The Saudi banking sector is in bullish shape but banks in the UAE and Oman will face tougher conditions in 2000, according to a senior analyst at ratings agency Thomson BankWatch. William Hassiepen, senior vice president at Thomson, says Saudi banks remain some of the strongest in the region largely because of the regulatory performance of Saudi Arabian Monetary Agency (SAMA - central bank). But low liquidity levels in Oman has left local banks vulnerable while UAE banks have been hit hard by the fall- off in trade volumes out of Dubai and their indirect exposure to the stock market.

Hassiepen, who visited a number of Gulf institutions in November and December, says Saudi banks have proved the sharpest performers in the region. 'Saudi banks were able to ride out the oil price fall over the last couple of years because the government moved to clear up banking arrears at the end of 1996, which allowed corporate and banking liquidity to increase during 1997. The relative lack of lending activity left both banking and corporate sectors flush with liquidity and with low levels of non-performing loans,' says Hassiepen. He adds that all but one of the country's 10 banks have ratings of B or higher. Saudi American Bank, Saudi Hollandi Bank, Saudi British Bank, Bank Al-Saudi Al-Fransi and Riyad Bank are among the strongest performing institutions while National Commercial Bank has also shown a marked improvement.

At the other end of the scale, the Omani banking system's liquidity crunch has left banks particularly exposed in the event of a financial crisis. 'Oman has very high levels of non-performing loans, which is depleting banks' cash reserves,' says Hassiepen. He says the real cause of this is not the banks' share lending schemes that fuelled the 1997 stock market boom but the increase in personal lending facilities intended to augment share purchases, as well as the drawing down of deposits into the stock market, both of which have left it in a weaker condition.

Asset quality problems also plague UAE banks, says Hassiepen. 'From a regulatory standpoint, the UAE banking system operates in a more relaxed environment than Saudi Arabia or Bahrain. Although the central bank has taken steps to improve the level of examination, only time will tell the actual impact,' he says, adding that more political support is needed from both the federal and emirate levels.

Another problem faced by UAE banks is their use of shares as collateral against corporate lending, which means it is difficult to accurately assess the actual level of collateral. 'Individuals channel personal loan facilities into the stock market and it's difficult to police that,' says Hassiepen.