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Slowing economy to challenge banks in 2013

A slowing economy and weak demand for loans will present financial challenges for Australian banks in 2013.

But ratings agency Fitch says the banks will remain stable and highly profitable.

In a preview of the banking sector for the year ahead, Fitch's director of financial institutions Tim Roche said revenue growth will be held back by low demand for credit and competition for deposits.

The slowing economy is also expected to cause higher arrears among businesses not in the resources sector, which will cause an increase in bad debt charges for the banks.

But that rise is expected to be modest, he said.

"Subdued credit growth and a moderate economic slowdown are likely to present some challenges for Australian banks in 2013," Mr Roche said.

"However, improvements to funding, liquidity and capital, and continued solid profitability should help them to navigate through these headwinds."

The biggest threat to the banking sector, and the wider economy, is a substantial slowdown in China, but that is not likely, Fitch said.

In a similar report released earlier in December, Moody's also said the banks were strong enough to sustain a rise in bad debt charges and slowing profit growth in the coming 12 months.

The big four banks made $22.8 billion in net profits in the 2011/12 year, while cash profits, a clearer reflection of underlying performance, totalled $25.2 billion.

But cash profit growth of four per cent in 2011/12 was the slowest rate in several years.

At Westpac's annual general meeting last week, chief executive Gail Kelly said there had been no increase in bad debt charges since the company posted a $5.97 billion profit in November.

ANZ holds its annual shareholder meeting in Perth on Wednesday.