* Australian banks vulnerable due to large mortgage books -Fitch
* Tighter bank lending regulation a "credit positive" - Moody's
* NAB says comfortable with housing lending portfolio
* ANZ, Westpac decline comment, CBA notes no change in ratings
* Bank shares up 0.6-1.5 percent in firm Australian market (Adds comments from banks in para 6, Moody's statement in para 13, share price reax in para 15, bullets)
By Swati Pandey
SYDNEY, April 30 (Reuters) - Australia's four major banks could suffer a ratings downgrade in the event of a severe housing market downturn with second-order economic effects, a stress test report published by Fitch Ratings showed on Monday.
Australia has seen a surge in property prices in recent years, sending the household debt-to-income ratio to a record high 190 percent at a time when income growth is crawling at a snail's pace, worrying policymakers.
Fitch said its test was undertaken as risks within the household sector continue to grow, adding that Australian banks were particularly vulnerable because of their large mortgage books.
Fitch's stress test showed Commonwealth Bank of Australia CBA.AX and Westpac Banking Corp WBC.AX - the country's top two mortgage lenders - experiencing the largest losses in an extreme case.
But the proportionally larger commercial exposures of Australia and New Zealand Banking Group ANZ.AX and National Australia Bank NAB.AX would render them vulnerable in a broader stress event, Fitch added.
Westpac and ANZ declined to comment while NAB said it was "comfortable" with its home loan portfolio. CBA noted there was no change to its rating, saying it was standard practice for ratings agencies to consider multiple scenarios.
Fitch said credit ratings could come under pressure in severe scenarios where banks also suffer from follow-on economic effects including a fall in consumer spending and higher losses from banks' business loan portfolios.
"The severe scenarios would involve a negative shift in Fitch's view of the operating environment for Australian banks, as well as our assessment of asset quality, capitalisation, profitability and, potentially, funding," it said.
To be sure, Fitch's base case is not a sharp or substantial correction in Australia's housing market. The test, in fact, showed the banks could still withstand "a significant housing market downturn."
House price growth across Australia's major cities have already tempered since late last year.
This run of losses is generally seen likely to continue in 2018 as banks clamp down on so called "liar loans" amid an exhaustive year-long judicial inquiry which has uncovered a series of wrongdoings. a separate statement, rival ratings agency Moody's said tighter lending regulation on banks was a "credit positive".
Australia's prudential regulator removed a cap on lending to property investors last week, replacing it with stricter requirements for bank boards to comply with its underwriting guidelines. shares advanced in a firm Australian market with Westpac and NAB both up more than 1.5 percent. ANZ added about 1 percent while CBA rose 0.6 percent.
The gains reflected a market perception that retail wealth management was in the inquiry's crosshairs, rather than general banking.
The benchmark ASX 200 share index .AXJO climbed 0.5 percent.