Westpac’s mission impossible to navigate both coronavirus and Austrac

Spooner’s week. Illustration: John Spooner

Heading into the worst recession in a generation, Westpac chair John McFarlane has almost a ­mission impossible to escape from the Austrac snafu without further damage to the bank.

The good news for him and chief executive Peter King is that neither was responsible for the cultural failings of the old guard who presided over a “good news culture” that meant details like the bank allegedly facilitating the funding of paedophiles didn’t reach the boardroom.

Austrac has the bank over a barrel because the new guard wants a deal more than anything but doesn’t want to risk more ­financial damage, while at the same time aware of the risk to the brand of fighting in court.

There is a real political overlay because Attorney-General Christian Porter will be the one who signs off on any settlement, so the upper echelons of a very political administration will be involved.

Westpac has set aside $900m for a settlement, which is more than the $702m CBA settled for in 2018 — but that figure was double the amount CEO Matt Comyn had publicly prepared for.

McFarlane will have a figure above which he will fight, but ­having put aside $1.6bn to cover potential COVID-19 losses, now is not a great time for the bank to be throwing away more capital.

The economy has a workforce of 13 million people, of which six million are on the JobKeeper allowance, 1.5 million are on JobSeeker, $200bn home loans are on deferral and $100bn smaller business loans are also on hold.

That is an atrocious time for Westpac to be cleaning up past problems only to clear the deck for the new ones.

Here to stay

As the BCA committees and ­Neville Power’s COVID-19 taskforce work with the state and federal governments on the way out of the lockdown, some temporary productivity moves should clearly be made permanent.

Telehealth was blocked originally because the feds were worried doctors would have balloon­ing patient lists way ahead of the number of people consulted. The fraud concern was dropped for COVID-19, and while we haven’t seen the bill yet, it’s an innovation whose time has obviously come.

Same goes with the hicaps payment by private health insurers, which was extended by the private funds to Telehealth.

Digital signatures are to stay, along with video witnessing of documents being signed, videoed annual meetings, a national e-conveyancing system, relaxed rules on migrant visas to allow workers extended hours, relaxed rules around the time trucks can deliver to supermarkets, and pathology results delivered online.

The list goes on, but these few examples are all evidence of a digital economy up and running and growing but often stymied by ­bureaucracy — until the virus hit.

The national cabinet process has worked well, but the hope is these innovative changes can be permanent and not just for six months during the lockout.

Chinese burn

The China trade threats are real but their potential impact is hard to determine because right now it’s a question of muscle-flexing.

Two things are notable: the US and China signed a free-trade deal earlier this year, and neither side is raising this as a point of leverage; and Australia’s two biggest exports to China, iron ore and coal, are also not raised, which is both fortunate and noteworthy.

Any action against Australian wine, as noted by BA analyst David Errington, obviously has the potential to hit Treasury Wine Estates hard ahead of its planned spin-off of the Penfolds brand.

The trade threats will no doubt have the folk at TWE looking at the potential of a Chinese buyer as a cornerstone investor in the proposed Penfolds spin-off next year to mitigate ongoing concerns.

China last year accounted for 17 per cent of TWE’s sales and 35 per cent of earnings before interest and tax. And according to BoA, over the next three years it will account for $200m of the $273m increase in earnings forecast. Over the past three years, China has accounted for $200m of the $350m increase in earnings.

Outgoing TWA chief Michael Clarke has invested heavily in China, creating a strong local distribution unit, with around 200 ­locals on staff. Sales of Australian wine over the past four years have been relatively flat around $4bn, but exports over the period have grown from $2.3bn in 2017 to $2.9bn this year. Exports to China have accounted for all the increase, growing from $568m in 2017 to $1.2bn in 2020.

Exports of bottled red wine have been the big mover over the period, with exports to China more than doubling from $502m to $1.1bn.

Separately, Stuart Boxer’s appointment as chief strategy officer at TWE is clearly a job initially aimed at the Penfolds demerger. Boxer led the Dulux demerger from Orica in 2010 and worked closely with boss Patrick Houlihan until November, when the Nippon Paint deal went through.

Australia has three dumping decisions against Chinese steel imports but the biggest issue is not so much the duties but how they were imposed. China has an arguable case against Australia on steel dumping rules because Australia applies its own definition of market price, arguing there is no transparency in the Chinese market so it’s impossible to come up with an independent fair value.

Dumping duties are imposed when a product lands in Australia at below the normal price in the country of origin and causes injury to the local industry.

In most cases it’s the second leg that causes the angst, because with injury it is difficult to pinpoint exactly why the harm is caused. There could be myriad reasons why a local manufacturer is in trouble, such as high gas prices or poor management, so blaming imports is often a convenient excuse.

In China, this is compounded by the fact the Anti Dumping Authority doesn’t take notice of the Chinese domestic price and instead imposes its own price based on a list of peer country prices.

The Australian steel industry has two domestic manufacturers BlueScope and Sanjeev Gupta’s Infrabuild and both are reputed to have offices inside the Dumping Authority. There are three present imports hit by duties including pipe and tube lodged by BlueScope and Infrabuild, galvanised coil from BlueScope and zincalume from BlueScope.