Fitch Ratings-Hong Kong: South and south-east Asian banks face the clearest credit risk from a prolonged Middle East conflict, but the impact is likely to emerge gradually through standalone credit profiles, Fitch Ratings says.
Higher energy prices, supply-chain disruption and weaker remittance flows would weigh most on emerging-market banking systems, where borrower resilience is lower and exposure to inflation and external shocks is greater. The key credit question is not whether banks face immediate stress, but which systems and loan segments deteriorate first if the shock persists.
Asset-quality pressure would be likely to appear first in vulnerable retail, micro-enterprise and small and medium-sized enterprise (SME) loan books. Fitch’s 2026 banking sector outlooks already incorporate expectations of some asset-quality deterioration in several APAC markets, but a more prolonged conflict would intensify pressure in countries with greater exposure to commodity prices and trade disruption – including the Philippines, India and Thailand – and to a lesser extent Singapore. In the Philippines, the effect may be more pronounced than in previous shocks because recent loan growth has shifted toward micro, SME and consumer segments as banks reduced concentrations to large conglomerates.
Standalone bank profiles could come under pressure in many emerging APAC markets, with emerging-market Viability Ratings (VRs) generally more vulnerable than those in developed markets. VRs could weaken if operating conditions deteriorate beyond Fitch’s current scenarios, especially if higher fuel costs and supply disruption reduce borrower cash flow for long enough to push up impaired loans and credit costs.
The sectors most exposed are those with weaker pricing power and higher energy intensity, including refiners, chemicals, energy-intensive manufacturing and parts of retail. SMEs remain more vulnerable to an economic downturn than larger corporates, although support for state-owned or strategically important borrowers in some markets could limit bank losses indirectly.
Any effect on IDRs would be more limited in most markets where ratings are driven by government or shareholder support, although this varies by country. Around two-thirds of emerging-market APAC bank IDRs are underpinned by government or shareholder support, which means weaker standalone credit profiles do not automatically lead to IDR downgrades.
This is particularly relevant in China, where all bank ratings are support-driven, and in India where almost all bank ratings are. As a result, a prolonged shock could pressure VRs or standalone assessments without necessarily resulting in immediate IDR downgrades. By contrast, in Indonesia and Thailand, support-driven IDRs are more sensitive because the sovereign ratings are on Negative Outlook.
Indian banks appear better placed than many regional peers to absorb a moderate deterioration in operating conditions. Recent positive rating actions and current asset-quality metrics indicate that Indian banks are entering this period from a stronger position at their VR level, and Fitch already incorporates forecasts for some weakening into its outlook and rating assessments.
Even so, the impact would still build over time if higher energy prices, weaker external demand or prolonged supply disruption start to erode borrower-repayment capacity. That makes the pace and breadth of stress transmission more important than the initial shock itself.