The banks in South and South-East Asia face the clearest credit risk from a prolonged Middle East conflict, but the pressure is likely to build slowly rather than all at once, Fitch Ratings has said.
The rating agency said higher energy prices, supply-chain disruption and weaker remittance flows could hurt emerging market banking systems first, where borrowers have less room to absorb shocks.
The report said the first signs of stress would likely show up in retail, micro-enterprise and small and medium-sized enterprise (SME) loans. It added that countries with heavier exposure to commodity prices and trade disruption, including the Philippines, India and Thailand, could face more pressure if the conflict lasts longer. Singapore may also feel some impact, though to a lesser degree.
Fitch said banks with weaker standalone credit strength, known as Viability Ratings, could come under pressure if higher fuel costs and supply disruption weaken borrower cash flows for long enough. It said the most exposed sectors include refiners, chemicals, energy-intensive manufacturing and parts of retail. Small businesses remain more vulnerable than larger corporations because they have less of a financial cushion.
The report also said most bank issuer ratings in emerging Asia are supported by governments or shareholders, which means weaker standalone profiles do not always lead to immediate rating cuts. Around two-thirds of emerging market Asia-Pacific (APAC) bank issuer ratings are support-driven, and in countries such as China and India, this is especially true. That means a weaker operating environment could hurt underlying credit strength first, before affecting broader ratings.
Indian banks, however, were described as better placed than many regional peers to handle a moderate slowdown. Fitch said recent positive rating actions and current asset-quality metrics show Indian banks are starting from a stronger position, even though it already expects some weakening in its forecasts. Still, the agency warned that the effect would depend on how long the shock lasts and how widely it spreads through borrowing sectors. |
