Saudi Banks Set to Sell Bad Loans Ahead of Boom in Giga Projects

(Bloomberg) — Saudi Arabia’s lenders are looking at offloading bad loans to prepare for a crucial decade of huge infrastructure investments.

The country’s banks, led by Saudi National Bank, are considering shedding non-performing loans from their books through securitization deals, according to people familiar with the matter. They said the first major sale could come this year, freeing up room for further lending for ambitious development initiatives known as giga projects.

The prospect of such sales, following in the footsteps of similar deals by banks in the United Arab Emirates, may draw more specialist debt funds to set up in the Persian Gulf. They could also help banks to take on a bigger role in funding the region’s efforts to diversify away from oil, with Saudi Arabia’s Vision 2030 project alone requiring around $1 trillion in funding. 

“Banks in the region are very keen to release capital from exposures that have turned sour, and sophisticated investors are looking to pick up those,” said Haris Meyer Hanif, a partner at law firm A&O Shearman, which helps structure such transactions. “In Saudi Arabia, you haven’t really seen a major NPL portfolio deal yet beyond individual exposures being traded, but you’ll see it very soon.”

A spokesperson for Saudi National Bank didn’t respond to a request for comment.

To offload non-performing loans, banks typically package them up into securitized notes and sell them onto investors, usually at a discount to the book value. That frees up management resources, reduces legal costs and ensures the banks comply with regulations on how long they can hold underperforming assets on their books. 

So far there’s been little pressure to do so because Saudi Arabia’s banks have low non-performing loan ratios. The kingdom’s central bank put Saudi NPLs net of provisions to capital at 2.1% at the end of the third quarter last year, or 1.3% of gross loans. There’s also been no active market for distressed debt, while local regulations haven’t been favorable.

A shift would make space for new lending at a time when the nation is powering ahead with a number of hugely expensive projects.

Among these is the creation of a pedestrianized city in the Neom region called The Line. The desert nation is also set to host the Asian Winter Games in 2029 — requiring creating conditions for events such as cross-country skiing — and then the football World Cup in 2034.

“The focus on giga projects has meant that Saudi banks have deployed vast amounts of money into these projects, which is already beginning to affect their capital and liquidity ratios,” said Victoria Mesquita, a partner at Curtis, Mallet-Prevost, Colt & Mosle LLP in Dubai. While loan-to-deposit ratios remain broadly healthy, this is “starting conversations about the tools available for cleaning up balance sheets.”

Regional lenders will play a large part in funding these projects, the people said. It will require a shift on the part of authorities who harbor concerns about how potential foreign investors might deal with local debtors. Many banks still extend loans to local families or prominent figures on the basis of name-lending, a long-standing practice in the region.

“There is a tendency to see an NPL transaction as bad press for the banking system,” said Alan Sheeley, head of civil fraud and asset recovery at law firm Pinsent Masons. “It helps that Abu Dhabi has already sold two books, and there was some nervousness there as well on the global impact. But it turned out extremely well — there was no real impact.”

In the UAE, Abu Dhabi Commercial Bank PJSC sold $1.1 billion of bad debt to Davidson Kempner Capital Management in 2023, and then a $357 million NPL portfolio to Grant Thornton’s specialty fund. This year First Abu Dhabi Bank PJSC sold a portfolio of soured loans worth around $800 million to Deutsche Bank AG. 

While the Gulf is enjoying a period of economic strength now, most banks are still grappling with legacy assets related to the booms-and-busts that have been prevalent in the region in the past two decades.

“As interest rates come down and with greater economic uncertainty there will be more focus on the banks to reduce their NPL ratios,” said Nick Wood and Prashan Patel, partners in Grant Thornton’s insolvency and asset recovery team. “We are expecting more portfolios to come on the market over the next 12 months.”

Still, selling bad loans will only be one part of the funding effort for giga projects, given their scale. Saudi banks could need to issue at least $16 billion a year in new debt through 2030 to support the kingdom’s investments, according to Bloomberg Intelligence analyst Edmond Christou.

Regulatory authorities in the region have been keen for banks to tackle underperforming books and to make the banking system more efficient, experts say. There still remain a number of obstacles, such as the lack of comparable data to price transactions adequately. 

These issues are not expected to stop the pace of bad debt deals picking up.

“We anticipate further NPL sales from banks in the UAE, and we also find the growing opportunity set in the KSA exciting,” said Naveen Sabharwal, a managing director at Davidson Kempner who acquired Abu Dhabi Commercial Bank’s first material NPL portfolio. “We would expect to see the first KSA NPL sale in 2025,” he added, pointing to the Kingdom of Saudi Arabia’s larger economy and banking sector.

–With assistance from Matthew Martin.

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