Saudi banks set to face difficult year, says S&P

Banks in Saudi Arabia are likely to face “increasingly difficult operating conditions” over the coming two years, as weak oil prices put pressure on government spending and impact the country’s economy, Standard & Poor's (S&P) Ratings Services said in a report on Wednesday.

"The sharp drop in oil prices and the resulting impact on Saudi Arabia's fiscal balance will weaken operating conditions for the banking sector. We expect banks' profitability will decline in 2016, owing to lower credit growth combined with a rise in funding costs and credit losses," S&P credit analyst Suha Urgan said.

The agency said the low oil prices have already resulted in slowed momentum in credit growth and local interest rates have climbed due to tightening liquidity.

"In particular, we expect credit growth will contract to mid-single digits, given the strong correlation between oil prices, government spending, and credit growth," Urgan said. "We also anticipate that asset quality will deteriorate but remain tightly managed, owing to countercyclical buffers the regulator has imposed in recent years, and we expect further tightening of overall liquidity conditions, leading to higher funding costs," he added.

S&P said its rating of “negative outlook” on eight Saudi banks it rates reflects its viewpoint.