(Reuters) - Fitch Ratings lowered its outlook for Westpac Banking Corp <WBC.AX> and Australia and New Zealand Banking Group Ltd (ANZ) <ANZ.AX> to "negative" from "stable", citing greater capital requirements imposed on Australia's No.2 and No.3 lenders.
The move comes after the Australian Prudential Regulation Authority (APRA) told three of the country's biggest banks last week to each set aside a further A$500 million ($350.50 million) until they strengthened risk management and reimbursed customers for wrongly charged fees.
Fitch said the increased focus on compliance and operational concerns may lead to diversion of resources from operations, thereby potentially weakening their earnings relative to peers.
However, the ratings agency affirmed Westpac's and ANZ's ratings at 'AA-'.
Rival Moody's had said after APRA's move that the governance weaknesses mentioned by the regulator are 'credit negative' for the three banks. The third bank cited by APRA was National Australia Bank (NAB) <NAB.AX>, the No. 4 lender.
The regulator's move followed damaging revelations from a powerful inquiry that rocked the financial sector and could reduce funds otherwise available for dividends. NAB has already slashed its dividend this year for the first time in a decade.
In a statement, ANZ said Fitch's change in outlook for the bank was consistent with that of the other three of Australia's Big Four banks.
"The additional capital requirements should remain manageable," Fitch added, but indicate material shortcomings in operational risk management which were not aligned with the assessment Fitch had previously incorporated into its ratings.
Fitch also revised to "negative" from "stable" the outlooks for the two banks' New Zealand units. ANZ's New Zealand unit has been in the spotlight as regulators there ramp up pressure on the lender to improve internal risk controls and governance.
Australia's top lenders have said they may reduce their businesses in New Zealand or look at selling them if the country pushes ahead with plans to increase capital requirements.
Regulators in both countries have been pushing their banks to beef up their capital buffers, but in a small win for the banks, the APRA earlier this month decided to lift the capital buffer it set by less than originally proposed.
In response, S&P Global Rating upgraded its outlook for the Big Four to "stable" from "negative".
Shares of ANZ and Westpac closed up 0.7% and 0.1%, respectively, on Wednesday.
($1=A$1.4265)
(Reporting by Nikhil Kurian Nainan and Aditya Soni in Bengaluru; Editing by Clarence Fernandez and Muralikumar Anantharaman)
