These are changing times for Saudi Arabia's 12 commercial banks. Their customer base is expanding rapidly, but creating different needs as a youthful population makes new demands on the banking system and its services. Technology is also transforming Saudi banking. It is altering the way people manage their money while holding out the twin promises of greater efficiency and higher profits. And, a vibrant private sector is emerging, eager to tap the banks' resources for a wide variety of new industrial projects.

Yet, as new business opens up, many of the banks' traditional activities are coming under pressure. Clients who relied on public sector work have been hit hard as tighter government spending has had an impact across the whole economy. Last year, the main talking point was the delays in government payments to contractors, which put a severe squeeze on liquidity in the last quarter of 1994.

As if the challenges within the kingdom were not enough, international bond and equity markets have also given banks a rough ride since US interest rates started rising in early 1994. Many banks which had reaped bumper returns in 1993, now find earnings from their international investment portfolios falling sharply.

Against this background, commercial bank results for 1994 showed a range of performances (see page 8). Saudi American Bank (Samba) topped the table for profits during the year, becoming the first Saudi bank to announce net earnings of more than SR 1,000 million. In contrast, Riyad Bank, the second largest bank in the kingdom in terms of assets, reported the steepest decline in earnings. Profits at the bank fell 37 per cent in 1994 to SR 582 million.

The kingdom's oldest and only privately owned commercial bank, National Commercial Bank (NCB), reported profits up by 15 per cent in 1994, only the second year the bank has announced full results since it began a process of restructuring in 1989. Profits were the fourth highest of all the Saudi banks at SR 579 million. However, with the largest balance sheet in the kingdom, its performance in terms of return on assets leaves it lagging at the bottom of the table.

Only Bank al-Jazira, the smallest of the commercial banks, reported a loss for 1994, of SR 29 million. However, this is a striking improvement on losses of SR 479 million reported a year earlier. The bank has worked hard to restructure both its management and balance sheet, which it hopes will bring the institution back into profit in 1995.

Overall, net income for Saudi Arabia's commercial banks fell by almost 4 per cent in 1994 to SR 4,808 million. This compares with a 30 per cent rise in net profits during 1993, which most banks regard as an exceptional year.

Total assets rose in 1994 by almost 4 per cent to SR 331,638 million which was markedly lower than in 1993 when total assets soared by more than 7 per cent. The rate of increase in shareholders' equity also slowed last year. At the end of 1994, total shareholders' equity had reached SR 34,727 million, up by almost 7 per cent on a year earlier. In 1993, equity reached SR 32,597 million a rise of more than 14 per cent on a year earlier.

This mixed picture looks set to continue through 1995, as the first quarter results show a similarly diverse performance. Arab National Bank, which reported an 8 per cent drop in profits in 1994, announced 1995 first quarter earnings down 24 per cent on a year earlier. Samba announced first quarter earnings which were almost 14 per cent lower than in the same period last year.

However, Saudi British Bank, which reported a 13 per cent fall in profits in 1994, has announced earnings of SR 98 million in the first quarter of 1995, up more than 10 per cent on the corresponding period last year. Similarly, Saudi Cairo Bank, which reported profits 8 per cent lower in 1994, also reported an improvement in the first quarter of 1995. First quarter earnings were SR 61 million, up 6 per cent on a year earlier.

'1994 is the first year there has been a major divergence in results between one bank and another,' says Peter Clarke, head of international banking at United Saudi Commercial Bank. This, he says, indicates the growing maturity of the market. No longer are banks reacting as one when interest rates rise or fall. Instead, they depend on a greater spread of income sources.

The rapidly changing demographic profile of the kingdom is encouraging many of the changes in the banking community. 'We are looking at a major prospect. Half the population is under 20, and so we want to be ready for them,' says Andre van Hove, assistant general manager at Saudi Cairo Bank.

The response has been a sharp shift towards more automation. Customers are now offered a range of electronic services which are the equal of those available in some of the most advanced financial communities. Internally, banks and their branches are being reorganised around more powerful centralised computer systems.

Automated teller machines (ATMs) are now a standard service offered by all banks in Saudi Arabia, with more than 1,000 machines spread across the country. Many are located in bank branches, but increasingly machines are found independently in shopping malls, at airports and free-standing units by the roadside.

Leading the way are the institutions with the most branches, including NCB and Al-Rajhi Investment & Banking Corporation. Both banks have more than 160 machines each but the growth in network size is no longer the obsession it once was. Regulations introduced by the Saudi Arabian Monetary Authority (SAMA - central bank) have linked the different banks' ATMs to ensure that the holder of a card issued by any Saudi bank can use any cash dispenser in the kingdom.

The same rule applies to the point-of-sale (POS) payment system, which allows customers to pay for goods and services by direct debit from their accounts. Credit card services are also on the increase, with banks offering Visa and Mastercard. 'People are getting into the habit of using this plastic money,' comments one Jeddah-based banker.

