Rising wage costs and higher investment spending by Australian banks pose headwinds that could potentially impact the sector's earnings by up to 10% in the near term, analysts at Macquarie said on Friday, downgrading their sector rating to "underweight".

Australia's "Big Four" banks - among the top seven listed companies in the country - control 75% of the country's A$2 trillion mortgage market.

Over the past two years, Australian banks have benefited first from a property boom on the back of Covid restrictions and then from interest rate hikes totalling 400 basis points.

That euphoria is now largely over as high living costs impact borrowers' capacity to repay loans.

Macquarie, an investment bank with a small retail banking operation, said banks' cost bases are likely to remain under pressure as more than 70% of their expenses related to personnel.

"The industry's weak track record of managing expenses, even in periods of subdued inflation, suggests expense growth will likely continue to disappoint in the current environment," the analysts wrote in a note.

Macquarie added that it expects banks' expenses to grow by around 1% to 7% in fiscal 2023 through to fiscal 2025, with third-biggest lender Westpac Banking Corp seen being impacted more than its peers.

The brokerage cut its earnings estimates for ANZ Group Holdings, CBA and NAB by around 1% through to fiscal 2025, while downgrades were more significant for regional banks such as Bendigo and Adelaide Bank and Bank of Queensland.

The regional banks will remain disadvantaged in the current environment as they will have to continue to invest to keep up, Macquarie said, estimating up to 4% higher expenses than consensus.

(Reporting by Sameer Manekar in Bengaluru; Editing by Janane Venkatraman)