Middle East war could cost Asia-Pacific banks $180 billion in losses, S&P says

A prolonged war in the Middle East could inflict significant losses on Asia-Pacific banks, with credit losses rising by about $180 billion over the next two years under a downside scenario, S&P Global Ratings said in a report released Thursday.

The report, titled “Asia-Pacific Banks: The US$180 Billion Downside Scenario,” said cumulative credit losses could reach $910 billion in 2026 and 2027, compared with $730 billion under its base case.

Under the base scenario, the impact of the conflict on banks is expected to remain limited, as direct exposure to the Middle East is low and indirect risks are manageable.

“These forecasts show most banks have sufficient capacity to absorb Middle East war pressures at current rating levels,” S&P said.

Indirect risks dominate

S&P said banks are more likely to be affected by secondary impacts on households, corporations and governments if the conflict worsens or persists.

“Banks are more likely to be hurt by secondary impacts on the household, corporate, and government sector in a downside scenario,” said credit analyst Gavin Gunning.

“This would occur if the effect of the war on economic and credit conditions is much worse or longer than our base envisages,” he added.

Financial institutions with large exposures to vulnerable sectors such as airlines, energy, chemicals and transportation could face greater strain.

Resilience and outlook

Despite the risks, S&P said the sector remains broadly resilient, supported by capital buffers.

Of the more than 400 financial institutions rated in Asia-Pacific, 92% have stable outlooks, while only 2.9% are on negative outlook. A negative or positive outlook indicates a one-in-three chance of a rating downgrade or upgrade.

Even under the downside scenario, S&P expects most banks to maintain resilience at current rating levels.

Regional impact and oil risks

The increase in credit losses relative to total loans would be more pronounced in countries such as Vietnam, Indonesia and India, though banks in these markets are still expected to remain resilient.

S&P’s downside scenario assumes the conflict persists through April, with Brent crude prices peaking at $200 per barrel and averaging $185 per barrel in the second quarter before easing toward $100 per barrel by 2027.