Moody's Investors Service says that the funding profiles and capitalisation of Australian banks improved in the six months to March 2017, but asset quality deteriorated moderately and latent risks in the household sector have increased the banks' sensitivity to external shocks.Overall asset quality remains strong, Moody's said, but residential mortgage problem loan ratios "deteriorated modestly due to exposures to resources-focused regions".Looking ahead, Moody's points out that Australian bank creditworthiness retains a heightened sensitivity to economic deterioration, as a result of banking sector's heavy focus on residential mortgage lending."Australian households have become increasingly vulnerable to any change in the their financial condition as consequence of their increased leverage, driven by sharply rising house prices in Sydney and Melbourne, combined with low wage growth," Moody's said in a media release yesterday.These sentiments are in line with reported comments from rival Standard and Poor's, which has warned that Australia's banks are undermining Australia's ability to hold on to its prized AAA rating.In an interview with ABC TV's The Business, S&P's chief ratings officer Moritz Kraemer pointed to Australia's massive level of external debt, rather than a housing price bubble or budget repair, as the real sticking point in recent deliberations over the credit rating."Through the banking system, Australia has accumulated a lot of external debt and that's the result of many years of large external current account deficits," Kraemer said.Among the AAA rated sovereigns, "Australia is the only country with a large external debt," he said."Actually, I will go further and say it's the only AAA sovereign which has any net external debt." Looking ahead, further strengthening is likely, as the Australian Prudential Regulation Authority is set to determine what level of capital is "unquestionably strong", in line with the 2014 Financial System Inquiry recommendations, and to consult on the domestic application of "Basel IV".