The Middle East war's spillover effects serve as the largest credit risk for Asia-Pacific financial institutions, S&P Global Ratings said in a Thursday release.
The region's banks are not directly exposed to the Middle East, while indirect exposure is manageable, S&P Asia-Pacific sector lead for financial institutions Gavin Gunning said.
Lenders also have ample buffers to absorb linked constraints at current rating levels under a scenario of a deal that will open the Strait of Hormuz by the end of May, Gunning said.
However, a downside scenario of a prolonged conflict could cause a 25% rise in credit losses for banks, S&P said.
This scenario would mean larger increases in credit losses to total loans in Vietnam, Indonesia, and India, the rating agency said.
China will account for the largest share in the total forecast credit losses at about $130 billion.
Other countries' banking systems will be stronger at current rating levels, given their buffers, S&P said.
Nonbank fund finance will remain a talking point, albeit being more muted, especially for US funds amid uncertainties in the software sector, the rating agency said.
Al is also a major concern given the diverging impact it has on the ratings of the region's financial institutions in the coming years, according to S&P.