More on Retail Banking Distress - Saudi Youth and Credit Cards

A rather short article from AlQabas relaying a recent survey among Saudi youth.

1. 52% are suffering from debt caused by the improper use of credit cards.
2. Two thirds expressed concerns about the rising cost of living, the housing shortage, decline in salaries, and the increase in unemployment.

Credit cards are a particularly insidious form of debt.  The interest charges are relatively high. As a result it's quite easy to get into a debt trap - where the debt keeps increasing even if one makes the minimum monthly payment.

Banks are not always responsible in the underwriting stage - cards are often given to those who shouldn't have them.  Where there is no central credit bureau, the bank is essentially lending "blind" as it doesn't know the customer's credit history (payments) nor does it know how much credit outstanding the customer has.  

And credit monitoring and management is absolutely woeful.  I know a customer of one regional financial institution - the winner of more than one award for excellence in banking who restructured a client's credit card debt to a five year personal loan. One month after the negotiations concluded the chap got a letter from the credit card division of that same bank thanking him for "paying off" his balance and offering him a new credit card with a higher limit!  This after they had spent the previous six months writing him letters threatening legal action and all sort of woeful consequences if he didn't pay his bill.   Somehow when his balance was transferred from the credit card division to the personal loan division it registered as a "payoff". 

HSBC Middle East Business

A while back the press reported on the decline in HSBC's Middle East earnings from US$1.7 billion to US$0.5 billion. I didn't see a detailed analysis. So a closer look today – with some focus  on retail in line with the earlier post on Emirates NBD.

So you can follow along here are links to HSBC's 2009 Annual Report and their 2009 Investor & Analyst Presentation. The annual report is a slim 504 page "puppy". You'll find the numerical analysis of ME business on pages 116 and following. I've also indicated sources for the major data. All amounts are in US$ millions.

First a geographical context. Just where is HSBC's ME business concentrated?

Let's look at net income allocated by geography. (Page 117 from Annual Report)

Country	2007	2008	2009
Egypt	$   153	$   223	$ 224
UAE	$   617	$   861	$   (3)
Other	$   300	$   367	$   41
Share of Saudi British Bank	$   237	$   295	$ 193
TOTAL	$1,307	$1,746	$ 455

 

1. The important of the UAE to HSBC's ME business is clear, though it should be noted that ME business is a relatively small part of HSBC's franchise. In the range of a rounding error compared to other geographic regions. 
2. As a general comment, HSBC's main lines of business across the ME (in order of income contribution) are Global Banking and Markets, then Commercial Banking and then Personal Financial Services ("Retail"). 
3. In 2007 and 2008 the UAE represented almost 50% of net income in the ME.
   

Now the asset side of the ledger – loans and advances only as FYE 2009. (Page 212 from the Annual Report).

	Egypt	UAE	Other	Total
Residential Mortgages	$       0	$  1,693	$   248	$  1,941
Other Personal	$   275	$  3,748	$1,560	$  5,583
Property Related	$   125	$  2,118	$   775	$  3,018
Commercial, International Trade & Other	$2,106	$10,214	$4,847	$17,167
TOTAL	$2,506	$17,773	$7,430	$27,709

 

1. HSBC's share of Saudi British Bank (reflected in the income data above) is not reported here. 
2. The Bank has significant US$ exposure in each of the product lines, particularly in the UAE. 
3. Equally, it's clear that the UAE business drives the Bank's ME franchise. 
4. The UAE is 64% of the loan book. 77% of real estate related lending. 67% of Personal Loans. 59% of Commercial and International Loans.
   

 Third, a sectoral breakdown by net income. What are the contributions of various lines of business? (Page 117 from Annual Report)

Line of Business	2007	2008	2009
Personal Financial Services	$   245	$   289	$(126)
Commercial Banking	$   482	$   558	$   21
Global Banking & Markets	$   495	$   816	$ 467
Private Banking	$       3	$       4	$      6
Other	$     82	$     79	$   87
TOTAL	$1,307	$1,746	$ 455

 

1. The Global Banking & Markets segment are large corporate and sovereigns. I expect that the Dubai Inc exposure is within this segment.

