of UAE banks.  Also when the government has given you "rescue" capital, it would be a bit ungrateful if you were to buy out your existing shareholders.  I suspect that the Central Bank had a quiet word with NBAD to encourage them to get the cancellation.  In that way the CBUAE does not have to rely on the discretion of NBAD not to repurchase its shares.

Since NBAD is one of the more conservative local banks, if I'm correct other banks with similar permissions may suddenly develop a CBUAE-sparked desire to cancel them.

Central Bank of UAE - Lifts Restrictions on Bonus Share Issue for 2009

 

You' recall earlier that the CB UAE  had imposed restrictions on UAE banks' dividends for 2009, limiting cash dividends to 50% of net profit and script or bonus share dividends to 60%.  The given rationale for the measure being to preserve liquidity and capital within the banking sector.

At that time I posted that the restriction on script dividends seemed strange as the issue of bonus shares actually was a stronger form of capital retention than a mere ban on the payment of cash dividends.  

The neat thing about bonus shares is that a shareholder desiring cash can sell the extra shares and thus receive cash, though in doing so he or she reduces his or her relative percentage ownership in the bank.  No cash leaves the bank because this is a secondary market transaction.  Cash is exchanged between shareholders.  Bonus shares also have a downside:  they dilute future earnings per share.

Apparently, bankers in the UAE "shared" my view and persuaded the CB to rescind its restriction on 2009 bonus share issuance.  Bonus shares up to 100% of 2009 profit may therefore be issued.  The article notes that this restirction on dividends was the first time the CB UAE had intervened in such a fashion.  Also it noted that bankers argued that stock dividends actually strengthened capital.  Shareholders are said to be happy though not as happy as they would have been with bigger cash dividends.

The limit on cash dividends was not lifted or modified.

Some "Islamic" Lenders Didn't Follow the Shari'ah

A  theme you may have heard earlier here is in today's The National (Abu Dhabi).

For those of you don't know, Mohammed Daud Bakar is Malaysian.  A very sharp fellow.  He spoke at a conference I attended once.  And gave a succinct insightful analysis of Islamic banking as well as the differences of opinion between the "Malaysian" and "Gulf" interpretations of which transactions are permitted.

The point of this is not that there is something wrong with Islamic banking.  But rather that bankers can  cut corners while claiming they are following the Shari'ah just like conventional bankers can do the same with whatever code of ethics they claim to be following.  The pursuit of the buck (a form of shirk) affects many.

Saudi Mortgage Law to Allow Foreclosures?

So says Reuters according to  Maktoob Business.

As well a prediction that initial lending forays will be for commercial space - which seems to make sense.

It may be socially a lot easier to foreclose on a shop than on someone's residence. 

Central Bank of Kuwait - Mandates Special Disclosure by Banks on Derivatives

This is a post from over one month ago (November 16 to be precise).  I made a small edit to it today and now it is on today's new posts lists.

About one year ago, Gulf Bank had a major loss arising from foreign currency derivatives undertaken for a customer who refused or was unable to settle.  Market speculation at the time was that the customer may have been a related party.  The loss was KD375 million requiring the recapitalization of the bank, including the Kuwaiti Government taking a 16% stake through KIA.

Today AlQabas reported that  the Central Bank of Kuwait ("CBK") issued instructions to local banks that they were to have their external auditors prepare a special audit report on their dealing in derivatives both for their own as well as customer's accounts. 

As per the press report, the CBK emphasized that the audit work and subsequent report should:

1. Review the sufficiency of the rules/principles of the system of internal control established and followed over this activity and its effectiveness
2. Examine extent of risks the bank might be exposed to, i.e., risk limits
   
3. Disclose the (financial statement) results of the existing position (of derivatives) as of 31 December 2009
4. Contain a statement outlining the development of the sufficiency and effectiveness of internal controls 
5. Compare the above points to the status as of the 31 December 2008 financials

The CBK warned that failure to provide this special report would be treated as a serious matter and would result in delays in the CBK approval of a bank's 2009 annual report.  Apparently the CBK wants to ensure that there are no more unwelcome surprises in the banking sector in 2009.

AlQabas believes that since Gulf Bank's 2008 problem, many local banks have closed their derivative positions or substantially reduced both volumes and riskiness of derivatives traded.

UAE Central Bank Governor Outlines UAE Bank Support Measures

Here is short two page speech in which HE Sultan Bin Nasser AlSuwaidi, the Governor of the Central Bank of the UAE, outlines the various programs undertaken by the UAE Government to support its banking sector.  Note:  This does not include the steps taken by Abu Dhabi to provide financing support to the Emirate of Dubai.

Not mentioned here are other initiatives being taken by the CB UAE, such as changing the non accrual rule from 180 days to 90 days, implementation of Basel II, etc.