The Iran conflict, which has gone on to hurt economic prospects in the region that is extremely dependent on Middle Eastern oil, may as well go ahead and cause growing credit risk for Asia Pacific banks and again increase their loan loss provisions in the short term, analysts said.
Banks in Australia, Singapore and India went on to flag potential credit hits in the hundreds of millions of dollars apiece as they disclosed their March quarter earnings, emphasising the indirect expense of the conflict. The rise in the credit loss provisions comes as lenders also grapple with the prospect of higher-for-longer oil prices and supply chain as well as trade disruptions, in addition to higher interest rates along with weaker corporate balance sheets.
Analysts go on to say that while higher loss provisions will not make a significant impact in the short term, considering the substantial capital buffers, extended energy market disruptions might result in real credit losses and put additional pressure on banks to restore balance sheets. It is well to be noted that more Asian banks have forward-looking overlays in order to account for the risks from the Iran war, remarked Gary Ng, one of the senior economists for Asia Pacific at Natixis CIB, although so far there has not been a spike of credit defaults.
The bottom line is that even if the war ends soon, energy prices may stay elevated because of supply destruction. Interest rates may not come down, which may harm corporate repayment capacity and put stress on credit demand, Gary added.
Although credit risk for Asia Pacific banks is seen, current credit loss provision quantities at Asia Pacific banks are considerably lower as opposed to the charges they took to deal with the COVID-induced economic shocks five years back.
The total of A$957 million, or $694.40 million, in reserves set aside by the top four Australian banks for war-related risks happens to be 80% lower than the reserve they established in 2020. For eight large Asian banks eliminating China and Japan, it is 70% lower at $2.8 billion, based on Reuters calculations.
High Oil Price
Ng went on to say that the actual credit losses at Asian banks could rise, but the magnitude would indeed go on to depend on the time frame of the war, which is at present in its 11th week.
The fact is that the economic cost of the war continues to rise in the region. The Asian Development Bank has slashed its growth projections for developing Asia and the Pacific to 4.7% in 2026 and 4.8% in 2027, from 5.1% for both years earlier.
One of the senior economists with Interactive Brokers, José Torres, said that the high oil prices, weakened currencies and higher bond yields contributed to the earnings of the regional banking sector to fall further next quarter.
Australia’s biggest lender, Commonwealth Bank of Australia, went on to lose nearly $22 billion in market value on May 13 after it set aside some more cash to be ready for risks that come linked to the Middle East conflict. The other three major banks of Australia have also raised provisioning levels by A$757 million, which is equivalent to $549.13 million, over the past two weeks in order to cover future possible bad debts due to the war.
But if the turmoil results in a disturbance in credit markets, current provisions held by Australian banks could be too low, Matthew Wilson, the head of financial research at investment bank Jarden, remarked. All this lies ahead, is what he said. Banks are late cycle, and one would see the actual effect on the domestic economy through the industrials and cyclicals in the following six months. He further went on to add that it was too early to tell if a credit market downturn was coming.
A Conservative Estimate
In Singapore, where all three big lenders have restricted direct exposure to the Middle East, with the region comprising less than 3% of their overall lending, the No. 2 lender, OCBC, took S$216 million, or $170 million, in provisions.
Singapore’s United Overseas Bank Chief Executive Officer Wee Ee Cheong said recently that the bank’s direct exposure to the Middle East was pretty insignificant but went on to warn that second-order effects could as well go ahead and increase costs for small and medium-sized enterprise customers.
London-based HSBC and Standard Chartered, which obtain the majority of their revenues in Asia, recorded $300 million and $190 million charges, respectively, in the March quarter, indicating caution. Further banks who increase their loan loss provisions such as HSBC and StanChart are not out of the question considering the volatile nature of the ongoing conflicts, said equity analyst at Morningstar Kathy Chan, who further added the two banks have been very vigilant in evaluating risks.
It is worth noting that some half a dozen lenders in India, including HDFC Bank, Axis Bank as well as Blackstone-backed Federal Bank, have gone ahead and created provisional buffers but have not observed any asset quality degradation so far.
Apparently, it is Australian banks that have been the biggest losers in the Asian banking space, with National Australia Bank down 21.2% and Westpac down 12.4% ever since the U.S. and Israel’s war on Iran began on Feb. 28.
The provisioning that has been provided at this point is a conservative estimation of the effects to date, opined the managing director at Whitefield, Angus Gluskie.
It owns Australia’s Big 4 bank stocks and oversees A$1.5 billion in assets. If the problem can be solved swiftly, banks who went on to increase their loan loss provisions might be rolled back in part. If the problem continues, the banks may as well have to add more.