Rising tensions in the Middle East have prompted investors across the banking, financial services and insurance (BFSI) sector to reassess risk and asset positioning. Following recent attacks and threats of escalated conflict, oil prices surged nearly 10% since mid-June, nudging Brent crude close to 80 dollars a barrel. Such sharp moves fuel inflationary pressure, potentially forcing central banks to maintain tighter monetary conditions for longer.
BFSI institutions are witnessing a classic “flight to safety” among investors. Demand has increased for US Treasuries, gold and the US dollar, while equity investors have trimmed exposure to riskier assets. Banks with strong capital buffers and liquidity profiles stand to gain from this cautious shift, while weaker players may see rising funding costs and tighter margins.
Equity markets in the Gulf region have shown surprising resilience, with Saudi Arabia, UAE and Qatar posting modest gains despite the broader risk environment. These regions may still attract investment as they leverage oil revenues to support financial stability. However, a prolonged surge in oil prices driven by supply concerns – such as a closure of the Strait of Hormuz – could drive inflation globally, threatening BFSI sector profitability through costlier risk provisioning and subdued demand for lending.
Insurers face mounting volatility in asset valuations and increased claims exposure linked to geopolitical events. Meanwhile, corporate borrowing costs could climb if central banks delay interest rate cuts due to persistent inflation concerns.
That said, history shows markets often rebound from Middle East shocks within a few months. For banks and insurers, this could offer opportunities to redeploy capital into discounted assets, enhance lending amid tighter credit supply, or design inflation-linked products.
