Australia is set to remain one of the Asia-Pacific’s most stable banking jurisdictions in 2026, with Fitch Ratings forecasting moderate loan growth and improving asset quality, even as peers across the region confront higher credit costs and weakening profitability.
Fitch maintained Australia on a Neutral sector outlook, in contrast to deteriorating views on Hong Kong and Taiwan.
Hong Kong’s ‘deteriorating’ outlook reflects lingering macroeconomic risks that are set to pressure core bank earnings and asset quality in 2026. Meanwhile, asset-quality pressure related to ongoing uncertainty around tariffs, and an associated increase in credit costs, is likely to result in Taiwan banks reporting the greatest deterioration in the non-performing loans ratio among APAC developed markets in 2026.
In comparison, Fitch said the Australian system should benefit from softer interest rates, modestly stronger economic growth, and a stabilising labour market, which together are likely to support a gradual lift in asset quality next year.
“We expect credit growth to moderate slightly but remain above 5 per cent, with earnings metrics being broadly flat for the sector, driven by moderate NIM compression from competition and the lower-interest-rate environment.”
The agency noted that capital buffers remain sound, though banks may allow ratios to drift back toward target ranges after several years of elevated levels.
“Capitalisation is likely to remain sound and not be a constraint on growth. We expect the large banks to manage their capital ratios down towards their respective target ranges from the elevated levels that have been held since 2020, which means capital ratios for the sector are likely to moderate as a result.
“We expect deposit growth to slow, driven by lower returns on deposit products, which could lead to a modest weakening in the loan/deposit ratio (LDR).”
Rising unemployment is highlighted as a key driver for impaired-loan levels, which could result in asset quality being weaker than anticipated.
“Albeit we see it as a low risk heading into 2026. This could over time pressure our assessment of asset quality and earnings, and ultimately the sector outlook. Steady underwriting, combined with sound collateral positions and rising house prices, provide some offset to losses should impaired loans rise.”
Fitch highlighted that Australian banks’ resilience makes them relatively attractive to investors compared with regional peers. Lower funding costs and stable credit quality are expected to support consistent dividend payouts, while modest loan growth provides opportunities for selective expansion.
Analysts say the combination of sound capital buffers and a predictable interest-rate environment could underpin share performance, even as external risks – including regional trade tensions and potential global rate shocks – remain a watchpoint.
Fitch notes that while the Australian banks are insulated from severe shocks, rising operational costs and regulatory compliance pressures could weigh on margins. Investors are advised to monitor banks’ cost-to-income ratios closely, as well as their exposure to property markets and household debt.
Strategic initiatives, such as digital banking investments and targeted lending growth, may offer upside potential, helping banks maintain competitive positioning and support long-term shareholder returns.
“We expect technology and digital investment to rise across the sector and should provide some cost benefits to banks in the longer term. However, the risk remains that efficiency gains are eroded through intense pricing competition.”
“Execution risk is also key – cost or time overruns and flawed implementation could lead to a prolonged weakness in the earnings or business profile through a weaker franchise.”
Analysts emphasised that while the near-term environment remains challenging, the resilience of Australia’s major banks, combined with strategic investments and prudent risk management, positions them to weather uncertainty.
For investors, this means balancing caution with opportunity – keeping an eye on dividend stability, capital strength, and growth initiatives that could drive returns in the years ahead.
New Zealand’s outlook also remains neutral, with Fitch forecasting broadly stable operating conditions for local banks in 2026. The low-interest-rate environment, where rates stand at 2.5 per cent, means pressure on borrowers is likely to ease – and expectations of recovering economic growth and an easing in the unemployment rate should result in better asset quality.
