Jabal Omar misses repayment on government loan. In a release to the exchange of its annual results, Jabal Omar, a Mekkah-based real estate developer, announced that on 1 January 2016 it missed a debt repayment of SAR650 million on a SAR3.0 billion government loan.   Split of Jabal Omar’s loans: As of 4Q2015, following are Jabal Omar major loan facilities:   SAR3.0 billion from the government, of which SAR650 million is classified as current. The loan is to be repaid in six annual installments starting from 1 January 2016 SAR4.0 billion bank loan (February 2015), used to refinance an earlier loan. The loan has a grace period of three years, and to be repaid over 12 years, with first payment due in September 2017 SAR2.0 billion three year bank loan facility (September 2015), of which only SAR728 million has been drawn down as per 2015 accounts SAR0.9 billion short term bank loan facility, which has not been completely utilised as yet SAR8.0 billion term approved bank loan facility to be used to refinance existing loans, but not utilised as of end of 2015   Which are the major bankers to Jabal Omar? According to company disclosures on Zawya, Jabal Omar signed a loan agreement of SAR4.0 billion with National Commercial Bank in Feb 2015 and SAR2.0 billion with SABB and Samba in May 2015. Later in the year, the company signed an agreement for an SAR8.0 billion 12-year loan facility with SABB and Samba, to refinance its loans. In addition, the company also signed a short term loan facility of SAR900 million with National Commercial Bank.   Impact – What to expect? Not surprisingly, the first issue has cropped up in the real estate and contracting segment, where most of the 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 the 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. However, we also believe that for some companies, leverage levels could be quite high. Of particular concern are businesses that are either linked to global commodity prices or those that had business largely dependent on government spending.   Stay defensive; BSF, Samba are our top picks. We continue to prefer a defensive stance on the sector. We are of the view that the asset quality cycle is likely to be prolonged should the economic environment remain weak. While the asset quality stress is largely reflected in current low valuations – most of the 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 of valuation multiple expansion in the near term. We continue to prefer BSF and Samba in the sector. (Murad Ansari) Samba Financial Group: SAR20.10 as of 01 February 2016, Rating: Buy, FV: SAR26.50 per share, MCap: USD10,720 million, SAMBA AB / 1090.SE Saudi British Bank: SAR21.90 as of 01 February 2016, Rating: Buy, FV: SAR33.00 per share, MCap: USD8,760 million, SABB AB / 1060.SE Banque Saudi Fransi: SAR25.00 as of 01 February 2016, Rating: Buy, FV: SAR34.00 per share, MCap: USD8,036 million, BSFR AB / 1050.SE