Saudi Arabian banks are expected to report a drop in profits due to the huge debt of the region's family-owned businesses.
The net profits of the region's 10 biggest banks are predicted to drop by an average of 19% according to EFG-Hermes Holding SAE, Egypt's largest investment bank. This is due to the restructuring of debts by some of the countries largest family businesses, namely the Saad Group and Ahmad Hamad Algosaibi & Btothers. It is estimated that Saudi banks leant the two conglomerates between $4 billion and $7 billion as stated in a 7 July HSBC report. The two companies are now struggling to repay debts they accumulated from borrowing from over 100 different banks.
The consequences for the Saudi banks are severe: a drop in profits after they were forced to tighten lending rules and increase provisions for bad loans. The loans were made on the strength of the reputation of the two companies and the levels of debt are unknown even to those running these companies. Mohamed Salem Al-Hindi, the non-family senior vice president at Algosaibi, told a Saudi newspaper: "The size of the groups overall debt is until now not known."
The survival of the companies is vital to the economic stability of the region as illustrated today by the Saudi government's move to create a panel specifically to help with the debt restructuring at Algosaibi.
Both the second generation Saad Group and third generation Algosaibi fell into problems in May related to banking issues in Bahrain and a lack of liquidity. Their situations have proceeded to deteriorate when those leading the companies had their bank accounts frozen and both businesses has their ratings removed by Moody's and Standard and Poor's.
For full analysis of the problems experienced by these two Saudi Arabian family businesses see the next issue of Campden FB. Not a subscriber? Click here to subscribe.