UPDATE 2-Saudi's Rajhi Bank Q1 profit rises on more lending

(Adds analyst comment, background)

By Souhail Karam

RIYADH, April 13 (Reuters) - Saudi Arabia's Al-Rajhi Bank's 1120.SE first-quarter profit rose 2.1 percent, as the Gulf's largest Islamic lender boosted profit from core business operations.

Net income in the three months to March 31 climbed to 1.6 billion riyals ($427.2 million), or 1.07 riyals per share, compared with 1.57 billion riyals, or 1.05 riyals per share, in the year-earlier period, the bank said in a statement.

The bank raised its paid-up capital by 11.1 percent earlier this year through a bonus share issue.

It was the strongest rise in quarterly net profit since December 2006, after which the bank had a run of negative results due to a stock market crash in 2006, which slashed local banks' brokerage and fund management revenue.

Net income from investment -- the equivalent of income from lending in traditional banking -- rose 11.5 percent to 2.03 billion riyals, it said. Income from banking services increased 18 percent to 454 million riyals, it said, without giving details about other sources of revenue such as from trading and foreign exchange operations.

"The bank continues to achieve growth by diversifying its sources of revenue, and developing the investment and corporate banking sectors along with retail banking," Chief Executive Abdullah Sulaiman al-Rajhi said in the statement.

Local investment bank KSB Capital forecast Al-Rajhi would post a profit of 1.6 billion riyals.