European banks have little direct exposure to the Middle East, says European credit rating agency Scope. However, as tensions in the region threaten to push up energy prices and slow economic growth, the risks for lenders may emerge elsewhere: in the balance sheets of the companies they finance.
“More impactful than the direct links between Iran and European banks are second-round effects,” said Angela Cruz, executive director in Scope’s financial institutions team.
A prolonged conflict, she said, could drive up oil and gas prices, weigh on growth and strain businesses across Europe. Those pressures are likely to show up first in corporate lending, an area where many European banks remain heavily exposed.
Banks in countries like Greece and Italy are most vulnerable, according to Cruz. Greek banks have meaningful exposure to transport and utilities. Italian lenders are tied into manufacturing and small and medium-size companies, which tend to have thinner buffers when costs rise.
Uneven exposure
Elsewhere in Europe, exposure is more uneven, with risks varying by country and sector. Core economies such as Germany are less directly vulnerable but face pressure through energy-intensive manufacturing. By contrast, Nordic banking systems are viewed as more resilient, reflecting a larger share of stable funding such as covered bonds and less volatile wholesale financing.
European banks are generally well capitalized and able to withstand short-term volatility, but a prolonged period of market turbulence could raise funding costs, especially for lenders that rely on wholesale markets. “If that were to continue over time, and funding conditions tightened, that could become an area of pressure,” Cruz said.
European bank stocks have dropped about 10 percent from recent highs, as investors price in higher energy costs and the risk of rising defaults.
Still, the sector is not necessarily cheap. “European banks are entering this period from a position of strength,” said Jonathan Schotz, senior equity analyst at Morningstar. Higher profitability and stronger capital offer some protection as credit costs rise.
Nonetheless, Morningstar estimates that normalizing credit provisions alone could cut earnings by 7 percent to 10 percent for the average bank, even without a major shock. If the conflict escalates, that process could speed up.
Karl Pettersen, co-head of corporate ratings at Scope, said weaker companies are likely to feel it most. “Non-investment-grade issuers tend to be more vulnerable by definition,” he said. Energy-intensive sectors such as chemicals and metals sit near the front of the queue.
Interest rates complicate the picture further. Higher rates can boost banks’ earnings by increasing the income they earn on loans. But they can also raise the cost of funding and strain borrowers, particularly in sectors like real estate. “A lot of the actual impact will depend on the extent to which banks are able to control funding costs,” Cruz said.