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Westpac should be able to absorb fines for alleged money laundering: analysts

Westpac Banking Corp. should be able to absorb fines for alleged money laundering, although compliance issues and costs will likely continue to weigh on its earnings and share price in 2020, analysts say.

The Australian Transaction Reports and Analysis Centre, or AUSTRAC, on Nov. 20 filed civil penalty orders against Westpac for "serious and systemic noncompliance" with the country's anti-money laundering act, alleging the bank breached anti-money laundering laws on more than 23 million occasions. Australia's third-largest bank by assets also allegedly failed to carry out appropriate due diligence on transactions that have potential child exploitation risks.

Westpac could face a fine of between A$1.0 billion to A$1.5 billion, according to John Lockton, head of investment strategy and senior investment strategist at Wilsons Advisory and Stockbroking Ltd. It would be more than the A$700 million fine Commonwealth Bank of Australia agreed to pay the AUSTRAC for breaching anti-money laundering laws in 2017.

"It's a significant blip on your earnings and status within the community. But from a financial perspective and ongoing franchise perspective, this is survivable," Lockton said, referring to the bank's capital as sufficient buffer.

As of Sept. 30, Westpac's Tier 1 common capital totaled A$55.05 billion, with core Tier 1 capital ratio at 10.67%, according to S&P Global Market Intelligence. Total assets stood at A$906.63 billion. In the fiscal year ended Sept. 30, Westpac's cash earnings fell 15% to A$6.85 billion from a year earlier, while provision for customer remediation rose to A$958 million from A$281 million.

Management might be distracted

Bell Potter analyst T.S. Lim said Dec. 17 that the bank could face a fine of A$1.25 billion. The house cut the bank's price target by 1.14% to A$26 from A$26.30, trimmed its earnings forecast by 2%, and added the management will likely be distracted over the next 12 to 18 months over risk governance.

S&P Global Ratings analyst Sharad Jain also said Nov. 25 that Westpac's capital and earnings should be able to absorb any financial penalties or increased regulatory capital requirements.

"While Westpac will bear the direct financial penalties from the AUSTRAC case, the broader damage from such lapses extends to all the Australian major banks, in our view," Jain said.

On top of the money-laundering allegations, Westpac was ordered by an Australian court Dec. 19 to pay a penalty of about A$9.2 million for breaches of the Corporations Act after one of its financial advisers failed to act in the best interests of his clients. Westpac has allocated a total of A$1.45 billion over three years through Sept. 30 to compensating its customers.

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As of Dec. 17, shares of Westpac have dropped 7.2% to A$24.64 from Nov. 19, the day before the AUSTRAC allegations surfaced. During the same period, CBA's shares were up 1.5%, although Australia & New Zealand Banking Group Ltd.'s shares fell 1.3% and National Australia Bank Ltd.'s were down 6.6%.

The allegations led to the resignation of then-CEO Brian Hartzer on Nov. 26 and prompted Chairman Lindsay Maxsted to bring forward his retirement to the first half of 2020. Shareholders also voted down the bank's remuneration plan for executives in a six-hour meeting Dec. 12, although the board kept their seats after surviving a conditional vote under Australia's Corporations Act on whether nonexecutive directors on the board should stand for reelection.

The bank is now under investigation by the country's banking regulator, the Australian Prudential Regulation Authority, which will look into potential breaches of the Banking Act. APRA also imposed an immediate increase in Westpac's capital requirements of A$500 million, bringing the bank's total operational risk capital requirement to A$1 billion following an increase APRA announced in July.

"The majority of the share price damage occurs in the first two weeks of that period and there's quite a long tail," Lockton said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.