BANKING: On track for a year of record results

21 November 1997
SPECIAL REPORT SAUDI ARABIA

The third quarter of 1997 brought another parade of promising results from Saudi Arabia's banks. Although there is talk of tightening loan margins, growing income from investments seems likely to bolster the banks' full- year profits.

The unaudited net profits of the Saudi banks for the year to September, excluding the newly-formed United Saudi Bank, were up by an average of 18.4 per cent on the same nine-month period of 1996 at SR 4,852.1 million ($1,293.9 million). This figure is equal to 90 per cent of the total profits made by the industry for the whole of last year. Barring the unexpected, full-year profits for 1997 should be well up on last year.

'Liquidity has been sustained at the higher levels achieved earlier in the year and the resultant improvement in business confidence has led to increasing economic activity,' says Sandy Flockhart, managing director of Saudi British Bank (SBB), in a commentary on the bank's nine-month results. SBB, the local affiliate of HSBC, increased net profits by 15 per cent, which was slightly below the average for the sector. 'Strong competition together with pressure on margins remains a feature of the market which will continue for the foreseeable future.'

A closer look at the results of the two biggest banks gives an indication of the trend in the sector as a whole. National Commercial Bank (NCB), the country's largest bank, reported that its net profits rose by 39 per cent to SR 916.6 million ($244 million). Its results show a pattern repeated at other banks: investment income rather than interest earnings have been the main motor of profit growth. The bank made a $40 million gain on its portfolio of investment securities, compared to almost no gains in the same period of 1996, while operating income and costs rose by about 12 per cent. Loans, however, grew by only 6.7 per cent over the 12-month period from September 1996. Most banks have reported lending growth of 3-6 per cent for the first nine months of this year.

Riyad Bank, the country's second biggest bank, lagged behind NCB with a 14 per cent increase in net profits to SR 728.7 million ($194.3 million), again with big gains in investment income. Interest income was actually down 5 per cent on the period. The most significant feature of the results is that they have been published at all. The bank published no results for the first half of 1997 because of its dispute with the Saudi Arabian Monetary Agency (central bank) about how to deal with arrears on loans to Saudi Arabian Airlines.

However, Riyad Bank says there have been 'recent positive developments in the negotiations between the bank and one of its lending customers' - a phrase understood by bankers and analysts to suggest that a way has been found to resolve the issue. Riyad Bank is rumoured to be planning a mutual fund open to foreign investors, on the model of the fund launched earlier this year by Saudi American Bank (Samba).

Other banks reported a wide range of profit increases, with the lower end represented by a 10 per cent rise at Samba. Although the bank's profits were boosted by the sale of its Turkish subsidiary at the start of the year, net operating income was actually down on the year. At the other end of the scale was Saudi Hollandi Bank, which reported a 37 per cent rise in net profits to SR 160 million ($42.7 million).

There were no results from the newest player on the field, United Saudi Bank, which is likely to be absorbed for some time with the after-effects of its creation in September from the merger of two smaller banks, United Saudi Commercial Bank (USCB) and Saudi Cairo Bank. Moody's Investors Service of the US, which rates all the Saudi banks, gives a cautious thumbs-up to the merger.

It also warns that the new bank will need to make sure that it holds onto Saudi Cairo's deposit base, while bringing together two very different institutions. However, the role of Prince Alwaleed Bin Talal Bin Abdulaziz as dominant shareholder and motive force behind the new bank is widely counted in its favour.

Some analysts see good prospects for the banking sector to increase lending in the coming months. 'When I tally up loan demand and compare it to deposits I see scope for growth, though we won't see the fat lending margins seen in 1995,' says Kevin Taecker, chief economist at Samba. One source of loan demand will be petrochemicals projects sponsored by the Saudi Basic Industries Corporation (Sabic). The $2,322 million loan financing for the Saudi Yanbu Petrochemical Company (Yanpet) has just gone into international syndication, and two other big projects are expected to come to the market by the end of the year as the first of several increases to be staggered over the next few years.

Saudi banks usually play arranging roles in these deals as well as lending to them. Banks are still keen to lend to such projects, even though Saudi Aramco is raising the cost of feedstock to chemical plants by 50 per cent as the first of several increases to be staggered over the next few years.

The government itself is also borrowing $4,330 million through an international syndicated loan to pay for new aircraft for Saudi Arabian Airlines: NCB and Samba are two of the five banks picked to arrange the loan, a chunk of which is expected to be raised from Saudi banks.

The personal loan market could also be a growth area now that customers are getting used to the concept of credit card debt, says Taecker. Samba, an affiliate of Citibank, has been very active in this area. In the corporate sector, there are many companies which do not see much growth in business with the government because of restrained public spending, prompting them to diversify into new businesses, from dairy products and car parts to consulting and vocational training. Municipalities in the major cities are also expanding their industrial parks for small and medium-sized industries, which will need credit.

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