Penalty the sticking point as Westpac, Austrac go to court

CBA chief Matt Comyn. Cartoon: Eric Lobbecke

It’s now looking very unlikely that Westpac and Austrac will walk hand-in-hand to the Federal Court on Friday and present a proposed penalty and agreed statement of facts to Judge James Allsop.

The bank will instead lodge a defence, including a range of admissions it has previously made.

In theory, it’s a step closer to a trial.

However, discussions are expected to continue, with optimists believing the odds still favour a commercial settlement, even if the process follows the same circuitous route as Commonwealth Bank’s clash with the combative financial intelligence agency in 2017.

CBA appeared to be willing to go head-to-head against Austrac by initially lodging a defence, only to think better of it in June 2018 and pay a record $700m fine to make the whole thing disappear.

Two years later, the main obstacle to a settlement in these capital-constrained times is the size of the cheque that Westpac is prepared to hand over to the commonwealth Treasury.

The bank set aside $900m for a penalty last month as part of an overall charge of $1.03bn, including $130m in costs linked to its Austrac response plan.

The provision was made only two weeks after the board tapped acting chief executive Peter King for the permanent gig.

King and his fresh-faced chairman John McFarlane, whose appointment was announced in January, would like nothing more than to see the back of Austrac —– after all, it’s a debacle that will be pinned forever on the lapels of their predecessors.

But there’s a limit to how much they are prepared to pay. Their considered view, informed by the usual battery of lawyers and advisers, is that the agency’s suggested asking price of $1.5bn-$2bn is way outside the ballpark.

Austrac has alleged more than 23 million breaches of anti-money laundering and counter-terrorism by Westpac, including money transfers that facilitated child exploitation in Asia.

The allegations led to a boardroom implosion, with chief executive Brian Hartzer falling on his sword and chair Lindsay Maxsted bringing forward his departure.

Despite protests from Austrac, the Federal Court ordered the parties on March 30 to file an agreed statement of facts by May 8 and a defence in relation to the remaining matters by May 15. The parties failed to meet the May 8 deadline.

In Westpac’s corner is John Sheahan QC, who helped guide CBA through its Austrac nightmare, and Ruth Higgins SC. Allens partner Peter Haig is backing them up.

The Australian Government Solicitor is advising Austrac, but Attorney-General Christian Porter will have to approve any settlement.

The Austrac case also spawned two class actions against Westpac over market disclosure issues, including one earlier this year which was spearheaded by the Parkinson Superannuation Fund.

In a spot of better news for the bank, the Parkinson case was dismissed about a week ago, leaving law firm Phi Finney McDonald in charge of the remaining suit.

Hartzer will welcome the dismissal of the Parkinson matter — he was named personally as one of the defendants.

Gilbert + Tobin partner Richard Harris has been looking after the class actions for Westpac.

CBA cruising

Matt Comyn has positioned Commonwealth Bank as well as could be expected for the coming coronavirus storm. The underlying business is performing soundly, with market-share growth in home lending and household deposits only producing flat interest income in the March quarter because volume gains were offset by an industry-wide erosion in ­margins.

Sure, the key common equity tier one capital ratio was a bit lower than expected at 10.7 per cent. But that was after CBA absorbed a 114 basis-point hit from the $3.5bn interim dividend (79 basis points), along with a $1.5bn COVID-19 provision and $135m in remediation costs.

A 30-40 basis-point rebuild is on the way after the sale of a majority stake in Colonial First State, which will yield $1.7bn in cash ­proceeds. The market’s real concern, however, is the heavy turbulence that lies ahead.

Comyn is no different from his peers, banking on a sharp contraction in gross domestic product in the June quarter.

“The period that we’re in now is going to be very challenging,” the CBA chief told this column. “We’ll see a significant impact on incomes from the number of people who are unemployed or otherwise on JobKeeper, and we expect the labour participation rate will contract quite sharply.”

CBA’s provisioning drew on a number of scenarios, including the Reserve Bank’s forecast earlier this month of a 6 per cent contraction in GDP in 2020 and an average unemployment rate of 8 per cent which peaks at 10 per cent.

Also thrown into the mix were baseline and prolonged downturn scenarios developed by CBA.

In the milder version, house prices were forecast to fall by 11 per cent, rising to 32 per cent in the prolonged downturn.

The latter scenario produced GDP contractions of 7.1 per cent this year and 0.8 per cent in 2021, with average unemployment rates of 9 per cent and 8.5 per cent.

CBA continues to make a cash profit and generate “strong” levels of organic capital under all scenarios, according to chief financial officer Alan Docherty.

Some parts of the economy will perform better than other, more vulnerable parts.

The big swing factors will be the success of plans to reboot the economy, and the ongoing suppression of the virus.

Right now, however, there’s a strange feeling of some kind of calm before the storm.

Comyn said CBA had “very strong” deposit growth in March and April, and home lending volumes were “surprisingly robust”.

“Our operational processes have performed well and there’s been quite a lot of refinancing activity and customer switching into fixed rates, but I don’t expect that to continue,” he said.

“Realistically, given the impact of what’s going to flow through the economy, we’re expecting a contraction or gradual slowing in credit growth, and some individual sectors of the economy are going to struggle for some time.”

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