Bank buffers sufficient to absorb rising loan losses, says Fitch

A projected rise in loan losses for Australian banks this year "should be modest and manageable", Fitch Ratings said in an overview of the industry, released yesterday.

The ratings agency said it expected "some asset-quality deterioration in 2013 [and that]... any asset quality pressure is likely to arise primarily through the commercial lending activities."

Fitch estimates the total buffer available to the four major banks to absorb lending losses to be A$79.1 billion.

Fitch said that, on its analysis, the major banks could, on average, withstand losses equal to 4.1 per cent of average gross loans while maintaining a core capital ratio in excess of seven per cent.

"The banks appear well-positioned to easily absorb any increase in impairment charges with pre-impairment operating profit, as Fitch only anticipates a modest weakening in the operating environment," said the ratings agency.

Fitch said its "base case scenario" remained for "a modest weakening in the operating environment of Australian banks [which] is mildly credit negative, but unlikely to result in negative rating action by itself."

"A more significant weakening would be required, such as may occur under a China 'hard landing scenario' for the operating environment to drive negative rating action."