“We expect lower business volumes, higher cost of risk, weaker profitability, and slower growth in deposits for Saudi banks,” S&P said.
“Still, the deterioration should be generally moderate in the next couple of years because Saudi banks have overall good capital cushions.” it said.
Saudi Arabia has reportedly withdrawn tens of billions of dollars from global asset management firms in response to the ongoing slump in oil price as the kingdom sought to maintain government spending to sustain the economy.
The central bank has also recently approached domestic banks to finance a bond programme to offset the rapid decline in reserves.
"Saudi banks' asset quality and cost of risk will be under pressure."
Saudi Arabia, remains the region’s biggest oil producer, with no real government debt, and with huge foreign exchange reserves.
Sovereign downgrade
However, at the end of last month S&P felt the impact of lower oil revenues was significant enough to cut its ratings on the Kingdom of Saudi Arabia by one notch to ‘A+/A-1’ from ‘AA-/A-1+’ and it warned it may reduce the rating further.
It has now downgraded the ratings for eight Saudi banks.
“We anticipate more limited lending opportunities for the banks given the government’s publicly announced plans to postpone some investment not currently underway and the high correlation between economic activity and government spending.
“We also think that Saudi banks’ asset quality and cost of risk will be under pressure. Still, the deterioration should be generally moderate in the next couple of years because Saudi banks have overall good capital cushions.
“We think Saudi banks will continue to exhibit good financial profiles, but their profitability could weaken slightly,” it said.
The downgrade to single A –plus level still means a banks ability to meet its obiligations remains strong.
