OREANDA-NEWS. Fitch Rating says in its report "Peer Review: Australian Regional Lenders - Risk Appetite in Focus for Ratings", released today, that we expect the performance of Australia's regional lenders to remain broadly stable over the next 12-24 months, but will continue to face pressure on earnings and growth in the current operating environment. All five of the regional lenders rated by Fitch were placed on Stable Outlook on 17 November 2015.

The risk appetite of the regionals is highlighted by Fitch as the driving factor in their respective Viability Ratings. The regionals generally maintain a conservative risk appetite, but we believe the five banks will be less likely to expand their franchises significantly in the current operating environment without weakening their risk appetites - either through a loosening in underwriting standards or aggressive growth.

The regionals operate simple and transparent business models, focusing mainly on residential mortgages, but their franchises are modest relative to the four major banks which dominate the Australian market. The regionals' combined residential mortgage market share was about 7.5% at end-August 2015, suggesting they are 'price-takers' but benefit from higher customer loyalty as a result of their customer or community-driven models.

Fitch views the regionals' funding mix as adequate but generally more reliant on wholesale funding sources - which is subject to investor sentiment - compared with international peers. We do not expect this to change in the medium term, partly reflecting the lack of deposits in Australia. The regionals manage their liquidity adequately, and the larger regionals have developed more sophisticated frameworks as a result of their requirement to report under the liquidity coverage ratio regime.

The regionals hold appropriate levels of capital - the smaller regionals will tend to have strong capital buffers and ratios to offset their size, concentration risk and limited access to new capital. Most of the regionals trail international peers on both risk-weighted and un-risk-weighted measures.

Fitch expects moderate pressure on earnings and growth in FY16 due to intense competition, potentially higher funding costs and a possible turning in the credit cycle. Household debt is high by global standards, leaving borrowers more susceptible to rising unemployment and a sharp rise in interest rates which are at historical lows. Fitch believes a moderate deterioration in asset quality would be manageable by the regionals - as their impairment levels are among the lowest globally.