US-based Standard & Poor’s Rating Services (S&P) has downgraded five banks in Saudi Arabia, including National Commercial Bank, as lower oil prices take their toll on the kingdom’s economy.

The slower growth in the Saudi economy means that operating conditions for banks are more difficult, according to S&P.

This follows a downgrade of Saudi Arabia’s sovereign rating by S&P in February, to A-/A-2, and a banks downgrade in November 2015.

Saudi Arabia’s banks are highly exposed to concentrated risk due to the limited diversification of the economy and the dominance of a few private sector companies. The sectors of concern include construction and real estate.

This will exacerbate the expected rise in non-performing loans and credit losses as the weaker economic outlook affects companies’ ability to service debt.

Profits will also be lower as deposit and loan growth slows. Lower capital generation will also make it harder for Saudi banks to generate capital to cover risks.

However, the Saudi banking system still benefits from low-cost deposits which form a funding base, high loan-loss reserves and strong capitalisation. The central bank, the Saudi Arabian Monetary Authority (Sama) is also a strength, with its close, conservative supervision.

Special Report: Finance