Middle East Exposure: A Test for European Banks' Resilience

HSBC and Standard Chartered face significant exposure to the Middle East conflict, potentially impacting their earnings. Rising energy costs are affecting lending across multiple sectors. HSBC's Middle East lending exposure is largely concentrated in high-rated corporates, while StanChart's loans to the UAE are significant. UBS and Julius Baer could benefit from wealth diversification amid geopolitical risks.

HSBC and Standard Chartered, two prominent European banks, hold significant exposure to the conflict in the Middle East, which J.P. Morgan warns could impact their earnings. The STOXX 600 Banks index hit a three-month low this week, with HSBC's shares dropping over 5% and Standard Chartered's falling more than 2%.

Rising energy costs are anticipated to affect corporate lending exposure across sectors such as agriculture, manufacturing, construction, and transport. J.P. Morgan expects Middle East exposure to contribute notably to StanChart's revenue and profit before tax, excluding Turkey and Egypt.

Though earnings pressure remains a primary risk rather than credit losses, J.P. Morgan estimates HSBC's Middle East lending exposure at approximately $23 billion for fiscal 2025. Meanwhile, limited exposure for other European banks, such as Societe Generale and Deutsche Bank, is noted, though UBS and Julius Baer may gain from diversified wealth booking amid geopolitical uncertainties.

(With inputs from agencies.)