Now breakdown of business in the UAE using net income. (Page 117 Annual Report)

Line of Business	2007	2008	2009
Personal Financial Services	$ 108	$ 133	$(177)
Commercial Banking	$ 262	$ 330	$(136)
Global Banking & Markets	$ 242	$ 388	$ 307
Private Banking	$     3	$    4	$    (2)
Other	$     2	$     6	$     5
TOTAL	$ 617	$ 861	$    (3)

 

1. Global Banking & Markets plays a key role with Commercial Banking next and then Retail. 
2. Both Retail and Commercial Banking have taken some rather dramatic hits – some US$776 million in reversal from 2008 levels. 
3. The Bank has yet to take any sizeable provisions for its GB&M business. I suspect that it is just a matter of time before this shoe drops.

And now loan impairment and provisions in the ME by line of business. (Pages 122-124 Annual Report)

Line of Business	2007	2008	2009
Personal Financial Services	$  66	$ 223	$   588
Commercial Banking	$(11)	$   45	$   573
Global Banking & Markets	$    0	$   12	$   173
Private Banking	$    0	$     0	$       0
Other	$    0	$    (1)	$       0
Inter Segment Eliminations	$    0	$     0	$       0
TOTAL	$ 55	$ 279	$1,334

 

1. Here a negative number is "good". It is a "de-expense" in the words of Emirates-NBD. 
2. HSBC doesn't provide a further breakdown of these lines of business by country. Or at least I didn't find them. So we have to work with ME wide figures. Thus, the analysis below probably understates the situation in the UAE as most of the loan problems are centered there. 
3. Over the three year period, we can see the distress building. 
4. Loan Impairment Charges ("LIC") to Gross Operating Income (before LIC and operating expenses) ("GOI") may be useful metric to quantify the extent of the distress. 
5. For Retail Banking that ratio was 9.6% for 2007. In 2008 23.2%. And in 2009 62%. I'd note that in the latter two years GOI was roughly the same so it's not a case of the numerator shrinking. 
6. For Commercial Banking, there was a net recovery in 2007. In 2008 5.5%. In 2009 72%. For GB&M, in 2007 0%. In 2008 1.4%. In 2009 21%. 
7. Let's take a purely "balance sheet" look at this same issue. On Page 211 we see that in 2009 of all HSBC's 7 geographic regions, the ME has the highest percentage of impaired loans at 6.8%, 0.8% more than the USA where HSBC is still struggling with the impact of Household Finance. What a change from 2008 where the ME had a 1.0% ratio and was tied for fifth place! 
8. One final place to look and that's charge offs. A provision is an amount added to a reserve (or as HSBC calls it an "allowance"). Provisions pass through the income statement as an expense.  The provisions are then added to the reserve/allowance account.  This account serves as a "contra" to the loan account and is subtracted from it. When a loan is deemed to be uncollectable either in part or in full, the uncollectable amount is charged off. This transaction does not pass through the income statement but is offset against the loans account  and the contra account. 
9. In 2009, HSBC charged off US$384 million of loans. Of this amount US$376 million was for Personal non mortgage loans. By contrast in 2008, the Bank charged off US$164 million of which US$153 million was for Personal non mortgage loans. The year to year increase on Personal non mortgage loans is 146%.
   

Central Bank of Kuwait Worried About Possible Ratings Downgrade

According to AlQabas it has learned from  high level banking sources that at a meeting held 3 days ago with chief executives and general managers of local banks, Yusuf AlAbid, Head of Banking Supervision, expressed concerns that the rating agencies might downgrade some Kuwaiti financial institutions as they had done in the UAE.

He anticipated that this would not be done for new reasons, but because of the operational situation the banks in Kuwait faced.  A particular note was sounded about the banks' loan problems with investment companies.

While this isn't stated in the article, I wonder if these concerns could lead the CBK and other relevant authorities to push the TID through the FSL.  With the conclusion of GIH's restructuring, TID is highly visible.  The amount is large.  Its restructuring is still hanging.  There's unfortunate publicity - the BLOM case for one.   Lack of progress may cause the rating agencies  to "mark down" ultimate recovery and  reflect that lower value in their rating of individual lenders. From a country reputation management perspective, it is probably ideal to move this case to "implementation".    Declare it is a success. If there is  a problem it's likely to be a year or so down the road,  And for that period, TID won't be a drag on the banks or the country.

