JEDDAH, 4 October 2004 — The Saudi Investment Bank (SAIB) has been making a conscious effort to increase its market share in retail banking especially in the high-margin consumer financing business.

The bank has aggressive expansion plans which includes increasing the number of branches and ATMs and also tying up with vendors for consumer financing agreement, according to a Kuwait-based Global Investment House (GIH) report.

The bank plans to increase its leasing business in which there is no major competition. “The bank has, till now, witnessed a stable investor base, but will have to go all-out to woo the retail investors as it cannot afford a flat rate of growth in the customer deposits,” the GIH report said.

The objective of SAIB — established on June 23, 1976 and began operations in March 1977 — was to provide medium to long-term financing for industrial projects but in 1984, it approached Saudi Arabian Monetary Agency (SAMA) and was allowed to provide full-fledged conventional banking activities.

For the year 2003, SAIB reported a net income of SR463.9 million compared to SR380.4 million for 2002 representing an increase of 22 percent. The increase was mainly a result of the large decline in special commission expense coupled with an increase in non-commission income.

SAIB reported a net profit of SR293.9 million for the first half of 2004, an increase of 32.5 percent as compared to the SR221.8 million net profit reported for the same period in 2003. The net commission income reported a strong increase of 29.3 percent over the corresponding period last year.

Fee from banking activities surged by 121.6 percent — from SR67.5 million in first half of 2003 to SR149.6 million in first half of 2004. The bank’s share capital increased from SR1.1 billion in 2003 to SR1.375 billion at the end of June 2004. The increase was a result of the bank issuing 5.5 million bonus shares (1:4 ratio) amounting to SR275 million.

Based on the combination of Dividend Discounting Model (DDM) and Comparative Valuation Methodology, the GIH valued the share of SAIB at an intrinsic value of SR461.8 per share.

The stock currently trades at around SR420, which implies that the value arrived by using above methods is 10 percent higher than the current market price. Hence, the GIB initiates the coverage of SAIB stock with a BUY recommendation on the stock with a medium term perspective.

Key Strategic Developments

SAIB that has traditionally focused on wholesale banking products is now going through a paradigm shift. The bank is now focusing on the lucrative retail-banking sector and plans to increase its branches and ATM locations in order to increase its coverage area. The bank plans to add 2 new branches and 10 more ATMs locations by the end of 2004. The bank has also enhanced and added more features in its retail products and services in order to be more competitive and cost effective. The bank is trying to overcome its limitation in terms of branch network by increasing its Web-initiatives and enhancing phone-banking facilities. SAIB proactively entered the unexplored territory of leasing business in Saudi Arabia by forming the first Saudi leasing company — Saudi ORIX Leasing Company.

Financial Performance

During the period 2001-2003, SAIB’s total assets grew at a CAGR of 19.3 percent, from SR15.25 billion in 2001 to SR21.71 billion in 2003. In 2003, SAIB had one of the lowest NPL ratio of 1.8 percent in the Saudi banking sector.

Customers’ deposits amounted to SR14.40 billion in 2003 compared to SR10.95 billion in 2001 representing a CAGR of 14.7 percent.

The bank reversed the trend of declining commission income by posting a marginal increase in commission income in 2003 — from SR850.3 million in 2002 to SR867.6 million in 2003. Due to the dominance of wholesale banking in its overall business, the bank has one of the lowest spreads in the sector.

During the period 2001-2003, non-commission income increased by a 47.3 percent CAGR, contributing almost 39.1 percent of total operating income in 2003 compared to 27.6 percent in 2001. SAIB had launched a Trade Finance Fund in 2003 and further launched 5 new funds in 2004 through which it intends to increase the non-commission income of the bank.

SAIB’s net income increased at CAGR of 23.5 percent during the period 2001-2003. The non-commission income is likely to increase further as the bank increases its fee-based activities. The GIH said that the bank will also improve its spreads in coming years that will have a positive effect on profitability.