DESPITE another bad year for the Saudi economy, the kingdom's 12 commercial banks have put in an unexpectedly good performance. Reflecting the lack of growth in the economy in 1995, their combined balance sheets rose by 5 per cent to SR 347, 152.1 million ($92,574 million), equivalent to about 73 per cent of gross domestic product (GDP). Deposits booked by the banks rose by a similar figure, which was in line with the expansion of nominal GDP. suggesting the market is now reaching its maximum potential. Most Saudis with significant amounts of cash have bank accounts. Loan growth was less than 3 per cent, a sign of the pressure on the Saudi private sector.

The good news was that the Links continue to deliver sharp increases in profitability. The combined profits of the 12 rose by 16 per cent to a new record level of SR 5,569.2 million ($1485 million). This gave the banking system a return on end-year assets of 1.6 per cent and a return on endyear equity of 15.4 per cent.

The increase in profits appears to have been achieved mainly by banks shifting more of their assets into interest-bearing instruments to capitalise on the rise in dollar interest rates during the summer of last year. However, there is also clear evidence that all the banks are managing their costs more tightly. Provisioning was generally modest as they applied a cautious approach to lending. The overall profitability of the industry was helped by National Commercial Bank's (NCB's) revitalisation since it emerged from a long period of uncertainty in 1993. Last year also saw Bank al-Jazira, the only bank to have recorded a loss in 1994, move back into profit, albeit a modest one. For the first time in more than a decade, all Saudi banks were in the black in 1995.

Yet, the key factors behind the profit surge remain the availability of low cost deposits in a community that is not interest rate sensitive, and the protection that excludes new entrants to the financial system. Saudi Arabia has barred new entrants to the banking market since Al-Rajhi Banking & Investment Corporation, previously a moneychanging operation, was converted into a bank in 1987. No foreign banks have been allowed to set up a direct presence in the kingdom since the financial system was Saudi-ised by law in the 1970s.

Such restrictions on competition fly in the face of the principles of the World Trade Organisation, created to implement the Uruguay round of tariff reductions, which Saudi Arabia has applied to join. But even if it was a member, it is unlikely that the doors to the kingdom's banking market would be thrown open. For the foreseeable future, the 12 banks have the domestic market all to themselves.

There were some significant variations in the performance of the banks in 1995:

National Commercial Bank (NCR). The kingdom's largest bank in terms of assets aggressively expanded its loans portfolio as it made up for ground lost in the late 1980s and early 1990s. This laid the foundations for a 10 per cent increase in total assets in the year. The growth of deposits was more modest. Net profit rose by 21 per cent, but it remains a long way behind the most profitable banks. NCB has positioned itself to increase its share of deposits and it has been radically restructured. Recent initiatives include the creation of a separate unit to handle sharia banking services.

Riyad Bank. The kingdom's second largest bank put a cap on assets and worked to boost profits in 1995. Net income increased by 31 per cent, the biggest rise among the 12 Saudi banks. This followed a 37 per cent fall in net profits in 1994 which was largely due to losses in trading securities. In 1995, Riyad Bank reduced its investments in this market by 85 per cent and shifted funds into the interbank market to capitalise on higher interest rates in the second halt of the year. A new chairman and deputy chairman were elected in the autumn, following the ending of the government trusteeship the bank has been in since 1962. The Saudi Arabian Monetary Agency (SAMA) holds 30 per cent stake in the bank.

Saudi American Bank. In 1994 Saudi American became the first bank in the kingdom to record profits of more than SR 1,000 million ($267 million). In contrast 1995 was a year of consolidation as securities matured and the balance sheet contracted by 6 per cent. Equity at the Citibank affiliate was boosted by 12 per cent, the second largest increase in shareholders' funds among the 12 banks. Saudi American played a prominent role in major project financings in 1995. including the $700 million syndicated loan for Saudi Petrochemical Company (Sadaf). the largest single credit to a private sector borrower so far agreed in the 1990s.

Arab National Bank (ANB). A 2.3 per cent rtse in net profits and a 6 per cent increase in total assets was recorded in 1995 by the Riyadh-based joint venture. 40 per cent owned by Arab Bank of Jordan. Its end-year balance sheet showed a sharp rise in liquid assets as ANB capped lending and allowed its investment security portfolio to run down. The modest rise in net profits in 1995 reflected the impact of a high rate of depreciation of fixed assets. Depreciation in 1995 was set at SR 100 million ($27 million), more than twice the rate seen in banks of a similar size. ANB has installed 2,200 point of sale terminals and 175 ATMs, and invested SR 50 million ($13 million) to refurbish its branches. There was a 22 per cent reduction in bad loan provisions. Net operating profit before provisions was barely changed in the year. The salary bill was cut by 10 per cent as part of a continuing programme of restructuring.