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.

The Investment Dar - Formally Requests Financial Stability Law Protection

Citing "sources close to the Creditors' Coordinating Committee", AlQabas reports that TID informed the Committee that its Board met two days ago and unanimously agreed to seek legal protection for its restructuring plan under Kuwait's Financial Stability Law.  The Company has submitted an official request to the concerned authorities.  A response is expected in approximately 14 days.

TID is holding creditor meetings in London to sweep up the banks that did not attend its Kuwait or Dubai briefings - mostly European banks.

TID will be the first investment company to avail itself of the "Chapter 11-like" provisions of the FSL.  If accepted, the company will be able to cram down the dissenting creditors who have frustrated its attempt to implement the restructuring.

Still apparently unresolved are TID's 2008 audited financials.  I expect not having these done might complicate matters under the FSL.

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.

Dubai World to Meet With Local Creditors - No or Low Interest Repayment Option?

The National reports that DW is planning meetings with local creditors - Abu Dhabi Commercial Bank and Emirates National Bank.  These meetings follow ones held earlier this week in London with "international" banks.

The goal of this series of meetings is probably twofold.

First to test some restructuring ideas with these major banks to get feedback.   Second as a way of managing the process - trying to influence future negotiations by framing the bankers' expectations.  

One of the options that apparently is being considered is a low or no interest repayment of 100% of the principal over some extended period.

Let's look at some examples to see what sort of discounts one can achieve through this device.

1. A bullet repayment 10 years from now of 100% of principal equals a present value of 61% of face at a 5% annual discount rate.  Changing just the repayment to 5 years from now raises the present value to 78%.
2. Using the same two scenarios above but applying a 10% discount rate, the 10 year bullet has a present value of 39% of face and the 5 year bullet is worth 62%.
3. Amortizing the loan in 5 equal yearly installments gives present value of 87% at 5% and 76% at 10%.
4. If there is unequal amortization of 0%, 10%, 15%, 25%, and 50%, then the present value of at 5% discount rate is 82% and 68% with a 10% discount rate.

What's the bottom line?  One can achieve quite a hefty "haircut" through this tool.

The Nation suggests that banks might want the zero interest or low interest option as a way of avoiding taking the "hit" to income up front.  I think it is highly likely that any reputable accounting firm is going to let a client who uses IFRS as the basis for financial reporting "get away" with carrying the loan at its nominal value.  This is clearly a restructured loan. 

The relevant Chapter and Verse are IAS #39 Paragraphs 58 and 59 which deal with impairments in value.  Haircuts, no interest or below market interest rates,  tenor extensions, other concessions that a lender would not normally agree to along with several other items are cited as evidence of  potential "impairment" in Paragraph 59.  

Paragraphs 63-65 deal with calculating impairments for assets held "at cost".   Present value the projected cash flows at the original interest rate on the instrument.  Any shortfall between original cost and present value is an impairment loss which must be taken immediately to the income statement.

Paragraph 66 deals with impairments on assets "held as available for sale".  There the discount rate is the "market" rate for that asset at present. Since this is an impairment not a fair value adjustment, it also goes through the income statement.

Bend it Like Bendtner 5-0!

Thanks lads.

Good luck ladies.

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.

The Investment Dar - Local Banks Reportedly "Comfortable" with Use of Financial Stability Law

Quoting unnamed banking "sources" AlQabas reports that local banks seem to be comfortable with TID using the Financial Stability Law as a tool to implement the restructuring.  As you're aware, while TID has advised that it has all the necessary legal documents ready, it has not sought to implement the restructuring because dissenting creditors are still pursuing the company in court.  The FSL contains a cramdown mechanism and so this would be a way to remove the legal weapon from their hands.

Two other points in the article worthy of note - perhaps much more worthy of note than the first for the implications they carry.

1. Morgan Stanley (advisor to the Creditors Committee) reportedly has two studies - an optimistic and a pessimistic one.  Under the former the banks recover 100% of their dues.  Under the latter 78%.  AA:  This is perplexing because in such a case it would make absolutely no economic sense for a creditor to sue.  Are the facts being fixed around the FSL requirements?  What's also clear here is that when the restructuring is over, TID which has pledged all its assets to the restructuring is going to left as little more than two guys, one desk and maybe a prepaid phone.
2. The sources also did not hide their concerns (literally fears) as to how the FSL might be applied to TID.  This would be the first use of the law.  AA:  I've posted some thoughts on possible issues.  One major stumbling block remains the company's 2008 audited financials and the Central Bank of Kuwait's apparent insistence on what would seem to be from the debate between CBK and TID to be rather substantial provisions and write-downs.

