Westpac flags a hit to first-half earnings

The bank expects to take a $140m hit to first half earnings due to bushfires and hailstorms, and costs from the Austrac scandal.

Westpac has flagged an earnings downgrade. Picture: AAP

Westpac’s first-half earnings will be dented by claims from the recent bushfires and hailstorms as well as expected higher compliance costs, as it reels from a financial crimes scandal that may lead to a $1bn penalty.

In a first-quarter update, Westpac estimated the cost of insurance claims for weather events, as at February 14, was $140m before tax.

A further $26m in pre-tax costs, are related to bushfire relief packages and grants to consumers and businesses, but the bank said most of those costs would print in the second half.

Westpac’s update also highlighted additional expenses in this financial year, including $80m before tax related to a response plan to Austrac’s legal action lobbed against the bank late last year.

Westpac cautioned of “increased litigation and regulatory investigation expenses” and a “potential significant” financial penalty.

“Westpac remains committed to materially lifting its approach to risk management … we are identifying further issues to address,” the update said.

“At the same time, the number of regulatory investigations and reviews into the group’s businesses has risen.”

The document said Westpac expected to incur additional expenses this financial year associated with the work and would “reconsider its current cost growth expectations” that expenses, excluding notable items, would be 1 per cent higher.

The bank will provide a further update at its results update in May, after ruling off its first half on March 31.

The financial crimes scandal, which alleged 23 million breaches of the law, claimed the job of former Westpac chief executive Brian Hartzer and the bank is now searching for his replacement. Finance boss Peter King is acting in the role and Westpac has tapped former Barclays chairman and ANZ chief executive John McFarlane to take the reins as chairman.

Westpac said it would defend separate class actions against it — concerning market disclosures on the Austrac matter — by Phi Finney McDonald and US-based Rosen Law Firm.

The bank noted “similar lawsuits” may be filed and said the corporate and banking regulators were conducting probes into its conduct.

Westpac shares dipped 0.5 per cent to close at $25.62 on Wednesday. Bell Potter analyst TS Lim estimates Westpac will have to pay a $1.25bn pre-tax penalty to settle the Austrac matter and ratcheted up his cost growth expectations.

“We now forecast a 2 per cent rise in these expenses to $9.76bn just to be conservative — therefore total operating expenses of about $11.49bn this financial year, including notable items of $1.73bn,” he said.

On the bushfires, Westpac said that while they’d had a significant impact on communities, so far they’d had only “a small impact” on credit quality.

Commonwealth Bank’s interim results this month showed a $100m charge from bushfires and drought.

The Westpac update also pointed to lower expectations for the economy linked to bushfires, storms and impact of the coronavirus. Westpac said those factors may affect “banking activity and growth”.

“Westpac Economics recently updated their Australian GDP forecast for calendar year 2020 to 1.9 per cent (down from 2.4 per cent forecast in November 2019).”

Westpac’s impaired assets were steady at $1.8bn, but the bank said Australian unsecured 90-days past due delinquencies increased five basis points to 1.82 per cent, largely due to a decline in the portfolio’s size.

As part of its response to the Austrac action, which linked the bank to payments used to facilitate child exploitation, Westpac has updated its transaction monitoring rules and implemented better governance over monitoring processes.

It has also implemented “priority screening” and reporting of transactions indicative of child exploitation to Austrac within 24 hours. Westpac’s common equity tier -one capital ratio edged up one basis point to 10.8 per cent at December 31, from three months earlier.

Westpac said it aimed to operate with a common equity tier capital ratio above 10.5 per cent — the banking regulator’s unquestionably strong threshold — in March and September.

“Additional buffers may also be held to reflect challenging or uncertain environments.”

Separately, UBS analyst Jonathan Mott on Wednesday said despite bright spots in recent earnings results the outlook for banks remained tough.

“The outlook for the banks remains under pressure and we expect the earnings-per-share downgrade cycle to continue.”