Australian banks' profit growth to slow in 2017

Find out what could jeopardise the banks' strong profitability.

Fitch Ratings has revised the sector outlook on Australia's banking sector to negative from stable in 2017. The change in the sector outlook reflects an increase in macroeconomic risks and pressure on profit growth, Fitch says in its Outlook report for the sector.

Here's more from Fitch:

Household debt is high and rising relative to disposable incomes, making borrowers sensitive to changes in the labour market and interest rates. Profit growth is likely to continue to slow in 2017, reflecting low interest rates, slow asset growth, competition for assets and deposits, higher funding costs, and a rise in loan-impairment charges. Fitch expects improvements in cost management to be offset by increased investment in technology.

Fitch's rating outlook for Australian banks remains stable. However, the ongoing rise in household debt and house-price growth heightens the banking system's sensitivities to a sharp correction if labour market conditions and interest rates were to change.

In addition, a worse-than-expected slowdown in China's growth would negatively impact Australia's economy given the countries' strong economic ties.

These scenarios - although not our base case - could jeopardise the banks' strong asset quality and profitability, and weaken capitalisation. A prolonged global funding market disruption could place significant pressure on the banks' balance sheets despite the improvements in liquidity.