Key Takeaways
- We do not anticipate any near-term pressures on our global bank credit ratings.
- Indirect effects on banks are likely to be via macroeconomic channels that affect credit quality and growth as well as central bank interest rate policies.
- Global asset managers do not have direct exposures, although smaller companies may be more exposed.
Given that Iran has been under severe sanctions that have crippled its economy, global banks do not have any material direct exposures to the country. While exposures do increase when considering the entire Middle East, they remain small or immaterial to banks’ balance sheets and earnings power.
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. If the conflict escalates or is sustained over a longer-than-expected period, we expect higher loan loss provisioning and slower-than-expected global economic growth to eventually weaken credit fundamentals, reflecting the increased uncertainty.
Smaller Asset Managers More Vulnerable
The current market dislocations are unlikely to have a material impact on underlying credit profiles, although smaller managers with more limited assets under management and less committed capital providers are more vulnerable to such 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. The majority of our larger rated asset managers, mostly privately rated, are in the investment-grade range, and demonstrate the expected level of resilience to such geopolitical events.
Prolonged Conflict Would Hit Economic Growth
We remain the most concerned about potential 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. Moreover, Iran could increase its cyberattacks against Western entities, including banks.
The global economy is already dealing with much uncertainty related to on-again, off-again tariffs, likely delaying investment decisions. A prolonged or widened conflict in the Middle East would only add to this and likely adversely affect global economic growth.
A sustained oil shock could exacerbate inflation, potentially delaying further rate cuts by the major central banks. While elevated interest rates generally support net interest income levels, higher inflation would further burden consumers that have been struggling with cost of living challenges for years. This could negatively affect credit quality and loan growth.
Mixed Impact on Capital Markets Businesses
Increased volatility should continue to bolster trading revenue at banks with capital markets businesses. However, we do expect merger and acquisition and debt and equity underwriting to suffer some delays until geopolitical tensions are reduced.
This article is taken from a Morningstar DBRS report, “Middle East Conflict: Direct and Indirect Impact Manageable for Global Banks and Asset Managers”
