SAUDI ARABIA'S banks have never seen change on such a scale. Their customers are all too aware of what banks can offer and they want it all, from tailor- made products to the latest technology. Other pressures are transforming the way the kingdom's banks conduct their business. As the state trims its sails, a resurgent private sector is seeking finance for new industrial projects. The result is new opportunities, but the loss of old certainties. Competition in this changing market place can be bruising. New technology can cost a fortune, but the relentless pace of change in the kingdom's banking sector means that no bank can afford not to invest in new products and services.

'The days of sitting back and letting money roll in are long gone', says Michael A. Callen, senior adviser at National Commercial Bank in Jeddah. 'Saudi banks are finding their own identities and developing their own fundamental strategies.'

Results reported for the first half of 1995 painted a very mixed picture. Riyad Bank, Saudi Cairo Bank, Saudi Investment Bank (SAIB) and Saudi British Bank all showed a healthy rise in profits. Al Bank Al Saudi Al Fransi and United Saudi Commercial Bank recorded slightly slower profit growth. Only four banks - Saudi American Bank, Saudi Hollandi Bank, Arab National Bank and Al-Rajhi Investment Banking & Investment Company - had profits which were lower than the previous year at this stage. The struggling Bank al-Jazira reduced its losses in the first half of 1995 by 17 per cent. Aggregate net profits were down slightly on the previous year, despite a 3 per cent growth in the aggregate balance sheet. By the time the third quarter figures were published most of the banks were firmly back on track, showing aggregate profit growth of more than 9 per cent (see table).

Riyad recovers

In one of the more notable developments of recent months, Riyad Bank, the largest joint stock bank in the kingdom, is now reaping the rewards of its recovery. Healthy half-year results to June 1995 confirmed a positive trend, showing a surplus of SR 452 million for the period, which was 21 per cent higher than in the first half of last year. After no less than 33 years in trusteeship the bank is about to elect a new board. The Riyad Bank board has been controlled by the Saudi Arabian Monetary Agency (SAMA - central bank) since 1962, when the bank was hit by a financial crisis. Nominations for the six members of the new board of directors opened on 15 September and were due to close in late October.

The lifting of the trusteeship had been foreshadowed in 1994 by the resignation of general manager Suleiman Mandeel and the departure of managing director Ahmed Abdullatif to the Bahrain-based Arab Banking Corporation. Always one of the most popular stocks on the Saudi share market, Riyad Bank saw its shares rise by 12 per cent in the two months after the lifting of the trusteeship was announced.

The mixed bag of half-year results reflected several factors that are at work. Fierce competition is readily cited as one cause for some discomfort. Some of the banks are also paying the price of ill-advised lending that was the result of the fight for market share. 'Rapid growth in customer loans seen in the early 1990s is feeding through to rapid write-offs three years later,' says one local banker. 'Some banks are paying for their aggression.'

However, the costs of restructuring and introducing new technology are also a factor in some of the weaker results during the period. Arab National Bank, whose half year profits fell almost 12 per cent to SR 192 million, has spent heavily on technology, introducing electronic and telephone banking at a very fast rate. National Commercial Bank, which does not report half year results, is also installing new technology. More than 200 of its 240 branches in the kingdom have been linked up to a real-time electronic system.

Expenditure on technology is not a luxury. The Saudi market is growing in sophistication and customers are voting with their feet for the latest in banking services. 'Technology is becoming a generic part of banking service in the kingdom,' says Saud Saleh al-Saleh, general manager of SAIB. 'A bank without ATMs (automated teller machines) is not a bank. Technology is a necessity, not a luxury.'

Banks that have spent on technology to improve customer services, are already being rewarded with a bigger share of the deposit market. As the banks upgrade, The Saudi Arabian Monetary Agency (SAMA - central) is making sure that it keeps up with the growing demands of the market. It is introducing an electronic fund transfer system to increase the speed of transfers, increasing security and confidentiality, and enabling new products to be developed.

With growth no longer guaranteed, banks are taking a more active approach to balance sheet management. There is growing enthusiasm for foreign exchange transactions and the local and international capital markets. In late September, NCB opened a state-of-the-art trading room at its Jeddah headquarters, set up at a cost of SR 25 million. Billed as the largest dealing room in the Middle East, the facility offers new levels of monitoring, and risk assessment. 'We are well on our way to derivatives and other sophisticated packages,' says NCB's Callen.

The government's programme to boost the role of the private sector promises to create new opportunities for the kingdom's banks. 'Banks should take advantage of the intended privatisation programme to grow their markets and introduce more creative financing,' says Al-Saleh of SAIB. 'They shouldn't be followers, but originators in developing the capital market, providing a vehicle for the growth of the private sector.' SAIB is already reserving itself a place in the coming privatisation programme. By 1996 it plans to have set up its own merchant banking section. Project finance is regarded as a major growth area, with banks looking at developing long-term links with projects rather than one-off financing agreements - following through from start-up finance to export finance and payroll services.

Performance culture

The more competitive environment is forcing banks to re-examine their management structures. For some this has meant reducing the existing workforce and raising the overall skill level. 'Performance management systems are moving us from a power culture to a performance culture,' explains NCB's Callen. 'This is conducive to meritocracy.'

The future performance of Saudi banks will depend on domestic interest rates and the level of confidence in the increasingly influential private sector. Lower rates could provide the private sector with affordable access to funds, which will enable them to press on with investment plans. And the banks themselves, absorbing the lessons of the past, are keen to demonstrate greater prudence in their analysis and control of risk. The secret of success in this environment, bankers say, is planning. Banks are adopting a more responsive approach to the balance sheet and are keen not to miss any new product opportunity. The banks that ignore the new environment do so at their peril.