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Saudi banking: bouncing with good health.

Saudi banks are making the most of the kingdom's buoyant economy. The latest annual report from the Saudi Arabian Monetary Agency paints an encouraging picture. But Mushtak Parker warns that they should not let their favourable rating from the Bank for International Settlements go to their heads.

UNLIKE ITS GULF counterparts in Kuwait and the UAE, the banking sector in Saudi Arabia, riding high on a resurgent economy and a healthy securities market, is relishing its return to profitability and steady expansion. Income of Saudi banks from investment securities, for instance, last year rose by a healthy 41.1% to SR3.1bn -- accounting for 26.6% of gross profits in 1992 compared with 17.9% in the previous year. And these figures do not include those from arguably the two largest banks in the kingdom -- the National Commercial Bank (NCB), which has not published financial accounts for the third successive year, and Al Rajhi Investment and Banking Corporation (Arabic), which operates under Islamic profit-and-loss banking principles and cannot therefore invest in securities.

All the indicators point to a vintage year in 1992 for Saudi banking, with the aggregate profits of the 11 reporting banks showing an average increase of just under 30%. The latest annual report of the Saudi Arabian Monetary Agency (Sama) for the fiscal year 1991/92 supports the optimistic prospects for both the Saudi economy and the financial sector.

The central bank says that deposits at the end of March 1993 reached SR186.8bn ($49.8bn), up by an average of 6.4% on the previous year. Total loans granted by the Saudi banking sector to the private sector rose by 18% in 1992 and there was a marked improvement in the liquidity of commercial banks, which are playing an increasing role in financing government borrowing requirements through the government development bonds and bills. Not surprisingly, the local assets of Saudi commercial banks increased from 54% at the end of 1991 to 61.1% at the end of the first quarter of 1993. Saudi commercial banks, says Sama, have increased their capital and reserves at an annual rate of 35.4% to reach SR26.2bn ($6.99bn) at the end of March 1993.

Saudi bankers are optimistic about prospects over the next few years and say that profitability is set to continue during fiscal year 1993. Saudi American Bank (Samba) recorded a net profit of $60m in first quarter 1993 -- up on the $58m in the same period in 1992. Riyad Bank recorded an 8.3% rise in net profits to $59.7m in the same period. Saudi Hollandi Bank, Al Bank al Saudi al Fransi, Saudi Cairo Bank, Saudi British Bank (SBB) and Arab National Bank all recorded similar increases in profitability. One of the few exceptions to this is Al Rajhi Banking and Investment Corporation which reported a 1.4% drop in net profits to $48m for the period (although this could be put down to high operating costs due to the bank's major restructuring programme).

The seeds of this apparent strength were sown by strategies to reinforce the capital strength of Saudi banks either through public share issues or transfers from bank reserves. As a result, Saudi TABULAR DATA OMITTED banks are now comfortably above the 8% minimum ratio of capital to assets set by the Bank of International Settlements (BIS) and the Basle Committee on Capital Adequacy which came into force at the beginning of this year. A recent study by Sama on the capital adequacy of Saudi banks showed that the kingdom's banks were well in excess of the requirements of the Basle Committee.

This solid capital adequacy base, together with a high-return and vibrant securities market, greater control of credit policy and other lending, analysts say, augurs well for the medium-term future of Saudi banking. It will also be better insulated against any economic downturn than during the late 1980s, when many banks suffered the agonies of heavy provisioning against doubtful loans and net losses.

Other encouraging trends in Saudi banking in 1992 include a marked decline in operating costs, especially in the rate of increase of administrative costs and salaries to 5.8% last year compared to 10.4% the previous year. As a group, the 11 banks which have produced results experienced a 5.2% fall in gross income and a 16% increase in assets of Saudi banks (excluding NCB) to SR234.2bn ($62.5bn). Customer deposits rose by 7.4% or SR11.15bn ($2.97bn) and equity increased by SR7.48bn ($2bn).

The one remaining question mark over the kingdom's banking sector is the performance of National Commercial Bank (NCB), which has now failed to publish accounts for the third successive year -- an omission which casts a shadow over the underlying strength of the Saudi banking sector.

Western monetary agencies are watching developments at NCB very closely, especially in its dispute with Sama over some aspects of its loan portfolio. They are wary of such inconsistencies and contradictions in both the banking sector in terms of supervision. For the moment foreign banking observers are content to view the NCB case as a one-off aberration which has to be resolved sooner than later.

The Saudi banking sector, one Western banking analyst said to The Middle East, have a worrying misconception about country credit and international banking settlement risks rating. Saudi Arabia was classified by the BIS as a low-risk country and the remaining Gulf states as high risks. "This is a misunderstanding. It has nothing to do with credit and risk rating. Saudi Arabia's inclusion with the OECD countries is purely by accident, in that the sole criterion used was subscriptions to the IMF, of which the kingdom has one of the largest. Kuwait, for instance, has hardly had any subscriptions with the Fund, despite its aggressive and large international investment portfolio."

Banking analysts also suggest that while income from securities and from trading activities will continue to play a major role in banking prosperity in the kingdom, there are signs that the banks are losing their appetite to lend to some state agencies who are seeking to diversify into new areas and products. It is also felt that the Saudi banking sector lacks the range and sophistication of financial products commonly used by Saudi clients, both corporate and private. Analysts, however, are confident that Saudi banks do have a certain depth of banking expertise to exploit these specialised demands.

"In terms of risk, the weighting carried by, say, British Petroleum would be the same as any other major company in the Gulf," says a Western observer. "OECD banks would have the same extra reserve requirements for exposure to such corporations under the rules. No-one is targeting or trying to classify Gulf banks. And the Saudi banking sector should be under no illusion that its inclusion in the OECD group is a reflection of its financial health."

Nevertheless, at least two of the top three Saudi banks in 1992 -- Samba, Saudi British Bank and the United Saudi Commercial Bank (USCB) -- are targeting the European Community as part of their expansion programme. Samba recently appointed James Collings, formerly from Citibank (one of the bank's major shareholders), as its new managing director. Earlier this year, Samba was authorised by the Bank of England to carry out banking business in Britain. There appear to be objections to Samba expanding elsewhere in the European Community under the Single Market rules.

As far as performance of the Saudi banking sector in 1992 is concerned, in terms of return on average equity -- that is generating dividends for shareholders -- Samba comes out on top of the profitability league with 36.25% compared with USCB at 29.18% and SBB at 23.57%.

However, a more reliable way of rating is perhaps the return on average assets and the ratio of revenue to expenses, both of which measure the efficiency with which a bank utilises its money. Here Al Rajhi emerges in the lead for return on average assets with 2.59% (down on the 1991 figure of 3.36%), followed by USCB with 2.44% compared with 2.27% in the previous year and SBB in third place with 2.41%, up on 2.32% in 1991.
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Title Annotation:Business & Finance; Saudi Arabia
Author:Parker, Mushtak
Publication:The Middle East
Date:Jul 1, 1993
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