Macquarie cuts Westpac forecasts after Austrac allegations

Macquarie Research tips Westpac’s potential fine from Austrac allegations might hit $700m.

Analysts note that Westpac’s co-operation with the regulator could trim any potential fine. Picture: Bloomberg

Macquarie Research has tipped the quantum of Westpac’s potential Austrac penalty in the realm of $700m, and warned it is unlikely the rest of the big four will escape the regulator’s ire.

Analyst Victor German was among several in the industry to trim earnings forecasts for the bank, raising expectations for a fine from $150m to $700, in line with Commonwealth Bank’s punishment for the 500,000 breaches identified last year.

Drawing parallels to the CBA case, Mr German noted that issues from the regulator prompted the departure of its chief executive Ian Narev, the initiation of an APRA inquiry into its governance and three-months of weakness in its share price.

With Westpac already trading at a 5 per cent discount to its long-term premium, he noted that Westpac was unlikely to continue to de-rate, though there was no real catalyst for rerating.

Since the announcement of the Austrac action, alleging more than 23 million breaches of anti-money laundering and counter-terrorism financing law, Westpac shares have dropped by as much as 6.5 per cent to hit their lowest since February.

“Given the complexity of issues and incomplete information, we believe it is difficult to assess the extent of the possible fines, however it is becoming increasingly clear that banks’ ability to reduce expenses in the near term is looking unlikely,” Mr German said.

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“Furthermore, we believe it is improbable that peers would avoid Austrac issues, albeit the severity of breaches is difficult to assess externally.”

Macquarie has downgraded FY20 earnings for the bank by 9 per cent, and FY21 earnings by 3 per cent, and lowered its dividend forecasts for FY21.

The broker said Westpac’s capital position would be weaker and the bank would need to meet the likely shortfall via a discounted dividend reinvestment plan or divestments.

Statement ‘reads very badly’

Jefferies’ Brian Johnson echoed the sentiment, saying Westpac “will likely settle for a meaningful, painful but not catastrophic civil penalty in the hundreds of millions of dollars range”.

But he added the statement “reads very badly” for the bank and proforma ex-div CET1 ration “looks skinny” given the potential civil penalty.

“Can WBC senior management and the WBC board survive such scathing criticism and allegations of inaction? The CBA Austrac episode, and even NAB’s following the Financial Services Royal Commission, suggests probably not.”

Offering a minor consolation, Ord Minnett analysts note that Westpac’s co-operation with the regulator could trim any potential fine.

“Austrac noted Westpac had self- reported, had co-operated with its investigation, and had commenced remediation of its controls. This could be viewed as potential mitigating factors, which could impact the quantum of the final penalty.”