Australia banks tighten mortgage checks amid govt inquiry, face revenue strain

* Powerful banks' inquiry focuses on selling tactics

* Regulator proposes higher risk weights for mortgages

* Moves to impact bank revenues, analyst

By Paulina Duran

SYDNEY, Feb 16 (Reuters) - Australia's largest banks have stepped up screenings of mortgage loan applications amid a powerful government-backed inquiry into the nation's lenders and their sales practices, potentially hurting revenues from their most lucrative products.

National Australia Bank NAB.AX communicated on Friday to mortgage brokers its stricter conditions to assess mortgage applications, according to emails seen by Reuters, becoming the latest of Australia's 'Big Four' banks to do so.

Citing regulatory concerns, the country's fourth-largest lender by market value, went a step further than rivals and lowered the amount it is prepared to lend - to a ratio of seven times a borrower's income from eight times previously.

Westpac Banking Corp WBC.AX , Australia and New Zealand Banking Group ANZ.AX , and Macquarie Group MQG.AX have also communicated to brokers in recent weeks changes in the way loans are assessed and approved, according to the emails reviewed by Reuters.

The stricter screening processes include emphasising accuracy of loan application details and employing methods to better estimate the living expenses of potential borrowers.

Mortgages are Australian banks' money-spinners, with the Big Four - Commonwealth Bank of Australia CBA.AX , ANZ, Westpac and NAB - holding about 80 percent of the country's A$1.7 trillion ($1.36 trillion) mortgage market.

Australia's big banks are among the most profitable in the world and the sector is a key contributor to the nation's economy. The lenders have been under regulatory pressure to boost capital and rein in lending to speculative investors amid fears of a downturn in the property markets of the country's biggest cities.

Moreover, a government-backed inquiry into banks began earlier this week following years of scandals including interest-rate rigging, poor financial advice and accusations of breaking money laundering rules.

Selling tactics on mortgages will be the first focus of the inquiry, whose final recommendations could lead to criminal or civil prosecutions as well as greater regulation. banking regulator, meanwhile, earlier this week proposed higher risk weightings on some mortgages. changes are likely to put pressure on revenues as they could result in fewer mortgage loan applications being approved, analysts say.

"Revenues would be somewhat lower," as a result of the new focus on mortgage affordability imposed on banks, as well as the higher risk weightings, said TS Lim, banking analyst at Bell Potter Securities.

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A spokesman for ANZ said the bank had recently added a higher level of approvals for some mortgage serviceability assessments to ensure "lending standards are in line with community expectations and our own risk appetite".

A Westpac spokeswoman said the bank had recently bolstered their lending practices, "with our staff and brokers now seeking more detailed information from customers to determine their borrowing capacity".

A spokeswoman for Macquarie, which has a much lower exposure to mortgages than the Big Four, said the bank conducts regular reviews of its lending parameters and pricing.

Representatives from CBA and NAB did not return requests for comment.

None of the banks addressed questions on whether the enhanced diligence would affect their sales. ($1 = 1.2534 Australian dollars)