Outlook for the Australian

Fitch said while its rating for the banks remained stable, its outlook for the year ahead had been impacted in particular by rising household debt, which was making borrowers more sensitive to interest rate changes or changes in the labour market.

“We still think the labour market is in good condition but there are pockets of underemployment that are impacting affordability,” Fitch director Andrea Jaehne said.

“Salaries are not increasing therefore peoples’ ability to repay loans becomes restrained. People are accepting lower paid jobs, or jobs that are three days a week instead of five.”

Fitch said the banks’ profit growth would likely continue to slow in 2017 due to low interest rates, slow asset growth, higher funding costs and a rise in loan impairment charges.

It forecast the banks would also be under pressure to manage a rise in bad loans, particularly in the mining states of Western Australia and Queensland.

“There are more risks in the market, and the banks’ profits are likely to slow because of the remaining low interest rate environment,” Ms Jaehne said.

“There are too many indications that this year will not be as good as the previous year.”

The banking regulator, the Australian Prudential Regulation Authority, said on Monday it did not believe there was enough systemic risk to enforce extra capital requirements on the banks.

It said it would continue to monitor riskier segments of the housing market, particularly lending to investors and interest-only lending.

“APRA believes the industry has appreciably improved its residential lending standards,” it said.

“APRA is continuing to work to have the improved standards firmly embedded into industry practice.”

The regulator views strong growth in lending to property investors as a key risk indicator for the financial system.

It said that while lending to investors had picked up in recent months, in had slowed on the whole, with investor housing credit growth falling from 10 per cent to 4.9 per cent in the year to September.