With little direct exposure to the region, global banks and asset managers don’t face material impacts from the growing conflict in the Middle East, but will be affected indirectly through macroeconomic channels, says Morningstar DBRS Inc.
In a report published Tuesday, the rating agency said global banks don’t have any direct exposures to Iran, given that it has been under severe economic sanctions — and, even their exposures to the broader Middle East region remain limited, and immaterial relative to the banks’ earnings and balance sheets.
“As a result, we do not anticipate any near-term credit rating pressures on our global bank credit ratings, despite certain global banks having modest operations in key urban centers in the region,” the report noted.
However, if the conflict lasts for longer than expected, or escalates significantly, global banks could face higher loan loss provisions, and slower-than-expected global economic growth that eventually leads to weaker credit fundamentals, it suggested.
As for global asset managers, DBRS said the conflict, and its impact on markets, is “unlikely to have a material impact” on the firms’ underlying credit profiles — although smaller managers “are more vulnerable” to these kinds of shocks.
“The Middle East does represent a growth platform for certain managers that we rate, but the exposures are modest, and therefore any disruption to strategic growth initiatives in the region is unlikely to be material,” it noted.
Despite the limited direct exposure, both banks and asset managers do face possible indirect consequences, “including sustained higher oil prices, negative earnings shocks for borrowers in key sectors like shipping, and any other potential event, such as a terrorist attack in a Western nation, that would hurt investor and consumer confidence,” the report said.
A prolonged oil shock could stoke inflation, resulting in higher interest rates and weighing on consumers, it said.
“This could negatively affect credit quality and loan growth,” the report noted.
At the same time, increased market volatility should boost banks’ trading revenues, it said.
“However, we do expect merger and acquisition and debt and equity underwriting to suffer some delays until geopolitical tensions are reduced,” it added.
Finally, there’s also a growing risk that “Iran could increase its cyberattacks against Western entities, including banks,” it noted.