SYDNEY • Australia's big banks - once among the most profitable in the world - are being forced to amass war chests worth billions of dollars to reimburse customers for years of dodgy fees.

Industry heavyweight National Australia Bank (NAB) yesterday became the latest bank to outline the mounting cost of refunding ripped-off customers after a government probe into the sector.

Australia's fourth-largest lender also said it would cut its dividend to comply with capital requirements, after it was forced to set aside A$1.1 billion (S$1.05 billion) to compensate customers for wrongdoing exposed at a public inquiry last year.

The bank slashed its interim dividend 16 per cent to 83 Australian cents per share - its first dividend cut in a decade - providing a capital buffer should economic conditions deteriorate amid a slowing broader economy.

Interim chief executive officer Philip Chronican said in a statement: "We have reduced the dividend to make sure that we are in a strong position and we can deal with a number of headwinds that might arise."

A year-long Royal Commission exposed rampant bank malpractice that included charging fees to dead people, charging fees for no services at all, aggressive selling tactics and poor advice that led to significant financial upheaval for clients.

The probe singled out NAB for especially harsh criticism, forcing the departure of its CEO and chairman. It "forced us to confront broader issues of how we treat customers", the bank said in a statement yesterday.

Earlier this week, NAB's competitor ANZ said it had set aside A$928 million in remediation costs since the first half of the 2017 financial year and contacted more than 276,000 customers.

Commonwealth Bank and Westpac have taken similar steps.

The total cost for the sector could be as much as A$6 billion, according to a Macquarie Research estimate. The costs are beginning to be felt on the banks' bottom lines, at a time when the housing market is slowing.

AGENCE FRANCE-PRESSE, REUTERS