Aussie banks' earnings feared to slow in 2014

Operating environment is likely to deteriorate.

According to Fitch Ratings, aA build-up of domestic headwinds for Australian banks is likely to slow down their earnings growth slightly.

Here's more from Fitch:

Recent results at the four big banks were strong, and such consistent earnings are one of the sector's key rating strengths. Such earnings performance, together with surplus capital and conservative loan provisions, provide substantial buffers to absorb pressure on earnings in a modest downturn - which is already factored into our ratings.

The operating environment is likely to deteriorate as mining sector investment peaks and unemployment rises slowly with softer economic growth. So we expect a rise in loan-impairment charges from cyclical lows in the rest of 2013, even though asset quality improved in the six months to March.

However, it is unlikely that asset-quality indicators will deteriorate significantly - so long as there are no unexpected shocks to the economy. We expect any increase in impairment charges through 2014 to be readily absorbed by operating profit.

Asset-quality problems are more likely to arise from commercial lending. The strong Australian dollar and receding consumer and business confidence has already affected retail trade, construction, tourism and manufacturing.

Commercial loans have traditionally been the primary source of loss for the Australian banks, despite the loan portfolios being weighted toward residential mortgages. This reflects the conservative nature of the banks' mortgage underwriting.

We believe credit expansion is likely to be more subdued in this environment - which in turn constrains revenue growth. However, one benefit of slower loan growth is that it should help to strengthen funding profiles, together with high household savings rates.

A shift to longer-term wholesale funding should also assist in boosting the banks' efforts to enhance funding stability.

The four largest Australian banks - NAB, Commonwealth Bank, Westpac and ANZ - are rated 'AA-', and are among the strongest in the world on a standalone basis.