Credit rating agency Fitch Ratings has downgraded its sector outlook on the Singapore banking system to "negative", in the light of soft economic conditions that are expected to persist next year.

This could place broadening pressure on banks' asset quality and dampen earnings over the next year, Fitch said.

"However, Singapore banks' solid credit profiles - characterised by steady funding and liquidity positions, strong loss-absorption buffers and healthy profitability - support our stable outlooks for their ratings."

Fitch has two types of outlooks - a sector outlook that reflects its views on the likely future performance of the sector, and a rating outlook, which indicates an entity's future credit risk.

Its downgrade of Singapore's banking sector outlook comes as its overall sector outlook on Asia-Pacific banks has become increasingly negative.

Three-quarters of the banking systems Fitch covers now have a negative outlook, including Australia, Hong Kong, Japan, Malaysia and China, compared with fewer than half in its outlook for 2016, a year ago.

These banking systems face a slew of economic risks that could affect their loan books and profits, Fitch said. These include economic headwinds from China, low commodity prices and related currency pressures.

Fitch said the key stress point for Singapore banks lies in the oil and gas sector, which it expects will continue to exert moderate pressure on banks' asset quality next year.

"Prolonged economic weakness could lead to broader asset-quality risks which may also affect small- and medium-sized businesses," Fitch added.

However, it said it believes the downside risks to be manageable, as the banks' combined exposure of $16.1 billion to the troubled offshore support services represented just 17 per cent of their core equity Tier 1 capital as at the end of September.

Local banks' targeted lending in China suggests risk from China would be well contained on the whole too, Fitch said.

It also noted that measures put in place by the Government to curtail over-borrowing and strong household balance sheets should contain the risk of a sharp deterioration in housing loan quality.

Fitch said it expects bank profitability to weaken slightly next year, driven by higher credit costs and a subdued domestic lending environment.

"This is balanced, however, by their diversified revenue, with core non-interest income forming close to 40 per cent of operating income."