Branches out

And soon customers may no longer need to even visit their local branch, as telephone banking becomes a staple item on the menu of services. SAMA, which is leading the technological transformation, is also overseeing the development of an electronic fund transfer system (EFTS).

The changes are forcing banks, particularly the biggest players, to reconsider the role of their branches. With the advent of the ATM, some of the strategic advantages once enjoyed by those with a large branch network are being eroded. But increased automation also allows more staff to move to the front of shop, and these are the faces that will sell the growing range of services.

But investing in new systems comes with a price tag which is not always welcome when banks are keen to trim costs. 'Technology in banking breeds on itself. If someone invents something that offers services faster, it cannot by disinvented,' says Kevin Traverse-Healy, spokesman for NCB in Jeddah. 'Despite the cost, you cannot not do it.'

Keeping a tight rein on expenditure while pushing up profitability is now more important to Saudi bankers than simply increasing the value of assets. But the art is in finding a balance. 'We think cutting expenditure drastically would undermine our efforts to compete. But we do monitor it closely,' says Henri Guillemin, managing director of Al Bank Al Saudi Al Fransi.

Tight money

It is not only the banks that are taking a closer look at costs. In January, the government announced a 6 per cent cut in public spending for 1995, on top of a 20 per cent planned cut in the 1994 budget. Actual spending last year was higher than forecast, but banks have still felt the effects of lower government spending. By the last quarter of 1994, banks were hit by the squeeze on liquidity as the government delayed payments to contractors who had been engaged in public projects.

But local bankers have welcomed recent moves by the government to address the payments backlog. In March, the authorities issued special government bonds worth SR 5,200 million to cover payments to contractors who were owed more than SR 10 million. The bonds have four maturity dates, ranging from 12- 30 months. However, contractors requiring an immediate cash injection can redeem their bonds with local banks at a discount.

By late April, contractors owed less than SR 10 million had been appeased, receiving between SR 3,000 million-5,000 million although an estimated SR 10,000 million was still outstanding.

Yet, even as the strings on the public sector purse are tightening, bankers see new prospects developing in the wings. 'Projects are still alive, and industrial projects still have to be financed,' says Van Hove of Saudi Cairo Bank. 'Quasi-government entities are going to be in the market for borrowing.' He points to projects planned by subsidiaries of Saudi Basic Industries Corporation (Sabic), the majority state-owned firm which posted record profits in 1994. 'Most Sabic companies are very successful and are at this stage trying to develop output which requires financing.'

Those firms entirely outside the government sector are also growing. 'The private sector is expanding substantially, and is starting to take off,' Van Hove says.

Saudi Industrial Development Fund (SIDF) has been a major supporter of local industry, and in 1994 reported record disbursements and a record number of studies for new projects.

SIDF financial backing of a project is usually a sufficient guarantee for commercial funding to be forthcoming. 'If an industrial project demands commercial financing, once we have supported and studied it, commercial banks are willing to come in,' says Saleh al-Naim, director general of SIDF.

But local industrialists still complain of the commercial banks' reluctance to proceed with projects that do not have SIDF support. 'I wonder if they are capable enough to evaluate a project, or whether they just wait for SIDF to carry out the study,' says one industrialist.

Short termism

For Saudi banks, the problems stemming from the bad loans of the 1980s are an all too recent memory, and the caution about backing new ventures is all pervasive. Most banks have fully provided for their non-performing loans, but are only slowly coming round to supporting new business ventures.

But it is not only this conservatism which is constraining their activity. 'It is clear that this is a short-term market,' says the managing director of a Riyadh-based bank. Depositors rarely place funds with the bank for longer than six months, so banks must maintain a high level of liquidity. 'Saudi banks have a problem in lending long-term money if we are to remain prudent,' the managing director says. 'We have limited access to long- term money.'

Fluctuations in market liquidity can also prove problematic. As companies make dividend payments the market can become highly liquid. But a delay in government payments can just as quickly have the opposite effect, mopping up liquidity and making it harder for the banks to devise a longer term strategy.

The market has yet to offer the opportunity for banks to specialise. However small the institution, most banks still find they need to offer a full range of services if they are to survive. 'Those that have looked at a niche market have been discouraged,' says Van Hove. This includes private banking, which is receiving much closer attention but is still largely confined to providing financial advice, rather than a range of home-grown investment products.

These challenges are forcing a transformation in the Saudi banking community. But, according to one Riyadh-based general manager, life can get tougher yet, and there is plenty of room for improvement. 'In my opinion, if you look at the US, UK or European market, and compare it with here, there is no competition here,' he says. 'Banks are working harder to try to compete, but it has not yet fed through to the bottom line - the customer.'

Exchange rate: $1=SR 3.75