High fuel costs and supply chain disruptions weigh on South Asia and SEA banks

The Philippines, India, and Thailand would see increased pressure from a prolonged conflict.

South and Southeast Asia banks will come under pressure the longer the Middle East conflict lasts, warned Fitch Ratings.

Higher energy prices, supply chain disruptions, and weaker remittance flows will weigh most on emerging market banking systems, the ratings agency said. These markets are where borrower resilience is lower and exposure to inflation and external shocks are greater.

The Philippines, India, and Thailand, and to a lesser extent Singapore, are amongst countries that would see increased pressure from a prolonged conflict, as they have greater exposure to commodity prices and trade disruption, Fitch Ratings said.

“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,” it said.

Indian banks appear better placed than many regional peers to absorb a moderate deterioration in operating conditions, Fitch added.

Vulnerable retail, micro-enterprises, and small and medium-sized enterprise (SME) loan books are likely to be the first to see asset quality pressures.

Higher fuel costs and supply disruption could reduce borrower cash flow long enough to drive up banks’ 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,” Fitch said.

“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,” it added.