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Australian banks to see weaker profit growth in 2016: Fitch

Australian banks' profit growth is set to slow further this year as lenders' bottom lines feel the impact of more borrowers falling behind on their loans, Fitch Ratings predicts.

A new report from the credit agency says the cycle of very low loan losses, which has helped to pump up bank profits in recent years, is set to turn in 2016, although it argues this change will be "manageable" for banks.

Even so, it says a combination of higher charges for soured loans, intense competition for borrowers, and higher funding costs will result in softer profit growth.

"Profit growth is likely to slow due to ongoing asset competition, higher funding costs, and an increase in loan-impairment charges. Improvements in cost management are likely to be offset by increased investment in technology," Fitch says in the report, which retains a "stable" outlook for the banks' credit ratings.

In 2015, the average profit growth for the Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank was 5.3 per cent, with earnings falling 4.7 per cent in the second half of the year, according to a previous PwC analysis.

For several years, analysts have predicted that the bad debt cycle would turn, and at the latest full-year results there were signs bad debts were close to the bottom.

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In a sign of banks' sensitivity to the economy, Fitch predicted a "mild" increase in loan impairments due to softer pockets of economic growth.

It said loan exposures to mining and resources areas may remain troubled, though this remained a small part of the banks' loan books.

It also underlined the high level of household debt as another source of economic pressure for banks.

The ratio of household debt to household disposable income - a key gauge of households' indebtedness - had climbed to a record high of 184.6 per cent  in September, figures from the Reserve Bank show.

"High debt levels make households vulnerable to a sharp increase in interest rates and unemployment, which could weaken banks' asset quality," Fitch said. 

Against these risks, Fitch highlighted that banks were now better prepared to absorb any increase in soured loans after the big four between them raised more than $18 billion in new equity capital last year.

Tighter credit standards in the mortgage market - which have slashed how much banks are prepared to lend to some borrowers - were also a positive for the banks, it said.

Bank stocks have not escaped the recent turmoil on world sharemarkets, with shares in the Big Four losing between 8 per cent and 12 per cent since the start of 2016.

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