I have done my share of Dubai bashing last year. When financial companies were crashing world over, Dubai was trying to hold its own by false proclamations from none other than ruler of Dubai and false reports by investment banks which were keen to remain in good books of Dubai authorities. Some people are just delusional assuming that if they close their eyes, the danger would just fade away. However, with the scare of Nakheel debt default in early December, it seemed that reality had finally reached this part of the world and last man standing of Middle East had finally fallen.
Actually NO. There is one other financial behemoth and it has been deluding auditors, credit rating agencies as well as financial press. The amazing thing is that despite signs visible every where, nobody has raised an eyebrow. This is the elephant in the room that no one wants to talk about. I am talking about National Bank of Kuwait more commonly known as NBK which has been awarded one of the safest banks in the world.
When financial institutions world over including middle east were taking provisions on their investment and real estate portfolio, coming out of closet and declaring losses on their derivative transactions, NBK was conspicuous with record profits and minimum losses. When all investment sectors were declining in value, how could NBK remain immune to the losses unless it was shorting securities which NBK being a commercial bank is not allowed to do.
So what gives? I would not need to tell anyone if people who are paid to do this job i.e., regulators, research analysts and credit rating agencies asked a simple question: when the whole region was growing based on real estate didn’t NBK finance this growth being one of the largest institutions? It seems the people were not doing their job diligently because the answer to this question is a resounding YES!!!
NBK has provided Al Kharafi Group (construction arm that is a contractor as well as major supplier of cranes in Dubai) financing by a conservative estimate to the tune of KD600 million (other estimates put the value at KD 1Billion). This puts NBK exposure to Al Kharafi from USD 2 Billion to USD 3.5 Billion which is not a small amount if no provision had been taken so far which my sources claim that none has been taken.
Recently there was a lot of activity in the local stock markets wherein Kharafi was trying to offload its strategic stake in Zain but the deal could not go through. The sole reason that Kharafi wanted to sell its stake was it wanted to settle its liabilities with NBK. I am not aware what accounting logic NBK is using to avoid taking a provision against such a huge exposure to a single counter party.
And there is more. People in Kuwait tell me that two tallest towers in Kuwait (one under construction Al Hamra Tower and the other recently completed Al Raya II) were financed by NBK. However, the developers are unable to payoff the loan and as such NBK has shifted / will shift its staff from rented premises to these towers which they will occupy rent free (non-payment of rental to be considered repayment by developer through some twisted accounting logic). NBK is currently occupying around 20 floors in Al Raya II and will be occupying equal number of floors in Al Hamra Tower once its completed.
Though NBK is a well capitalized bank and losses to the tune of USD 4 to 5 billion might not affect its footing significantly, however, I am flabbergasted that the bank would hide such huge amount of losses for so long.