IT is the youngest and one of the smallest of Saudi Arabia's commercial banks but it has not always enjoyed such ready acceptance among its peers. In the mid-1980s, United Saudi Commercial Bank (USCB) reported a string of losses and the Cyprus-based ratings agency Capital Intelligence issued the bank a below average rating of gamma.

Now the bank presents an entirely different picture. Profits have risen steadily since 1988, management has been overhauled and Capital Intelligence has awarded the bank a long-term rating of A. USCB is now proceeding with a second five-year plan and is keen to develop as a niche operator, which makes it something of a rarity among Saudi banks.

History and structure: USCB was founded in 1983 with the merger of the local interests of three foreign banks - Beirut-based Banque du Liban & d'Outre Mer, Bank Melli Iran and Pakistan's United Bank. A further stake in the new operation was taken by the London-based Saudi International Bank, itself 50 per cent owned by the Saudi Arabian Monetary Authority (SAMA - central bank). The remaining 60 per cent was held by the Saudi public.

In 1986, Banque du Liban & d'Outre Mer sold its 10 per cent stake to the Saudi public and at the end of 1994 Saudi International Bank (SIB) completed the sale of its 10 per cent holding to two public entities, the General Organisation for Social Insurance and the Pension Fund. SIB's management contract with USCB expired in 1989.

But the most dramatic change in USCB's shareholding structure came in 1988, when Prince Al-Waleed Bin Talal Bin Abdulaziz

al-Saud became the largest single shareholder, acquiring about 40 per cent of USCB. Prince Al-Waleed has since gained a reputation as a smart and colourful investor and is perhaps best known for his 1990 purchase of Citicorp stock - turned into a handsome profit through the sale of 8 million shares in 1993 - and a recent foray into Eurodisney.

USCB's performance since 1988 has undoubtedly reflected the close association with Prince Al-Waleed. The bank has, for example, acted as an advisor and transitional underwriter for the acquisition of the prince's holding in Eurodisney.

'He is still the driving force behind this bank and continues to support the bank directly and indirectly, particularly supporting the bank's marketing efforts,' says Maher al-Aujan, the managing director. But Al-Aujan is keen to emphasise the management's independence: 'As a financial institution we stand on our own feet.' Al-Aujan joined USCB from Saudi American Bank in 1988. He was promoted to general manager in 1993.

The last few years have seen the bank transformed, but Prince Al-Waleed's chairmanship has ensured continuity. 'He lends support to the image of stability of this bank, which is as good as any major financial institution,' says Peter Clarke, head of international banking.

Since 1987, there has been a sharp drop in staffing levels from 427 to a low of about 270 at the start of the 1990s. It has since stabilised at just over 300.

The bank has also become increasingly automated. It has 16 branches but about 80 per cent of all transactions are now processed through the head office. USCB's 19 automated teller machines (ATMs) are due to double in number by the end of 1995. And USCB-operated point-of-sale (POS) payment machines, which at the end of 1994 numbered 312, are expected to increase by almost half again by the end of 1995.

Strategy: It is not only the structure of the bank which has been transformed since 1988. USCB has also radically rethought its strategy and is now 18 months into its second five-year plan. 'For many years we developed our corporate banking, but now that sector has reached maturity and gives little opportunities in the market,' says Al-Aujan. 'Now we are developing treasury and private investment activities.'

As an indication of USCB's commitment to its new strategy, the bank is soon to extend the private banking division so that it covers the entire first floor of its Riyadh head office, to include the area now occupied by the corporate banking department.

The strategy includes developing the bank's retail services, but the focus is now on the upper end of the consumer market, where strong marketing arms for treasury and investment products will be essential. USCB is planning a series of new products with three or four to be launched by the middle of this year. 'We are not simply going to be a conduit to advise and channel funds,' says Al-Aujan.

This comes closer to a specialist approach than anything being undertaken by other banks in the kingdom. 'We have found our niche and defined our niche,' says Clarke. 'We are the Saudi equivalent of a merchant bank in many respects. We think it is a dangerous road to try to be all things to all men.'

He says many banks in the kingdom have wasted money trying to promote a wide range of products, and he acknowledges that USCB's route is unique among Saudi banks. Al-Aujan is unequivocal: 'We are going to be a specialised bank.'

Performance: The changes introduced since 1988 have made USCB one of the most profitable banks in the kingdom. At 2.93 per cent, the bank's return on assets was the highest among Saudi banks for 1994. The string of profits and a policy of retaining earnings to boost shareholders' equity rather than distributing dividends, has also made it one of the highest capitalised banks in the kingdom.

'We are overcapitalised,' says Peter Clarke. 'Profit growth has outpaced the growth in the balance sheet.' The decision to retain earnings was a response to the bank's difficulties in the 1980s, but the issue of whether to restart dividend payments is moving up the agenda.

In 1994, the bank's assets shrank slightly to SR 10,378 million, as profits rose by almost 15 per cent, to SR 304 million. The same trend has shown signs of continuing into 1995, as first quarter results showed profits up slightly on a year earlier to SR 81 million, against a 2 per cent drop in assets to SR 10,510 million during the same period.

The bank attributes the improvement in earnings in 1994 to its small portfolio of medium-term fixed income assets. This left the bank in a positive position when the bond markets went into a tailspin last year. Only in the last six months has the bank returned to the bond markets.

Outlook: USCB is not planning to increase the size of its balance sheet, despite the opportunity offered by a rapidly expanding capital base, and the need to use this resource effectively. The emphasis will be on increasing returns from its existing portfolio, and concentrating on the treasury and private banking departments.

Management is confident that this narrower focus can deliver a more profitable outfit. 'Nobody else has tried it yet,' says Clarke. But only time will tell if USCB can make it work.