THE 11 Saudi commercial banks have once again reported solid annual profit increases, continuing the trend of recent years. Falling levels of interest income imply that lending margins are still under pressure, however, and the weakness of oil prices this year suggests that economic growth will slow and bad loan problems may well re-emerge. Payments to contractors by some government departments are already reported to have slowed down.

The government is likely to make up a good part of the shortfall in forecast oil revenues for 1998 by borrowing from the banks. Saudi American Bank's chief economist, Kevin Taecker, calculates that lending to the government accounts for about 25 per cent of banks' total assets at the moment, implying that there is still scope for the government to borrow quite a lot more without seriously unbalancing the bank's asset profiles.

The biggest structural shift within the industry in the last year was the creation last September of United Saudi Bank (USB) out of United Saudi Commercial Bank and Saudi Cairo Bank. The figures show that the new bank is very well-capitalised even by Saudi Arabia's conservative standards and has a lot of scope to expand its asset base.

The main features of last year's results are:

Profits. The net profits of the Saudi banks rose by an average of 19.6 per cent in 1997 to a total of SR 6,587 million ($1,756.5 million). Once again, the main factor behind the increase was the strength of regional and global capital markets throughout much of the year. Earnings from investment securities grew strongly, while interest earnings contracted at most of the banks. Only Saudi Hollandi Bank, Saudi Investment Bank and the newly-formed USB reported higher interest earnings during 1997. Interest income is still by far the largest earnings stream for most banks, however. The biggest

increase in profits was at Al Bank Al Saudi Al Fransi, the affiliate of France's Credit Agricole-Indosuez, which increased its profits by 33.2 per cent to SR 401 million ($106.9 million).

Al-Rajhi Banking & Investment Corporation, which uses a complicated Islamic system for classifying its assets, reported higher income from certain trade-related transactions (mutajara) and from industrial financings (istisnaa), but lower income from leasing and installment sales. Thanks largely to its sizeable interest-free Islamic deposits, Al-Rajhi remains by far the most profitable of Saudi banks. It made a return on end-year assets of 3.71 per cent last year, compared to the industry average of 1.61 per cent. The least profitable bank was Bank al-Jazira, the smallest of the 11. The bank reported a 28.6 per cent rise in net profits to SR 18 million ($4.8 million), giving a return on assets of 0.43 per cent.

Total Assets. Leaving aside USB, the balance sheets of the other 10 banks grew by an average of 7.09 per cent. The banking system's total assets, including those of USB, reached SR 385,860 million ($102,895.7 million) at the end of 1997, a rise of 12.10 per cent. The assets of Bank al-Jazira contracted slightly as it reduced its interbank placements and increased lending.

Loans and advances. These expanded by 15.8 per cent across the industry to SR 130,909 million ($34,909.1 million), though falling levels of interest income suggest that lending margins have continued to tighten. The biggest growth in loans was reported by Al-Bank Al-Saudi Al-Fransi - up 20.4 per cent - and National Commercial Bank - up 19.1 per cent.

Liabilities and shareholders' equity. Customer deposits grew more slowly than new loans last year, averaging a growth rate of 6.63 per cent and reaching a total of SR 261,899 million ($69,839.6 million). Al Bank Al Saudi Al Fransi and Saudi British Bank did the best job of attracting new funds, raising their deposits by 11.3 per cent and 10.9 per cent respectively. Most banks raised their shareholders' equity by between 1 and 10 per cent. Average shareholders' equity for the 11 banks stood at SR 40,003 million ($10,667.4 million) at the end of last year, up 7 per cent from the year before. Following the merger of the two banks, USB is now the fifth most strongly capitalised bank with equity of SR 3,182 million ($848.5 million).