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Westpac Banking Corporation Facing Significant Headwinds

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

Westpac Banking Corporation (ASX: WBC) is an Australian bank and is one of the largest Australian publicly listed companies on the ASX. Westpac has a market capitalisation of A$89.5 billion.

WESTPAC

What are the recent developments in the banks business activities?

On 20 November 2019, AUSTRAC announced that they applied to the Federal Court of Australia for civil penalty orders against Westpac. AUSTRAC alleges Westpac contravened the AML/CTF Act on over 23 million occasions. According to AUSTRAC Westpac failed to:

  • appropriately assess and monitor the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships.
  • report over 19.5 million International Funds Transfer Instructions (IFTIs) to AUSTRAC over nearly five years for transfers both into and out of Australia.
  • pass on information about the source of funds to other banks in the transfer chain.
  • keep records relating to the origin of some of these international fund’s transfers.
  • carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks.

What has Westpac announced today (17 December 2019)?

Today, APRA launched an investigation into Westpac. APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank’s actions to rectify and remediate the issues after they were identified. The investigation will examine whether Westpac, its directors and/or its senior managers breached the Banking Act –including the Banking Executive Accountability Regime (BEAR) – or contravened APRA’s prudential standards.

APRA announced that Westpac is required to increase its operational risk capital requirement by A$500 million. This brings the total operational risk capital add-ons that Westpac is required to hold to A$1 billion.

Westpac announced that they acknowledge APRA’s announcement in response to AUSTRAC’s statement of claim.

Westpac Chairman, Lindsay Maxsted said:

Westpac accepts the gravity of the issues presented by AUSTRAC

 

and

As previously stated, these shortcomings are unacceptable, and we are determined to urgently fix these issues and lift our standards.

 

The additional $500 million operational risk capital requirement, which will be implemented through an increase in risk-weighted assets, will apply from 31 December 2019.  This change is expected to reduce Westpac’s Level 2, common equity tier 1 (CET1) capital ratio by approximately 16 basis points, based on the Group’s balance sheet as at 30 September 2019.

What is the outlook for Westpac?

Westpac endured a rough 2019. Westpac announced in their full year results that statuary net profit was down 16% from the previous year, cash earnings was down 15% from the previous year and final fully franked dividend was down 15% from the previous year.

It is also important to note that Westpac is facing a significant fine in relation to AUSTRAC findings. The fine is estimated to be between 1 to 2 billion.

Overall, the Australia’s banking sector is on a double-edged sword. On one edge, availability of credit to consumers and businesses should increase due to low interest rates and an easing in lending regulations and capital requirements. However, on the other edge, the net interest margins for each bank could be squeezed even more. It is clear that Westpac fell this year on one side of the sword, where the squeezing of the net interest margin had a greater negative effect than the positive of an increase in potential lenders.

What is the market response?

The market reaction to Westpac’s announcement is negative. Westpac share price is down 1% and is currently trading at A$24.59. This is a significant fall since the share price was previously trading at around A$29.00 around the beginning of November. Westpac has a forward P/E ratio of in the low-teens and an annual dividend yield of 6.7%.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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