Australia's banks are well positioned despite global market turmoil and concerns over the Chinese economy but profit growth is set to slow in 2016, according to a leading ratings agency.
Fitch Ratings expects increased funding costs, pressure on cost management and a modest increase in loan impairment charges to put a lid on profit growth.
The big four of Commonwealth Bank, ANZ, National Australia Bank and Westpac reported combined full year cash earnings of $30 billion in 2015.
"Operating revenue growth is likely to be affected by a softer operating environment than in 2015, regulatory changes to the banks' investor lending, which is likely to affect lending volume, and low interest rates combined with continuing slow credit growth," Fitch said in a report released on Tuesday.
Fitch predicted that banks will focus on expenses to offset some revenue pressures, but that the sector's cost to income ratio is set to weaken moderately despite those efforts.
Even so, Fitch said its outlook for the sector remained stable.
"We expect strengthened capitalisation and recently tightened underwriting standards to offset slower profit growth and modest asset-quality pressure," Fitch said.
Loan growth would be at a similar level to 2015 but to be driven by owner-occupied mortgages rather than investor mortgages and business loans following the Australian Prudential Regulatory Authority review that required the banks to deleverage.
Fitch's view echoed that of Motley Fool's Scott Phillips, who said profit growth would slow.
"If you think about what's driven bank profits over the last three decades, you've got structurally lower interest rates, a massive increase in the workforce in second incomes to households and of course a massive increase in house prices," Mr Phillips said.
"That can't keep happening."
Fitch pointed out that the Sydney and Melbourne housing markets have already cooled due to the banks' tightened lending criteria.
"Fitch believes this trend is likely to continue in 2016, especially as house price growth in both markets was driven by stronger investor demand," Fitch said.
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