It's pretty clear that creditors (or at least 80% of them) are eager to close this file by implementing the restructuring.  Perhaps, the authorities in Kuwait are also interested in removing this case from the newspapers.  If there is a will, a way can be found.

Earlier posts can be accessed using the label "The Investment Dar".  My thoughts on the FSL are here and applicability to TID here.

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.  

Aldar AED 9.1 Billion Sale of Yas Island Assets = Bailout

In its press release on 2009 performance, Aldar noted it had sold some infrastructure and land assets on Yas Island.  Apparently, as the sale was for only a small amount no further details were felt  necessary.  

A week later when it released its 2009 financial report, Aldar noted the sale had been to the Government of Abu Dhabi for AED9.138 billion (US$2.49 billion).  At that point Aldar did not provide any discussion of the profit on the transaction.  Either they spell الشفافية with a capital ش   in Abu Dhabi.   Or the company and the Government were still figuring how to structure the sale.

Today Aldar responded to a letter from the Abu Dhabi Stock Exchange to advise that the sale had been at cost.

Clearly, the Government of Abu Dhabi is bailing out Aldar - either with some additional cash or loan forgiveness.  It appears we'll have to wait for the release of Aldar's 1Q10 financials or the ADX to send another letter to the company to learn how the bailout was structured.

Yas Island website here. 

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. 

Kuwaiti Banks to Provision 100% for Saad and AlGosaibi?

AlQabas quotes unnamed banking sources that banks and financial firms have decided to increase provisions against their exposure to Saad and AlGosaibi to 100% in light of the fact that the condition of  the two Groups as not reassuring regarding the possibility of collection of the amounts due.  And that some banks have already received verbal instructions to do so.  (Presumably from the Central Bank, though this is not stated in the article).

One local bank pursuing Saad in court is said to have been surprised by the violent, confrontational and fierce tactics used by Saad to resist which means that the legal battle will be long.  In such circumstances it's not possible to leave the balances open or uncovered.  (This may be AlAhli Bank which was identified earlier as pursuing a court case against Saad in New York).

A banking source  (note now singular) is quoted as being pessimistic about recovery stating that the two factors of time and expenses to wage the protracted legal battle probably mean a net recovery of 20% to 25%.  (It's unclear if the recovery  amount includes interest or is just the principal.  And whether the calculation is face value or present value.  In any case it's small.)

The Investment Dar - Text of Press Release From Creditors' Meeting

 

Here's the text of TID's press release on Nasdaq Dubai of its meeting with its Sukuk certificate holders in Kuwait yesterday.

Pretty much what the press already reported and which I have already commented on. 

Here's also the press release TID published at the KSE.

