Westpac warns of potential $341m hit to earnings

Westpac expects to take a $341m hit to its second half cash earnings, warning of a potential “significant financial penalty” for anti-money laundering failures.

Westpac Bank reports full year earnings early next month. Picture: AAP

Westpac expects to take a $341m hit to its second-half cash earnings, as the bank also warned of a potential “significant financial penalty” for anti-money laundering failures.

Westpac said the $341m after tax impact on second-half profit largely reflected customer repayments including interest, while a small part was due to the cost of running the program. Including the restructure of Westpac’s wealth division, total notable items in the six months ended September 30 will print at $377m, the bank said in an ASX statement.

Westpac is the latest to top up its compensation charges, following on the heels of ANZ and National Australia Bank earlier this month. In total, the big four’s customer compensation and related charges now exceed $8bn, including tallies from 2017 for three of the majors and Commonwealth Bank of Australia’s total since 2014.

NAB’s total pre-tax compensation charge since 2017 is the largest of its rivals at about $2.37bn.

Westpac’s statement said the majority of new charges were related to its financial advice business, which has since been sold and shut down, and ongoing advice service fees and changes. The next largest remediation costs came from the business banking division followed by the consumer bank.

In its first-half, the six months ended March 31, Westpac booked customer remediation charges of $617m and wealth reset costs of $136m.

On a pre-tax basis, Westpac’s total remediation bill since 2017 has swelled to $1.9bn.

Chief executive Brian Hartzer said dealing with outstanding customer remediation and refunding them was a “key priority” in 2019.

“The additional provisions announced today are part of that commitment” he said in Wednesday’s statement.

Reviewing products and services

“As part of our ‘get it right put it right’ initiative we are determined to fix these issues and stop these errors occurring. We will continue to review our products and services to ensure they deliver the right outcomes for customers, and if necessary, make further provisions.”

Westpac’s announcement will have analysts recutting their expected earnings numbers for the bank, ahead of its full-year results being presented on November 4.

The customer compensation costs stem from a spate of scandals that were fleshed out last year at the Hayne royal commission.

Bell Potter analyst TS Lim said the potential remediation top ups at Westpac and its big bank peers would remain an issue and “linger on for some time”.

“We lowered our (Westpac) FY19 cash earnings forecast by about $300m after tax in our result preview note for remediation — roughly in line with the $341m after tax but will have to factor in the $36m after tax program costs as well,” he added. “As for Austrac, this will take some time to sort through.”

On a separate issue that Westpac eventually self-reported to financial crime agency Austrac, the bank said it was not taking a provision in its accounts.

Westpac said a contingent liability disclosed last year over the matter was due to it failing to report large numbers of international funds transfer instructions (IFTI), as required under the law.

The statement warned, though, that any Austrac enforcement action may include civil penalty proceedings and result in a “significant financial penalty” which Westpac is currently unable to estimate.

“Previous enforcement action by AUSTRAC against other institutions has resulted in a range of outcomes, depending on the nature and severity of the relevant conduct and its consequences,” Westpac said.

“Austrac has issued a number of detailed statutory notices over the last year requiring information relating to the group’s processes, procedures and oversight. These notices relate to a range of matters including these IFTI reporting failures and associated potential failings related to record keeping and obligations to obtain and pass on certain data in funds transfer instructions, as well as correspondent banking due diligence, risk assessments and transaction monitoring.”

Last year, CBA paid a record $700m fine to AUSTRAC for a series of breaches of anti-money laundering and counter terrorism financing laws.

Westpac’s shares dipped 0.2 per cent to close at $28.91 on Wednesday, in what was a mixed trading day for the sector. Prior to the higher remediation charges being announced, analysts expected Westpac to report a profit of $7.12bn for the year ended September 30.