Saudi banks to sell non-performing loans ahead of GIGA project boom

(Bloomberg) – Saudi Arabia’s lenders are considering unloading bad loans in preparation for a huge infrastructure investment that is vital to a decade.

According to people familiar with the matter, banks in the country, led by Saudi National Bank, are considering saving bad loans from books through securitization transactions. They say this year could be the first major sale, providing further loan space for the ambitious development program, called Giga Projects.

After similar transactions by the Bank of the United Arab Emirates, the prospect of such sales could attract more professional debt funds to be established in the Persian Gulf. They can also help banks play a bigger role in funding the region’s efforts to diversify from oil, with Saudi Arabia alone requiring about $1 trillion in funding.

“Banks in the region are very keen to release funds from the sour exposure, and advanced investors are looking to receive those funds,” said Haris Meyer Hanif, partner at law firm A&O Shearman. “In Saudi Arabia, you haven’t really seen NPL major portfolio deals, but you’ll see it soon in addition to personal exposure.”

A spokesperson for the Saudi National Bank did not respond to a request for comment.

To unload bad loans, banks usually package them into securitized notes and sell them to investors, usually discounted at book value. This can free up management resources, reduce legal costs, and ensure banks comply with regulations on how long they can hold underperforming assets on books.

So far, the pressure to do so is small, as Saudi Arabia’s banks have lower loan ratios. At the end of the third quarter of last year, the Kingdom Central Bank set the net capital rating of Saudi Arabia’s national province at 2.1%, accounting for 1.3% of gross loans. There is no positive market for debt owed, and local regulations are not favorable.

The transformation will provide space for new loans before many very expensive projects are underway in the country.

This includes the creation of a pedestrian city called The Line in the Neom area. The desert country will also host the Asian Winter Olympics in 2029, which will need to create conditions for cross-country skiing and other activities, and then the Football World Cup will be held in 2034.

“The focus on GIGA projects means that Saudi banks have deployed large amounts of funds into these projects, which has begun to affect their capital and liquidity ratios,” said Victoria Mesquita, partner at Mallet-Prevost, Colt & Mosle LLP. While the loan-to-exclusion ratio is still healthy, it is “the beginning conversation about the tools to clean up the balance sheet.”

Regional lenders will play a major role in funding these projects, people say. Authorities will need to change, and they are concerned about how foreign investors deal with local debtors. Many banks will still extend loans to local families or outstanding people under the name loan, which is a long-term business in the region.

“There is a trend to see NPL transactions as a bad pressure on the banking system,” said Alan Sheeley, head of civil fraud and asset recovery at law firm Pinsent Masons. “Abu Dhabi has sold two books, and that’s a bit nervous about the global impact. But it turns out to be very good – there’s no real impact.”

In the UAE, Abu Dhabi commercial bank PJSC sold $1.1 billion in bad debt to Davidson Kempner Capital Management in 2023, followed by a $357 million NPL portfolio to grant Thornton’s professional fund. This year, Abu Dhabi Bank PJSC first sold an acid loan worth about $800 million to Deutsche Bank AG.

Although the Gulf is now enjoying its economic strength, most banks are still struggling to deal with traditional assets associated with prosperity and obstacles that have been widespread over the past two decades.

“As interest rates fall and with greater economic uncertainty, more attention will be paid to banks to lower their NPL ratios,” said Nick Wood and Prashan Patel, partners at Grant Thornton’s bankruptcy and asset recovery team. “We expect more portfolios to launch markets over the next 12 months.”

Nevertheless, given their size, the sale of non-performing loans will be only part of the funding efforts of the GIGA project. Bloomberg intelligence analyst Edmond Christou said Saudi banks may need to issue at least $16 billion in new debt each year to support the country’s investment.

Experts say regulators in the region have been keen on banks to cope with underperforming books and improve the efficiency of the banking system. There are still many obstacles, such as the lack of comparable data to price trading.

These issues are not expected to stop the pace of bad debt transactions.

“We expect UAE banks to further sell NPL sales and we also see growing opportunities,” said Naveen Sabharwal, managing director of Davidson Kempner. He added: “We hope to see the first KSA NPL sales in 2025.”

– Assistance with Matthew Martin.

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