$250m capital penalty imposed on ANZ over markets ‘misconduct’ investigation

APRA has waded into a looming scandal over ANZ’s markets team, imposing an extra $250m penalty due to concerns about persistent risk governance and culture issues.

ANZ chief executive Shayne Elliott. Picture: Arsineh Houspian

The prudential regulator has waded into ANZ’s bond scandal, imposing a $250m capital penalty on the lender in a move that puts further pressure on boss Shayne Elliott and chair Paul O’Sullivan.

The Australian Prudential Regulation Authority said it was increasing ANZ’s capital add-on in response to “non-financial risk management concerns”, taking the bank’s total penalty to $750m.

APRA has warned it will force ANZ to appoint third party reviewers to examine “the root causes of recent issues and risk governance in the markets business”, which is facing a separate investigation from the corporate regulator over allegations of market manipulation in the placement of a $14bn government bond.

ANZ will also be required to develop a remediation plan to address the findings of the review, the second time since 2017 the bank has been forced to clean up its act by a regulator.

The additional $250m capital penalty is expected to squeeze ANZ’s full-year earnings, set to be announced in November.

ANZ, which does not report its quarterly earnings, posted a $3.5bn cash profit in its half-year results in May.

APRA said it was imposing the additional penalty on ANZ because of concerns about its markets team and risk and culture issues.

“ANZ is financially sound with strong capital and liquidity levels. However, weaknesses in managing non-financial risk can lead to detrimental financial impacts and APRA has no tolerance for such weaknesses persisting,” APRA chairman John Lonsdale said.

The Australian Securities & Investments Commission is also probing trades by ANZ in the lead-up to the placement in April, with some warning the bank could face up to $780m in fines.

ANZ denies any market manipulation. However, the bank has admitted it misreported bond trading data to the Australian Office of Financial Management in 2022 and 2023 “and that action has been taken in response to poor behaviour by employees in its markets business”.

ANZ is also running its own internal cultural review of the bank’s markets team and has already terminated, suspended or warned several employees.

APRA said while ANZ was investigating these issues, there were prudential concerns that the bank had “yet to adequately address”. Of the major banks that had capital add-ons applied in 2019, ANZ is the only one not to have its add-on either removed or reduced.

APRA said it had “longstanding” concerns over ANZ’s non-financial risk management, after initially imposing a $500m penalty on the bank in 2019.

This capital penalty has remained in place for five years, while penalties for CBA and NAB have been removed and Westpac’s has been slashed by $500m.

“APRA has yet to observe significant improvements in ANZ’s non-financial risk management,” the regulator said.

Analysts have warned ANZ could face years in the doldrums in the wake of the prudential regulator’s intervention, pointing to Westpac’s “operational underperformance over the last four years” as a potential fate for the bank.

Mr Lonsdale said ANZ still had gaps in its risk governance and culture that needed to be closed “as a priority”.

“We have communicated our clear expectations to the ANZ board and executive team that these issues must be urgently reviewed to ensure underlying drivers are identified and addressed,” he said.

“Depending on the outcomes from ANZ’s independent review, APRA will consider whether further action is required.”

As revealed in The Australian, ASIC was alerted to concerns over ANZ’s trading activity after the placement was raised by The Australian Office of Financial Management in July last year.

In a market update ANZ said APRA’s penalty was six basis points of common equity tier 1 capital.

“ANZ acknowledges APRA’s concerns and is expediting work already under way to address the issues raised,” the bank said on Friday.

“This includes working with APRA on the scope of an independent culture and control review within its markets business, which has already been initiated and will report to the board.”

E&P bank research executive director Azib Khan warned ANZ now faced a “key risk” it would be required to agree to an enforceable undertaking with APRA “akin to the EU provided to APRA by (Westpac) in 2020”.

ANZ signed an earlier enforceable undertaking with ASIC in 2017, agreeing to a three-year, ongoing review of its risk management processes within the markets team. This came after the bank agreed to settle a case over allegations it tried to manipulate the Bank Bill Swap Rate. ANZ was fined $10m for its unconscionable conduct and forced to pay a further $40m in penalties.

ANZ shares closed 2.3 per cent or 69c lower at $29.26.