Moody's Investors Service says that Australian banks demonstrated mildly deteriorating asset quality metrics during the six months to 31 September 2016, although they remain well capitalized to withstand an adverse shocks. At the same time, their funding profiles have improved.

"We expect that asset quality will continue to be supported by low interest rates, but that gradual pressure will be exerted by multiple headwinds," says Maadhavi Ramanayake, a Moody's Associate Analyst. "However, the banks are well capitalized to absorb any losses."

Moody's expects asset quality metrics to gradually come under further pressure as a result of multiple headwinds, including stress in resources-related sectors and regions; underemployment and weak wage growth; a worsening outlook for residential property developments; and the cumulative effects of weak milk prices on the dairy sector, notably in their New Zealand subsidiaries. Housing risks also remain elevated as house prices continued to appreciate in the key Sydney and Melbourne markets, which eroded modest improvements in housing affordability.