Fitch Ratings has downgraded its sector outlook for Australian banking from stable to negative, due to a rise in macroeconomic risks and pressure on profit growth.
The ratings house cautioned that the increase in household debt levels, which is expected to continue rising relative to disposable incomes, has made borrowers “sensitive to changes in the labour market and interest rates”.
Additionally, Fitch Ratings said profit growth within the sector will likely continue to slow down throughout 2017 because of low interest rates, slow asset growth, competition for assets and higher funding costs.
Fitch’s rating outlook for Australian banks, however, remains stable, though the research house cautioned the high household debt that affected the sector outlook also puts banks’ ratings outlooks at risk.
“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,” the company said.
“In addition, a worse-than-expected slowdown in China's growth would negatively impact Australia's economy given the countries' strong economic ties.”
Fitch Ratings said these factors could “jeopardise the banks' strong asset quality and profitability, and weaken capitalisation”, and added that continued disruption of the global funding market would also put “significant pressure” on balance sheets.