Low interest rates in Australia are likely to weigh on domestic lenders' margins and earnings over the next two years, and mutual ADIs are particularly vulnerable, says a report from S&P Global Ratings. In a report into the sector's prospects for 2020, and two years beyond, the ratings agency pointed to the small respective market positions and higher cost bases for all mutuals versus their bigger bank peers at a time of fierce competition in the Australian mortgage market.This pressure is more of a concern for the mutual sector, as it has fewer alternative sources of income than its banking rivals.Combined, the market share of core residential mortgage lending held by the 68 institutions analysed by S&P was 4.5 per cent, as of 30 September 2019. The largest mutual among this group (surely CUA) had a 0.95 per cent share of the Australian residential mortgage market.Within the segment of 14 mutuals that are rated by S&P, net interest margins have fallen by an average of six basis points each year for the past six years, with a similar rate of margin decline likely over the next two years, the agency reported.S&P also predicted the battle to match the larger banks on technology will take its toll on the mutual sector over the next two years. There will be both regulatory requirements - for example, the Banking Executive Accountability Regime, comprehensive credit reporting, and open banking - and the "evolving digital requirements of their customers" to soak up funding.Further, the S&P report suggests that the mutuals' ability to charge a premium for an "exclusive" brand and personalised service at a branch has been "eroding".On the positive side, S&P pointed to the level of capital held by rated mutuals "as both an absolute and relative strength". Further, the absence of dividend payouts in a mutual structure allows capital to accumulate, which will fund loan growth - although at the risk of depleting the large existing capital bases of some mutual players in the longer term.S&P also assessed the application of the two capital management initiatives open to the sector, taking a two year outlook. "In our view, the larger mutuals in particular have some flexibility in their ability to manage capital with, for example, capital relieving securitisation or mutual capital instruments, should a viable MCI market develop in Australia," S&P said. Nevertheless, S&P warned that that the majority of mutuals would struggle to generate the incremental return on equity from new projects or growth that would justify the cost of issuing MCIs.