Morgan Stanley analysts feel Westpac has enough capital to cover potential Austrac fines

Westpac civil penalties beyond $2bn for alleged legal breaches would change things, Morgan Stanley analysts predict.

Morgan Stanley also reiterated its negative stance on the broader banking sector. Picture: Getty Images

Westpac will avoid tapping investors for further capital, unless civil penalties for the bank’s alleged 23 million legal breaches exceed $2bn, analysts at Morgan Stanley predict.

Analysts led by Richard Wiles said after Westpac raised $2.77bn late last year, the bank was likely to be able to absorb a large settlement with financial crimes regulator Austrac.

“We do not expect Westpac to undertake another capital raising unless the Austrac civil penalty exceeds $2bn,” he said in a note to clients, which also referenced risks of future dividend cuts.

“Separately, our base case assumes that it (Westpac) holds the 80c half-yearly dividend. However, with an underlying payout ratio of about 80 per cent, there is risk of a further circa 10-15 per cent dividend cut this year.”

Austrac launched legal action against Westpac in November, sending the bank into damage control as it was accused of 23 million breaches of the law, including facilitating payments linked to child exploitation and pornography.

The damning revelations led to the exit of former chief executive Brian Hartzer, while Westpac chairman Lindsay Maxsted has brought forward his retirement.

Morgan Stanley said Westpac’s 2019 capital raising added about 64 basis points to its common equity tier one ratio, taking it to 11 per cent. The report noted Westpac’s core capital levels provided a buffer about the banking regulator’s “unquestionably strong” threshold of 10.5 per cent.

Mr Wiles said the broker estimated a Westpac civil penalty of $1bn for settlement of the Austrac action. That would surpass the Commonwealth Bank’s $700m legal settlement with Austrac, agreed in 2018, which at the time was a record payment.

Morgan Stanley also reiterated its negative stance on the broader banking sector.

“We have a negative stance on the major banks given a challenging operating outlook, an uncertain regulatory environment, the growing threat of disruption, and stretched trading multiples.”