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SYDNEY, Dec 17 AAP

December 17 2012, 3:58PM

Australian banks are expected to remain stable and highly profitable in 2013, despite facing a slowing economy and weak demand for loans.

In a preview of the banking sector for the year ahead, rating's agency Fitch 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 outside the resources sector, which will cause an increase in bad debt charges for the banks.

But Fitch's director of financial institutions Tim Roche said that rise is expected to be modest.

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

"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.

However, Westpac treasurer Curt Zuber said weaker lending growth, along with a better mix of funding sources meant Australian banks were better prepared to weather a credit crunch than they were in the lead up to the collapse of Lehman Brothers in 2008.

"What has happened in the last four years have put us in a better position than we were when Lehmans happened," he told a banking conference in Sydney.

"Banks have all improved their mixes of funding and the economic environment that we are operating in today is one of slower credit growth and much more conservative businesses and consumers, so the savings rate is better."

Reserve Bank of Australia assistant governor Guy Debelle said the relative strength of local banks, compared to their international counterparts, would serve them well if the global economy worsened in 2013.

"If you look forward I think the banks have got themselves in a much more stable funding position," he told the conference.

"One thing you have seen over the last few years is banks which are perceived to be relatively stronger have had more than their share of funding."

Another rating's agency, Moody's, said in a report released in early December that 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 profit 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.

By Drew Cratchley and Evan Schwarten