RESULTS for the first nine months of 1994 show that the banking sector is beginning to feel the impact of the liquidity squeeze. Only three of the nine banks that had released figures by the end of October reported a rise in net profits over the equivalent period of 1993. Balance sheet figures show that more of the sector's resources are being deployed domestically and that the overall level of bank footings has stagnated.

Yet, forecasts that this would be the year that the profit boom of the early 1990s would end have not been borne out. Despite the profit slow down, total net earnings in the first nine months were equivalent to 1.24 per cent of total assets at the end of the period, a high figure by international standards.

Change in structure

The big change is in the structure of balance sheets. Lending by the nine reporting banks in January-September was almost 13 per cent higher than in the equivalent period of 1993. Much of this is due to banks providing facilities to help suppliers deal with the consequences of a slow down in government payments (see page 34). Saudi Arabian Monetary Agency (SAMA - central bank) guidelines call for lending to be kept at no more than 60 per cent of customer deposits. Some Saudi banks are now breaching this ceiling. Nevertheless, loans and advances still account for less than 40 per cent of bank balance sheets.

The largest element of bank balance sheets is investments. This encompasses the amounts invested in fixed-interest government development bonds, the principal means by which the state finances its deficit. This category rose again in the first nine months of 1994, but the rate of increase is beginning to slow.

The other big change in the aggregate balance sheets was a rise of almost 10 per cent in bank equity as the banks converted profits into reserves. Riyad Bank, the kingdom's largest joint stock bank, raised its paid-in capital to SR 4,000 million earlier in the year. In October, Saudi Hollandi's shareholders agreed to double the bank's capital in a similar fashion.

Low priorities

The big issue is whether the banks can avoid the bad debt problems that damaged the system in the mid-1980s. More heavily exposed to the private sector than ever before, they are looking to the 1995 budget, to be unveiled at the end of this year, for signs that the government is going to relax the financial squeeze that is now testing business. Analysts say that provisions made so far for possible bad debts are surprisingly low. They expect the performance of the loan portfolio and the management of provisions to be a big factor in banks' full-year profits.

Signs that some of the banks are already feeling the impact of the tougher business conditions of 1994 are evident in the figures released by Riyad Bank. Its profits for the year so far were 15 per cent lower than in the equivalent period of 1993. The balance sheet was almost 4 per cent smaller. Loans were up 11 per cent year on year. They now account for 36 per cent of the balance sheet and are equivalent to 71 per cent of customer deposits.

Mixed results

Saudi American Bank, the Riyadh-based affiliate of Citibank, reported a 14 per cent profit rise. All the major elements of its balance sheet rose in the first nine months of the year, confirming the bank's position as one of the strongest performing financial institutions in the Middle East.

The two other banks reporting profit rises in January-September were the United Saudi Commercial Bank, up 14.4 per cent to

SR 232 million and Saudi Investment Bank, up 15 per cent to SR 53.4 million.

The biggest profit drop was reported by Saudi Hollandi Bank. Its net earnings were 25 per cent lower at SR 102 million. Profit falls of up to 15 per cent were recorded by the other four banks.

Analysts are waiting with interest for the figures from The National Commercial Bank (NCB), the kingdom's largest bank and the biggest privately owned financial institution in the Middle East. The bank is deep into a corporate re-organisation programme which involves heavy cost-cutting (Banking, MEED Special Report, 30:9:94, page 34). There are expectations that the bank will report a profit rise for 1994 as a whole.

Bank al-Jazira has yet to release any interim figures for 1994. Its 1993 results, finally released in September, showed it was the only one of the kingdom's 12 banks to make a loss last year. Al-Rajhi Banking & Investment Corporation, Saudi Arabia's fourth largest bank, reported a strong profit rise in the first half of 1994.

EOS