• Jabal Omar misses repayment on government loan In its recent filing results with the exchange, Jabal Omar Development Company, a Mekkah-based real estate developer, stated that on 1 January 2016, it missed a debt repayment of SAR650m on a government loan of SAR3.0bn. It also stated in its press release that its sustainability depended on finding ways to repay short-term debts. The company has a SAR900m loan facility, of which SAR751m remains unutilised. While asset quality stress is largely reflected in the current sector low valuations – most of the Saudi bank stocks trade at or near book value – we believe that negative news flow on asset quality is likely to remain an overhang on the potential for valuation re-rating in the near term. BSF and Samba remain our top sector picks.
• Snapshot of Jabal Omar’s loan split As per 4Q2015 published accounts, the company has outstanding long-term loans of SAR7.4bn of which SAR2.4bn are government loans. Also, it has short-term loans of SAR1.3bn. According to company disclosures on Zawya, Jabal Omar signed a SAR4.0bn loan facility with NCB in Feb 2015. Later in the year, it received a facility of SAR2.0bn from SABB and Samba, which has not been completely utilised. It also signed a SAR8.0bn loan facility with SABB and Samba to refinance its existing loans; however, this facility also remains unutilised as of 4Q2015. The SAR900m short-term loan was recently signed with NCB.
• Is this a red flag for asset quality? Not surprisingly, the first issue has cropped up in the real estate and contracting segment, where most general concerns on asset quality are. However, it is early to suggest that this will develop in to a full blown asset quality problem for the banking sector. We have been hearing a consistent message across the sector of “working with well-established clients to support them through a difficult phase” and expect loan restructuring to be the likely initial route in most cases. We expect loan restructuring momentum to pick up strongly over 2016, as banks support companies with strong business models, but who are faced with short-term cash flow issues. Of particular concern are businesses that are either linked to global commodity prices or largely dependent on government spending.

Murad Ansari