The Australian banking industry "trails international peers on risk weighted and un-risk weighted [capital] ratios," Fitch Ratings declared yesterday in an assessment of five smaller banks.For four of the banks their "reliance on wholesale funding remains a weakness relative to international peers," Fitch also warned.Fitch yesterday affirmed the long-term issuer default ratings of Suncorp-Metway (at A+), Bendigo and Adelaide Bank (A-), Bank of Queensland (A-), Police Bank (BBB+) and Heritage Bank (BBB+). All have stable outlooks, Fitch said.Of the five, Police Bank is the only one that is wholly deposit funded.On the same day, QT Mutual Bank had a ratings lift from Moody's Investors Service, with its long-term issuer and bank deposit ratings skipping to A3 from Baa1. The supporting Fitch commentary took a favourable tone."The affirmation of the IDRs and senior debt ratings reflects our view that all five entities are likely to continue to perform solidly over the next 12 to 24 months," Fitch said."However, the current operating environment emphasises the importance of the Australian regional banks' risk appetites."Fitch believes that the banks are unlikely to significantly increase their franchises without compromising their risk appetite. This would be compounded by the turning credit cycle, increasing the downside risk to asset quality. "However, Fitch expects that the regional banks will maintain their conservative risk appetites, reflected in a greater weighting of mortgages within their loan books."Fitch said that "as a group, the banks' risk controls have continued to improve" and the banks showed lower impaired loan ratios relative to international peers.Fitch said it expected the funding and liquidity profiles of the banks "to remain stable in 2016, with retail deposits to remain the main source of funding. "Police Bank's loan book is fully deposit funded, however the other banks' reliance on wholesale funding remains a weakness relative to international peers. "Further improvements in funding structures are likely to come from longer-term wholesale issuances rather than increased deposits due to the structural deficit of deposits in Australia."