,Singapore

Here's the biggest threat AsiaPac financial firms must brace themselves for

Fear of regional risks escalate.

According to Standard & Poor's Rating Services, Asia-Pacific financial institutions may face more hurdles in 2014 as pressure on the economic front is likely to bear down on their asset quality.

Although the analysts see GDP growth in the Asia-Pacific region moderately improving to 5.4% from 5.3% in 2013, growth prospects in emerging countries such as China and India have weakened.

Here's more from Standard & Poor's:

Going against past trends, Asia-Pacific financial institutions are now more exposed to local/regional risks than external risks. In our view, the following stand out as potential risks: high private-sector indebtedness in many Asian countries, meager economic outcomes from the region’s policies, a disorderly market reaction to the U.S. tapering off its quantitative easing, and the eurozone debt problem.

“We hold the view that China’s slower growth could have spillover effects on other countries such as Australia, Indonesia, Taiwan, Korea, and Hong Kong,” said Standard & Poor’s credit analyst Naoko Nemoto. “Sluggish economic conditions, combined with a high level of corporate and household debt in some major economies will stress banks’ asset quality. In our view, the credit profiles of banks in Malaysia and Thailand are vulnerable to deterioration in the health of their respective household segments due to the rapid growth of household debt.”

Generally, Standard & Poor’s expects credit costs to rise. Nevertheless, we are unlikely to see a sharp increase hurting banks’ capitalization, said Ms. Nemoto, assuming the region will benefit from a gradual global economic recovery under Standard & Poor’s base-case scenario.

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