In a special report, Moody's Investors Service said it expects Australia's mutual financial institutions to remain under pressure in 2014.Increased competition for both loans and deposits on the back of Australia's subsiding resources investment cycle, will threaten the mutual sector's net interest margins and may pressure certain institutions to increase their credit risk appetite, according to Daniel Yu, a Moody's analyst.These forces, combined with rising regulatory and compliance costs, means consolidation pressure will be maintained on the sector, Yu said.For example, during 2013, many of the sector's larger institutions increased their proportions of interest-only loans and approved more borrowing where the loan-to-value ratio was greater than 90 per cent. However, most of the mutuals now have customers outside their traditional home regions or employer groups, which, Moody's said, will decrease concentration risk.The overall credit standing of the mutual sector is likely to remain sound, supported by "often solid niche franchises" and strong balance sheets. However, it cuts both ways, as the mutual sector will find it hard to access the local and offshore credit markets to issue paper "For example, Australian mutuals have not expanded into higher-risk, higher-return lending, such as commercial property loans, which led to significant losses among peers in other markets like Spain, the UK and the US," said Yu.The sector has also seen credit unions and building societies move to adopt mutual bank status. Although this trend may broaden their appeal to customers unfamiliar with the mutual sector, this extension of business beyond their core franchises can also introduce new risks, warned Moody's.Nevertheless, the ranks of mutual banks look likely to expand further as the Community First Credit Union, which is based in Lidcombe in Sydney, has applied for trade marks for the names Community First Mutual Bank and Community First Bank. Michael O'Reilly, head of marketing for Community First, wrote in an email: "We are keeping a careful eye on developments in this space and will always consider options, but will only make a change if we think there is a benefit to members."Responding to the Moody's report, the sector's peak body, the Customer Owned Banking Association, pointed to the sector's strengths: solid balance sheets, conservative business models and an above average degree of customer loyalty. COBA also called for the removal of what it termed the "unfair advantages" that allowed the major banks to compete aggressively against smaller players."This report is timely as the Financial System Inquiry (FSI) gets into stride in its examination of the Australian financial system," said Louise Petschler COBA's chief executive officer."A key issue for the FSI is how the regulatory framework promotes competition. COBA has identified at least nine examples of the regulatory framework's failure to deliver competitive neutrality for the customer-owned model," she said.The mutual sector has maintained its share of household deposits at around 11 per cent.