APRA hits Westpac with $500m new capital requirement

Regulator hits lender with additional $500m capital charge following Austrac scandal.

Westpac is now carrying $1bn in capital risk requirements. Picture: AAP

Westpac copped a fresh blow on Tuesday as the banking regulator imposed a new capital charge and started its first compliance probe under a new regime, that could see executives and managers banned and the bank hit with further fines.

The Australian Prudential Regulation Authority’s Westpac investigation could take up to two years as it assesses how the embattled bank allegedly broke the law 23 million times, after legal action was launched last month by financial crimes regulator Austrac.

APRA will also look at whether executives and managers have been held to account and if the Banking Act or prudential standards have been breached.

The regulator on Tuesday slapped Westpac with an additional and immediate capital charge of $500m for governance and risk shortcomings, taking the total add-on capital the bank must hold to $1bn.

Several analysts said despite the additional capital charge and an expected penalty by Austrac, that could top $1bn, they did not expect Westpac would need to raise more capital. That comes after the bank tapped investors for $2.77bn last month.

Still, Westpac’s shares declined almost 0.9 per cent to close at $24.64 on Tuesday.

Austrac’s damning legal action alleges 23 million breaches of anti-money laundering and counter terrorism financing laws, including that the bank facilitated payments linked to child sexual exploitation.

APRA’s probe includes an in-depth review of what happened at Westpac and of its culture, governance and accountability, and it is also formally assessing the role of individuals under the Banking Executive Accountability Regime (BEAR) for the first time.

Under the BEAR, which started mid-last year, the regulator is not required to go to court to apply a disqualification to an executive or manager, but the decision is open to appeal at the Administrative Appeals Tribunal.

APRA can also apply to the Federal Court for civil penalties and fines of up to $500m for organisations under its supervision, depending on their size.

Macquarie Group banking analyst Victor German said even though Westpac confronted fines and a new capital charge, the bank’s capital position was “manageable”.

“We continue to see the path of Westpac meeting higher capital requirements via discounted DRPs (dividend re-investment plans),” he said.

“We estimate the total impact on capital from Austrac and APRA’s capital impost is about 32bps… We estimate that with the discounted DRP in 2020, we expect WBC’s capital position to be at circa 11.35 per cent, which we see as appropriate.”

Bell Potter analyst TS Lim echoed that view but said APRA’s investigation would “increase management distraction over the next 12 to 18 months”.

Mr Lim doesn’t expect Westpac to raise more capital, but he has factored in lower dividends in 2020 and 2021.

The Austrac legal action has already claimed the job of Westpac chief executive Brian Hartzer, while chairman Lindsay Maxsted has brought forward his retirement.

On Tuesday, Mr Maxsted said the bank was “committed to co-operating with APRA in all aspects of its investigation and review”.

“As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards,” Mr Maxsted said. “We will provide our full support to APRA.”

In the wake of the Austrac scandal, Westpac has appointed independent expert Promontory Financial Group to examine accountability for the failures, including the now-defunct Lite-Pay product. The bank is also expected to appoint three prominent individuals within days to oversee the accountability review.

APRA deputy chair John Lonsdale said Westpac would endure a “lengthy investigation”.

“Austrac’s statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia’s second-largest bank,” he said.

“While Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed.”

The statement pointed to an extensive review focused on governance, covering aspects of the bank’s risk management, accountability structures, remuneration and culture.

The review will also inspect the steps Westpac has taken to strengthening risk governance in recent years, including internal assessments.

The nation’s banks - bar Commonwealth Bank of Australia which was forced to have an external assessment done - conducted their own culture, governance and accountability reviews after a string of scandals were fleshed out at the Hayne royal commission.

The APRA probe of Westpac will coincide with a simultaneous investigation conducted by the corporate regulator, as well as the legal proceedings by Austrac. The agencies will co-operate where appropriate, APRA said.

The BEAR rules force banks to set out and lodge with APRA deferred pay models and lines of accountability within executive and management ranks.

But some of the alleged Westpac breaches date back to 2013, meaning BEAR will only be relevant for a much smaller number of transactions.

Westpac’s new capital charge – which adds to $500m that three of the big four were hit with this year - is in line with the charge APRA placed on CBA over its anti-money laundering and counter terrorism financing failures. Commonwealth Bank paid a record $700m penalty to Austrac last year.

An Australian Securities and Investments Commission spokeswoman declined to comment on its Westpac investigation on Tuesday.

At the bank’s annual general meeting last week, angry shareholders berated Westpac’s board over the Austrac legal action as they delivered a second strike against its remuneration report but stopped short of spilling the board.

A penalty is expected to be paid by Westpac next year as it seeks to settle the Austrac legal matter.

Westpac said the doubling in APRA’s capital charge was expected to reduce its Level 2, common equity tier 1 capital ratio by about 16 basis points, based on the balance sheet as at September 30. A fine of $1bn would reduce the ratio by a further 23 basis points.

Additional reporting: Gerard Cockburn