[14:5:54]  ِ.تطورات خطة اعادة الهيكلة المالية لشركة دار الاستثمار ‏

يعلن سوق الكويت للاوراق المالية بانه ورد اليه الان من شركة دار الاستثمار ‏

بان الشركة واللجنة التنسيقية التي تمثل البنوك والمستثمرين قد عقدتا اجتماع

مع البنوك والمستثمرين للوقوف حول اخر التطورات فى اجراءات خطة اعادة ‏

الهيكلة والانجازات التي تم تحقيقها والتي تضمنت تجهيز المستندات والهيكل ‏

القانوني وكيفية تطبيق خطة اعادة الهيكلة للشركة .‏

وقد ناقشت الشركة واللجنة التنسيقية مع البنوك والمستثمرين خيار الدخول ‏

فى قانون الاستقرار المالي وذلك فى سبيل تطبيق اعادة الهيكلة المتفق عليها ‏

من قبل ما يزيد عن 80% من بنوك ومستثمري الشركة .‏

وقد تمت الموافقة على خطة اعادة الهيكلة من قبل غالبية البنوك والمستثمرين ‏

ما عدا عدد قليل يرفض الدخول فى الخطة مع العلم بان تطبيق الخطة يضمن ‏

استيفاء جميع المستحقات المالية لجميع البنوك والمستثمرين .ان قانون ‏

الاستقرار المالي يوفر الضمانات القانونية التي تسعى لها شركة دار الاستثمار

واللجنة التنسيقية فى سبيل تطبيق الخطة المتفق عليها.‏

ان خيار انضمام الشركة الى قانون الاستقرار المالي بعد الموافقة عليه من قبل

مجلس ادارة الشركة لن يؤثر على الوضع القانوني والتشغيلي للشركة من ناحية ‏

النشاط التجاري ،باعتبارها شركة استثمارية ذو محفظة تضم اصول تشغيلية ‏

ذات قيمة مضافة تعمل فى مختلف القطاعات والاسواق.‏

And what they published on their website.  You'll note here they state everything is ready to go - all the legal documents prepared - but not having all the creditors on board is frustrating implementation of the restructuring.

Gulf Finance House - Text of S&P Rating Increase to CCC-/C

 

GFH published the text of S&P's recent upgrade in its ratings today at the BSE - a scant five days after it was issued.

Apparently, it has not yet found the time to update its ratings page on its website which still shows its ratings as of 25 November 2009.  But I suppose one shouldn't demand that it update its webpage on some sort of draconian rush schedule.

The Investment Dar and the Financial Stability Law - What's Involved?

 

TID has been unable to secure the acceptance by 100% of its creditors to its restructuring plan.  A sufficient number of these creditors have launched or plan to launch legal actions.  Since these actions could derail the restructuring, TID has recently indicated that it is considering resorting to the cramdown procedures available in Kuwait's Financial Stability Law to stop this legal threat.

Let's run through the pertinent bits of the FSL.

1. TID has stated it does not require any new financing so it will focus on the legal protections afforded under the FSL.  That's probably a good thing because I rather doubt that Kuwaiti banks would rush to lend TID more money even with a 50% Kuwaiti Government shortfall guarantee. 
2. The basic condition for the cramdown procedure is that the investment company have sufficient capital, be able to continue its business and meet its obligations.  The FSL is not to be used as a cover for winding-up companies.  TID would then be subject to a study of its viability.  The question is can it pass?  My recollection of earlier accounts of the restructuring is that the restructuring seemed to be pretty much a disguised windup.  All the assets were being pledged to the lenders and all of them would have to be sold in order to have the possibility of 100% repayment.  That probably explains why 20% of creditors have chosen not to get on to the restructuring "boat" but are pursuing their claims in court.
3. The FSL requires that that study be performed by a specialist company.  To determine if it is viable and as well to provide the basis on which to found an appropriate restructuring plan.   Will the Court take the existing analysis on TID and the "agreed" restructuring plan with no need for a  new study?  Or will it require another study of TID's financial standing and viability?  Note that as per the Implementing Regulations Article 43 this study is the same as if TID were applying for financing under the FSL (Implementing Regulations Article 23).  If a new study is undertaken, could this reopen the terms of the restructuring deal?
4. And here the issue of TID's 2008 audited financials could be critical.  As of yet, the Central Bank of Kuwait has not yet given its approval.  All the press reports I've seen indicate that sticking point is asset valuation - with the CBK pressing TID to take some significant writedowns or provisions.  These must be quite major because the parties have been arguing over them since late last summer (by my calculation).  It's hard to see the FSL process going forward without audited financials.  They are for the "magic" date of 31 December 2008.   If the CBK mandated write offs are severe as they appear to be,  then TID may be on the borderline between solvency and insolvency.  And recall the test is not just solvency but capital adequacy.
5. Under the FSL, the CBK must appoint or approve the specialist who undertakes this study.  Will the CBK approve the creditors' or the company's consultants?  The choice could be material in determining whether TID "passes" or "fails" the viability test.  Earlier press reports said that there was a rather wide value in assessment of repayment with the company's consultants very optimistic and the creditors' consultants predicting a significant shortfall.  No doubt one reason why some creditors are pursuing repayment through the courts.  One potential solution would be to throw both studies out and come up with a new one.
6. But, if a new consultant is engaged, there is a "danger" that it could come up with its own restructuring plan.  One that might have terms not to the liking of one or both parties.  For example, an extended repayment tenor.  A debt to equity conversion.  A haircut.  And even if no such dire things occur, TID and its creditors may be looking at four+ more months of waiting.
7. As part of the process, the Central Bank of Kuwait must provide its own report on the restructuring plan to the Court.  Presumably, its statement would be critical.  If it opposed the restructuring, that would likely greatly lessen the Court's probability of approving the deal.  If it supported the restructuring, that would be a powerful argument for the Court to approve.  This process also apparently gives the CBK the opportunity to comment on the plan itself.  To suggest helpful amendments or new points.
8. Assuming the plan is approved by the Court and then implemented, the CBK becomes the monitor of adherence.  That could prove a double edged sword as in the discharge of these duties, the CBK make a decision one or both parties might not like.  
9. Finally, as per the Law, if the agreement is implemented by the Court and TID subsequently breaches  it, the CBK can ask the Court to abrogate the restructuring, thus re-instating creditors' rights to sue under their old contracts.  With a deal outside the FSL, there might be more scope for "forgiveness" by the banks over borrower transgressions under the agreement.

