US-based Standard & Poor’s Rating Services (S&P) has downgraded five banks and assigned a negative outlook to a total of eight banks in Saudi Arabia, including the largest banks in the kingdom.

The ratings agency predicts a weakening operating environment for Saudi banks and increased economic risks.

It expects banking sector profits to decline.

S&P downgraded Saudi Arabia’s sovereign rating in October as its fiscal balance is deteriorating sharply.

The government’s plans to slow capital spending on infrastructure investment will result in less lending opportunities for the banks.

Deposit growth has also begun to slow, according to S&P, but banks are still fairly liquid. Potential reforms of social subsidies could also affect banks’ retail business as households are less able to save and borrow.

Slower economic growth, which is highly dependent on government spending, will also affect the banks as asset quality declines and the cost of risk increases.

The cost of interbank lending and credit-default swaps, which insure risk, are at their highest levels since 2009, according to Bloomberg.

However, the banks built up excellent capital buffers while oil prices were high, and the decline should be gradual, according to S&P.

Non-performing loans are currently only in single figures and coverage is high.

If lower oil prices persist, the banks’ balance books could come under more pressure.

Saudi Arabia’s banks will be helped by government debt issuance, of which they can comfortably buy $75m to $100m, according to S&P. Riyadh has issued less than $10bn so far in 2015.