Thai banks outperformed in Moody's Investors Service's stress tests, indicating their capability to withstand economic shocks.
Peers in China, Malaysia and the Philippines also outperformed in the stress test, the international credit rating agency said in its report, "Banks -- Emerging Asia: Stress tests reveal resilience among most Emerging Asian banks but also some pockets of risk".
"Their losses are more limited and they have enough buffers to absorb the stress test: their capital ratios would fall by around four percentage points, with the stressed TCE [tangible common equity] ratio remaining above 6%," the report said.
Moody's tested 97 banks in Emerging Asia. Pakistan, Mongolia, Sri Lanka, Vietnam and India are among the worst performers in the stress test, with stress capital ratios falling into negative territory.
Their current levels of capitalisation are low and non-performing loans (NPLs) high, Moody's said, adding they would also be severely hit by their exposure to government bonds with low ratings that would carry high expected loss rates if a stress scenario were to materialise.
The risk is also severe in Indonesia, but the system there benefits from a high initial capital ratio that is more than sufficient to offset losses, it said.
In general, the stress tests' outcome showed banks in the region on average would see their capital ratio fall by 5.7 percentage points over the two-year testing period (down from 11%), whereas NPLs would go up to 12.5%, up from 3% at the end of 2015.
"These are better results than the average of the near 80 banking systems that we covered in our regular stress tests," it said.
Moody's expects Emerging Asia's GDP growth to have decelerated to 6.5% in 2016 and to 6.2% in 2017.
"These are still robust figures, although they belie some divergent trends across the individual countries. China is the main driver of aggregate EA GDP growth, and we expect its economy to continue slowing down to levels closer to 6% in 2018, down from almost 7% in 2015. India will maintain its strong momentum, whereas growth in Indonesia, Pakistan and the Philippines will accelerate. In turn, growth rates in Mongolia, Thailand and Vietnam are expected to decelerate," it said.
Fundamentals in these economies may have improved, but two factors present a clear downside risk -- half of the countries in the region still run current account deficits, and weaker capital inflows will make those deficits more difficult to fund.
Moreover, in some of these economies the total level of indebtedness is high and a significant proportion is in foreign currency.
For example, according to the Institute of International Finance, foreign-currency debt in countries like India, Indonesia, Malaysia and Thailand ranges between 20% and 40% of total debt.
The current pace of depreciation in these countries may make debt more difficult to serve, and may pose a risk to the corporate and banking sectors, it said.
"We think these challenging macroeconomic conditions will only have a modest impact on the metrics of the regional banking system. Banks could absorb losses from higher NPLs, and capitalisation will roughly remain at 11% [as measured by the TCE]."