Of course, there is an old financial principal at play that can trump all of the above.  Where there is a will there is a way.  Or to paraphrase a canny Scot, facts are sometimes fixed around the policy.  AA has seen this done more than once during his career.  Sometimes as an observer.  Sometimes as one of the "repairmen" who helped "fix" something.

Dubai World Rescheduling - Draft Restructuring Plan to Be Presented?

 

Two reports out.

Maktoob quoting a Reuters story quoting unnamed bankers states:

1. DW will put forth an initial proposal to creditors as early as this week, but problems valuing Nakheel are delaying finalization of the Plan.  AA:  That probably means the values at Nakheel are much less than anticipated.  And does one use current depressed values?  Or assume that these will increase over some time period?
2. "what's being offered will not be as bad as feared"  AA:  Perhaps a good negotiating strategy.  If banks are worried about a 40% haircut a 20% haircut might sound "good".

The Financial Times has another take also from unnamed bankers - presumably a different lot that Reuters spoke to:

1. Meetings with major creditors in London starting this week.
2. Initial outline plan to be offered.  Two options.  Bigger haircut and shorter tenor.  Smaller haircut and longer tenor.  Some injection of new funds.
3. Potential for split among creditors as different groups may wish to see any new funds or concessions focused on those members of the DW Group with most impact on them.  By way of example, the article mentions local banks possibly preferring support being directed to Nakheel and Limitless given exposure of other local bank clients to these two entities.

This is a key issue.  As I posted earlier, often the most contentious debates and negotiations in a restructuring take place among the creditors.   The problem for DW is that if the creditors get hung up among themselves, DW suffers as well.  And the Emirate.

The Investment Dar To Enter Financial Stability Law Process

 

Two articles on TID and the FSL process.

The first from The National and the second from AlQabas.   Both seem to be largely constructed around TID talking points.

1. The Central Bank of Kuwait is "resisting" approving TID's 2008 financial statements.  AA:  Or from another perspective TID is resisting providing the CBK with financials satisfactory to it.  I find it hard to imagine that the CBK is capriciously refusing to approve TID's financials.
2. A "small minority" of creditors are frustrating TID's attempts to implement its restructuring plan which will result in a 100% repayment to all creditors.  AA:  Either TID is plagued with creditors who can't recognize a really great deal when it's offered to them.  Or some creditors don't think they're going to get paid back and are willing to take their chances in court.  When one considers the amount of money a typical court case of this sort costs, one might get an idea of the extent of these banks' (a) recalcitrance and pig headedness or  (b) assumption about the eventual repayment under the restructuring.
3. The recalcitrant group is described as a "small minority".  AA:  From where AA sits 20% is a significant minority of creditors.  A small minority would be perhaps 5% or so.
4. TID is considering availing itself of the Financial Stability Law.  It doesn't need any financial help from the government and would use the FSL merely to cram down these pesky recalcitrant creditors.

It's pretty clear from the tone of TID's comments relayed in these two articles that indeed the wheels have come off the restructuring deal or perhaps more precisely never were on the deal.  You'll recall the one that TID said had achieved sufficient creditor acceptance to go forward.