Aug 4 (Reuters) - Australian shares treaded water on Friday, with banks hit following money laundering allegations against the country's biggest mortgage lender, while strength in material firms lent support.
The benchmark gained momentum this week after two successive weeks in negative territory, ahead of bank earnings next week.
The S&P/ASX 200 index fell 1.32 points, or 0.02 percent, to 5,733.8 by 0308 GMT. The benchmark edged 0.2 percent lower on Thursday.
Bank stocks painted the index red, accounting for more than half of the losses in the bourse, after the Australian government on Thursday accused Commonwealth Bank of Australia (CBA) of widespread breaches of money-laundering and counter-terrorism financing rules.
Shares of CBA dropped up to 3 percent, its biggest intraday fall since May, after financial intelligence agency AUSTRAC said it had initiated civil penalty proceedings in the Federal Court against the bank for "serious and systemic non-compliance", in the biggest case of its kind in Australia and the first against a major bank.
"The fall in CBA is worth about 10-and-a-half points. Without CBA, the market would actually be in positive territory this morning," said Michael McCarthy, chief market strategist at CMC Markets.
Australia and New Zealand Banking Group and Westpac Banking Corp followed suit, shedding up to 0.9 percent and 1.3 percent, respectively. The benchmark of financial stocks fell as much as 1.3 percent to its lowest in over two weeks.
McCarthy said that as to how far this issue would affect the entire index, "the market is watching for further information, particularly a response from CBA, to help it form an assessment of the risks of this situation."
Crown Resorts is set for its biggest one-day decline in five weeks as the casino giant reported a 16 percent drop in annual net profit.
Material stocks offset some of the losses as mining giant Rio Tinto bounced back to gain as much as 1.9 percent after two days in the red.
Spot iron ore prices rose for its seventh week in eight as strength in the futures market lifted bids for physical iron ore cargoes.
Australia's biggest horse-race betting company, Tabcorp Holdings, edged up about 1.3 percent despite a fall in full-year profit.
New Zealand's benchmark S&P/NZX 50 index fell 1.49 points, or 0.02 percent, to 7,752.26 at 0308 GMT. The index is set for a rise this week, up around 1.5 percent so far.
The bourse was steady as gains in consumer discretionary stocks curtailed losses from other sectors. A2 Milk vaulted to a record high, jumping as much as 5.3 percent after the milk producer expressed confidence over its China export application for infant formula with Synlait Milk. (Reporting by Hanna Paul; Additional Reporting by Binisha Ben; Editing by Jacqueline Wong)