How are banks strengthening buffers against oil price shocks?

China-based banks will likely bear the largest impact.

Asia-Pacific (APAC) banks have relatively limited direct exposure to the Middle East, but a prolonged conflict could increase credit losses by 25%, or around $180b. 

Most banks are expected to withstand existing pressures through the end of May, assuming an agreement is reached to ease the effective blockage of the Strait of Hormuz, a S&P Global Ratings report said.

If the conflict persists, countries such as Vietnam, Indonesia, and India could see rising credit losses. 

China’s banking sector is expected to bear the largest impact, with additional estimated losses of around $130b due to the sector’s scale.

Non-bank finance—particularly fund finance—is also expected to remain a key area of investor concern in 2026, especially amongst US funds where uncertainty around software-sector asset quality and valuations persists.

Artificial intelligence, meanwhile, is expected to significantly reshape the credit profile of financial institutions across the region over the next one to five years, though impacts will differ. 

Large, systemically important banks in APAC are viewed as being in a stronger position due to their sizable technology budgets, allowing them to improve efficiencies and unlock new revenue opportunities.

Asian Banking & Finance reached out to experts from BDO Unibank, Inc. (Philippines) and Natixis, to tell us exactly how banks are preparing for potential loan losses amidst an oil price spike.

Luis S. Reyes, executive vice president and head of Investor Relations, BDO Unibank, Inc. (Philippines):
“With energy prices remaining elevated and volatility rising across Asia, it is important to keep the impact in perspective. So far, the energy shock has been felt primarily by households and businesses through higher operating costs and tighter cash flows. 

Any knock-on impact on banks tend to emerge later and are largely determined by how long these pressures last.  For that reason, it may be too early to assume large credit losses across the banking system. Asset quality has remained stable to date, and many borrowers are still adjusting through pricing changes, cost controls, or existing financial buAers. Nonetheless, we are planning ahead.  

Our approach has been to strengthen resilience early rather than wait for conditions to deteriorate. We continue to maintain strong liquidity and capital buAers, giving us flexibility should higher oil prices lead to tighter financial conditions or weaker borrower cash flows. 

These buAers are part of our normal risk framework and are designed to help us operate through diAerent economic scenarios, not only during periods of stress.  Whilst asset quality remains sound, we have taken a prudent, forward-looking stance by increasing provisions to prepare for potential pressure from prolonged high energy costs and inflation. 

This reflects disciplined planning rather than any material weakness in the loan book at present. We have also tightened underwriting standards since last year, particularly in consumer lending, and since the onset of the conflict in Iran, we have enhanced portfolio monitoring— especially in sectors more exposed to sustained cost pressures. 

As a systemically important bank in the region, our priority is to remain stable, liquid, and predictable through economic cycles—ensuring we are prepared should first order pressures eventually translate into broader financial stress, whilst continuing to support our clients and economic activity across our markets.”

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis:
“Persistently high energy prices have moved from a macroeconomic inconvenience to a systemic stress test for regional banking.

As industrial margins compress and household disposable incomes erode, the credit risk embedded in loan books — particularly in energy-intensive economies — is crystallising into something banks can no longer manage at the margins. The question is no longer whether provisions need to rise, but by how much, and how fast.

Our approach has been to move early and move deliberately. Over the past eighteen months, we have materially increased our expected credit loss provisions across the most exposed segments of the portfolio: SMEs in manufacturing, commercial real estate tenants with high utility overheads, and households in lower income brackets carrying variable-rate mortgages. In aggregate, we have set aside roughly 40% more in loss reserves compared to the pre-energy shock baseline, a figure that reflects both modelled deterioration and a deliberate management overlay for tail risk.

Beyond provisioning, we have tightened underwriting standards on new lending to sectors where energy cost pass-through is structurally limited. A ceramics firm or a cold-storage operator faces a fundamentally different risk profile today than it did three years ago, and our credit committees have updated their sectoral scoring accordingly. We have also stress-tested the portfolio against a scenario where energy prices remain elevated for a further two to three years — a scenario that, regrettably, no longer looks implausible.

On the capital side, we have deliberately slowed dividend growth and retained a larger share of earnings to build the Common Equity Tier 1 buffer above regulatory minimums. This is not a popular decision with some shareholders, but it is the right one. A bank that distributes capital generously today and scrambles for recapitalisation in eighteen months is a worse outcome for everyone.

We are also working closely with clients in distress rather than moving straight to enforcement. Restructuring and loan modifications — done properly, with realistic recovery plans — preserve more value for the bank than a wave of forced sales into a weak asset market. That is not forbearance for its own sake; it is sound credit management.

The broader honest assessment is this: the sector is better capitalised than it was in 2008, but complacency would be dangerous. Energy prices are a slow-moving but powerful solvent eating through credit quality, and the banks that survive the next cycle will be those that priced that risk honestly — and acted on it early.”