Moody's gives Australian banking a clean(ish) bill of health 07 December 2012 5:23PM David Walker Australian banks face stagnating profitability to mid-2014, as businesses and consumers continue to restrain borrowing, says the annual review of the sector from Moody's Investors Service.But the banks will be able to squeeze out more efficiencies and keep prices up, and they won't face high impairments. This, says Moody's, means their ratings should stay where they are.Indeed, Moody's sees a number of positive dynamics in the sector.Continued profits, low credit growth and their dividend reinvestment plans mean the banks will generate plenty of capital, minimising any strains from the rising standards imposed by the Basel III rules.Continued deposit growth, good international conditions and the availability of covered bonds will let them keep lengthening the terms of their borrowings in international markets, just as has happened since 2008. This will improve their stability.The de-leveraging that has happened over the past four years has built up buffers that should limit the number of loans that go bad.The one sector that is booming most now and could go bust - mining - is a sector to which the banks have relatively little exposure.And the industry's structure is "stable", unlikely to be upset too much by competition."Consolidation and the exit of foreign and securitisation-funded competitors during the crisis have increased the power of the major banks to price for risk," the review says. "The major banks' focus on maintaining margins and on improving the stability of their funding profiles will moderate competitive pressures."Among Moody's concerns is that the resource-driven Australian dollar stays high, and pressure on tourism, retail and non-mining exports will perpetuate a "two-speed economy" where those firms outside resources stay weak and lending opportunities remain scarce. This might help increase loan-loss provisions over the months ahead, the review says.Moody's also notes that the major banks remain sensitive to any change in overseas wholesale markets, which still provide them with substantial funds.And high household debt and house prices make the economy more vulnerable to shocks.All four major Australian banks remain rated by Moody's at Aa2 with a stable outlook.