Al-Rajhi Banking & investment Corporation.The only Saudi bank committed to dealing exclusively in Islamic financial instruments recorded a 27.5 per cent rise in net profit to SR 1,117.4 million ($298 million), emerging as the kingdom's most profitable bank for the first time. It reported a 22 per cent rise in total income in the year. The rise in profits was despite a moderate 6 per cent rise in assets in the year to SR 30,662.6 million ($8,177 million).

Al-Bank Al-Saudi Al-Fransi. A 3.5 per cent rise in net income to SR 353.3 million ($94.2 million) was recorded by the Riyadhbased affiliate of Banque Indosuez. The bank's balance sheet grew by 13.7 per cent in the year to SR 27,472.3 million ($7,326 million) as it stepped up investments in securities, which rose by 48 per cent to account for 33 per cent of total assets at the end of the year. Net operating income rose by 3.6 per cent. Provisions were raised by 50 per cent and depreciation lifted by 13 per cent to SR 48.5 million ($13 million). Gains on investment securities increased by almost 100 per cent, but this was offset by a sharp rise in other expenses to SR 12.4 million ($3.3 million). The balance sheet figures show the bank cut lending by 5 per cent and loans and advances ended the year only marginally higher than investment securities. Customer deposits rose by 1.7 per cent while borrowing from banks was increased by 78 per cent in the year.

Saudi British Bank. The affiliate of HSBC is one of only two Saudi banks to have increased paid-in capital in the past two years, issuing a 25 per cent bonus to shareholders earlier in 1996. In 1995, it joined the select group of Middle East banks reporting profits of more than $100 million in a single year. Total assets fell by 4 per cent. The bank says the rise in profits was achieved against a background of a restructuring in the balance sheet following lower investment income in 1994. Total deposits and loans and advances rose in the year.

Saudi Cairo Bank Features of 1995 included a 31 per cent rise in interest income and increases of more than 50 per cent in trading securities and investment securities income. Provisions were unchanged at SR 40 million ($10.7 million). Net operating income rose by 5 per cent and net income by 7.14 per cent to SR 212.1 million ($57 million). Saudi Cairo sharply reduced investments in securities and its loans and advances portfolio fell by 27 per cent to SR 4,833 million ($1,289 million). Customer deposits expanded by 5 per cent to SR 14,202.3 million ($3,787 million), equivalent to 75 per cent of total assets. The balance sheet grew by 4 per cent to SR 18,883.8 million ($5,036 million). Saudi Cairo Bank says 1995 was a year of consolidation.

Saudi Hollandi Bank The Riyadh-based affiliate of ABN Amro Bank recorded a 16 per cent rise in net income to SR 140.3 million ($37.4 million) in 1995. The balance sheet grew by 7.5 per cent to SR 16,109.5 million ($4,296 million). Features of the profit and loss statement included a 6 per cent rise in total operating income and a 31 per cent fall in net operating income. The balance sheet showed a 9.5 per cent rise in deposits and a 4 per cent increase in loans and advances. The most striking change was a 45 per cent cut in the general reserve with the result that shareholders' equity fell by 15.6 per cent to SR 1,089 million ($290 million)

United Saudi Commercial Bank (USCB). The bank reported a net profit of SR 307.8 mil lion ($82 million). This was equivalent to 2.82 per cent of end-year assets and 20 per cent of end-year shareholders' equity, figures that are likely to be the highest reported by conventional Saudi banks. USCB says its return on average assets during the year as a whole was 2.89 per cent and the return on average equity was 21.1 per cent. Features of the profit and loss account include a 49 per cent rise in interest expenses. Total operating expenses rose to SR 575.4 million ($153 million). Income from investment securities rose by 17 per cent to SR 225.9 million ($60 million), equivalent to 26 per cent of total operating income in the year. The bank reported a SR 1 million ($270,000) profit from investment securities after recording a loss in 1994. Loan loss provisions were increased by one third to SR 40 million ($11 million).

