Middle East conflict poses limited direct bank risk, says agency

At the present stage, the direct and indirect effects of the expanding conflict in the Middle East on international banks and asset managers are considered manageable, according to a report by Morningstar DBRS.

The rating agency stated that international banking groups do not have material direct exposures in the Middle East, thereby limiting immediate credit risk.

However, it warned that indirect effects are expected to arise mainly through macroeconomic channels, which could affect loan portfolio quality, economic growth rates and central bank monetary policy decisions.

“If the conflict escalates or lasts longer than expected, we anticipate higher loan loss provisions and lower than expected global economic growth, which could ultimately weaken credit fundamentals, reflecting increased uncertainty,” said North American Financial Institution Rating Director Michael Driscoll.

Morningstar DBRS explained that a prolonged or intensified crisis could therefore weigh on credit fundamentals, even in the absence of significant direct regional exposure.

With regard to asset managers, the agency noted that there are no significant direct exposures to the region, although development initiatives in the Middle East may be delayed.

Market volatility is not expected to materially affect their credit profiles, but smaller asset managers are seen as more vulnerable to prolonged instability.

According to the rating house, despite heightened geopolitical uncertainty, immediate risks to the global financial system remain contained.

It added that the main challenges are likely to stem from potential macroeconomic impacts in the event of a prolonged or further escalation of the crisis.

The overall assessment suggests that while financial institutions are shielded from substantial direct shocks, the broader economic consequences of sustained instability could gradually influence profitability, asset quality and strategic planning across the sector.