Westpac’s Austrac problems could trigger re-rating, says Moody’s

Ratings agency Moody’s warns Westpac’s Austrac strife could trigger a cut to the bank’s credit rating

Moody’s says Westpac's Austrac issues could cost the bank its Aa credit rating.

Ratings agency Moody’s has warned Westpac’s alleged breaches of money laundering and counter-terrorism financing laws could trigger a cut to the bank’s credit rating given the uncertainty around potential fines and other costs.

The comments follow financial crimes regulator Austrac launching Federal Court action against the bank that detailed 23 million alleged breaches of the law, including fund transfers that facilitated money laundering and child exploitation.

Austrac’s allegations included claims Westpac had not properly monitored international fund transfers and shocking claims that the bank failed to properly assess 12 customers with links to child pornography and sexual exploitation in The Philippines and Southeast Asia.

Westpac’s shares continued to lose ground on Monday, dropping 1.4 per cent to be trading around $24.42 by early afternoon.

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Moody’s on Monday said the allegations were “credit negative” to its current “Aa” rating on Westpac.

“The allegations are credit negative because of the damage to the bank’s reputation and the adverse financial impact from potential fines and costs related to remedial actions,” Moody’s said in a note to clients.

“Compliance problems of this nature also highlight the corporate governance challenges of maintaining tight controls at large and complex institutions, and the negative spillover effects for the banks’ reputations,” the credit ratings agency said.

Moody’s said it was too early to estimate the value of any potential financial penalties, but noted that in 2018 Commonwealth Bank was fined $700 million by Austrac for breaches of AML/CTF laws.

Even so, a fine of similar size or even one significantly larger should still be “manageable” within the $6.8 billion of net profit Westpac reported for the fiscal year ending 30 June, Moody’s said.

“However, these proceedings come at a time when Australian bank profitability is facing pressure from low interest rates amid weak credit growth and intense competition, while costs relating to compliance, regulation and investments in technology are elevated,” it added.

Westpac recently raised $2.5 billion of capital to cover a range of needs, including regulatory actions such as the Austrac allegations.

While Moody’s stopped short of issuing a ratings action, any cut could push up Westpac’s financing costs. Such a move would in turn hit its ability to price mortgages.

Meanwhile, analysts at Credit Suisse reported they would maintain an “outperform” rating on Westpac, saying the hit to its shareprice the bank had already taken into account any bad news and potential fine that could be levied as a result of the Austrac action.

“We consider the c$6.5bn drop in market value since the statement of claim to more than encompass the most pessimistic of scenarios in relation to the long term value of the shares,” they said in a note to clients.