Australian banks can look forward to a stable year, despite some challenges says international ratings agency Fitch.

The agency believes a modest weakening in the operating environment will lead to some manageable asset quality deterioration, and place some pressure on revenue growth.

However, this is likely to be offset by further strengthening in funding and capital positions.

In a special report published today, “2014 Outlook: Australian Banks”, Fitch says the biggest risk to this outlook remains a sudden and severe downturn in China. However, this is not Fitch’s base case.

“Weakening credit standards in an attempt to win market share in a low credit growth environment, and a prolonged and severe dislocation of funding markets, constitute other risks,” the report says.

“Higher impairment charges are likely to result from asset quality deterioration, while strong loan competition could pressure net interest margins, meaning profit growth will probably be limited in 2014.

“A likely increase in credit growth and fall in funding costs could provide some offset to these factors, and cost management should remain a key focus.”