Westpac has revealed it will suffer a massive $1.4 billion hit to its first-half earnings.
In a statement, Australia’s second-largest bank said the bulk of these “increased provisions” and writedowns related to the AUSTRAC money laundering scandal.
The bank estimated that it might receive a $900 million fine for failing to prevent up to 23 million breaches of anti-money laundering and counter-terrorism financing laws via its Litepay system.
If that proves accurate, it will be less than the $1 billion penalty that many banking analysts had forecast.
Either way, it is expected to surpass the record fine of $700 million — paid by Commonwealth Bank for systemically failing to report around 54,000 suspicious transactions made through its “intelligent deposit machines”.
Westpac’s system was also used by paedophiles to send money to the Philippines to pay for child abuse material without raising any red flags.
This scandal brought down Westpac’s leadership, forcing the resignation of chief executive Brian Hartzer and the early retirement of chairman Lindsay Maxsted.
Last week, HSBC outed itself to the financial crimes regulator for potentially breaching anti-money laundering laws, but the international bank did not go into specifics.
Uncertainty about penalty
Westpac said there was “considerable uncertainty” about what the Federal Court would decide.
There was also a chance the bank might agree on an “appropriate penalty” with the regulator AUSTRAC, which the court “would have regard to but [is] not be obliged to accept”.
“The actual penalty paid by Westpac following either a settlement and joint submission on a penalty, or a hearing, and in each case as determined by the Court, may be materially higher or lower than the [$900m] provision,” the statement said.
In May 2019, Westpac’s half-year profit was $3.2 billion, which was a 24 per cent slump.
Its full-year profit was $6.78 billion in the last financial year, which Mr Hartzer considered to be a “disappointing result”.
Westpac announced it would also take a $130 million hit to its cash earnings from improving its compliance with financial crime legislation, “support[ing] industry initiatives to enhance financial crime monitoring” and “provid[ing] additional support and resources to organisations working to eradicate child exploitation”.
Refunding customers and COVID-19
Its earnings will also be impacted by $260 million due to “customer remediation activities” and “litigation matters”.
Essentially, the bank will refund business customers who were lent money in breach of the National Consumer Credit Protection Act, or responsible lending laws.
Westpac briefly addressed the cost of the coronavirus pandemic on its business.
The bank said that COVID-19 has led to a $70 million writedown on “software costs and some physical assets”, but it did not elaborate further.
Its earnings will be reduced by another $70 million because Westpac Life Insurance Services (WLIS) will “end its existing relationship” with BT Super, another subsidiary within the same corporate umbrella.
WLIS will “stop providing group life insurance” to BT Super, which will result in “deferred acquisition costs” being written off, the bank wrote in its statement.
In September, WLIS and BT were sued by their superannuation members who alleged, in a class action, to have been “short-changed” out of their retirement savings for over a decade.
Since late-February, Westpac’s share price has plummeted by 38 per cent to $15.96 (its closing price before the Easter long weekend).
This was partly due to the coronavirus outbreak, which led to a panic sell-off across global stock markets and fears that Australia’s banks may be forced to slash their high dividends to deal with the economic fallout of the pandemic.