Total assets rose by 5.4 per cent to SR 10,935.6 million ($2,916 million), making USCB the third smallest quoted bank in the kingdom. A cash dividend was paid in 1995 for the first time since Prince Alwaleed Bin Talal Bin Abdul-Aziz al-Saud took control of the bank in 1986. Saudi International Bank, which is 50 per cent owned by SAMA, sold its 10 per cent stake to the General Organisation for Social Insurance (GOSI) and the Pension Fund, both existing shareholders, at the end of 1994. The other shareholders are Bank Melli Iran and United Bank of Pakistan, each with 10 per cent. Prince Alwaleed is believed to own up to 40 per cent of the bank. A 100 per cent bonus share issue was paid to shareholders earlier this year.

Saudi Investment Bank (Saib). A sharp rise in lending and investments in securities helped lift the net profits at the bank by 27 per cent in 1995 to a new record of SR 85.2 million ($23 million). The bank, the second smallest of the 12 Saudi banks, has again decided to pay no cash dividend for the year, opting instead to issue an unspecified number of bonus shares to stockholders. Features of the year included a 46 per cent increase in operating income, the biggest rise in this category reported by any of the banks in 1995. Provisions were cut by 25 per cent and other income rose by more than 300 per cent. Total assets rose by 25 per cent to SR 8,211.2 million ($2,190 million). This reflected a 20 per cent rise in customer deposits and a 17 per cent increase in lending in the year. The investment securities category of the balance sheet, mainly government development bonds, rose by 36 per cent.

Saib is owned by a consortium of local and Saudi financial institutions: Chase Manhattan Bank has 15 per cent; GOSI, NCB, Riyad Bank and Bank al-Jazira have 8 per cent each; and The Industrial Bank of Japan, J.Henry Schroder Wagg & Company and National Industrialisation Company (NIC) have 5 per cent each. The rest is freely floating. Saib chairman Abdulaziz OHali said the size of the bonus share issue will be similar to that provided to shareholders in 1994 when the bank's capital was doubled to SR 180 million ($48 million). He says the bank is also considering the possibility of raising new capital through a share issue. General manager Saud al-Saleb said long-term earnings growth is being driven by an increasingly broad spectrum of banking activities. Saib was the best-performing share on the Saudi stock market in 1995. It rose by 47 per cent to SR 471 ($126) in the year, but has since fallen back to SR 435 ($116).

Results for the first three months of 1996 show that the positive trends seen last year were continuing at most banks. AI-Rajhi, Arab National Bank, Saudi British, Saudi French, Saib and USCB have announced higher profits, with Saudi American reporting that net income in the first quarter fell modestly from the figure recorded in the same period of 1995.

This year holds a range of opportunities and risks. The opportunities include a growing demand for project finance. The most prominent and challenging is the $500 million, 10-year facility to finance the expansion of the Ghazlan power station. In March, three groups submitted bids for the mandate to organise the loan, the first of its kind for a Saudi utilities scheme. It is possible that it will set a precedent for future borrowing to finance infrastructure in the kingdom and enhance the development of the Saudi credit market.

Developing products

Other emerging opportunities include developing the personal loan market. The growth in the number of young professionals starting families is stimulating the increase in demand for financial services, including instalment credit, car and durable good finance plans, mortgages and overdraft facilities. Banks are also developing their capacities to provide more personalised services for bank customers, in effect a private banking product that better reflects the cultural and social characteristics of the kingdom.

The challenges for bankers include the limited number of high-quality lending opportunities. This is forcing banks to invest more in marketing departments and the credit-risk assessment process. Because a high proportion of Saudi deposits are shortterm, banks have to work hard to maintain the loyalty of customers who can quickly withdraw their funds.

The government's demand for finance is also a worry, and it is evident from 1995 figures that several leading banks have decided they have reached the limit of their appetite for development bonds. The state has responded by issuing special bonds to cover payment arrears to contractors, many of whom had built up substantial overdrafts with the banks. The latest tranche was issued in April and carries yields of 6.45-6.97 per cent, depending on maturity. Income from the bonds is free from zakat tax, and this makes them attractive to the banks. In March, banks began trading in non interest-bearing certificates paid to farmers to cover overdue amounts worth an estimated $2,500 million.

These developments provide a further incentive for banks to increase their wholesale capital market trading activities. They already benefit from having the monopoly over trading in the over-thecounter market for shares. The bonds and certificates issued in the past year entail complications that are apparently inexorably linked to the way the kingdom operates. But for those institutions able to master their intricacies, they provide another way to keep the profits rolling.