Unlike rivals NAB and the Commonwealth with their (in the market’s view) – solid result and update last week, we saw a very different story yesterday from Westpac which issued what amounted to a warning of a looming earnings downgrade.
In fact, it sounded a bit like the sort of warnings credit ratings get when placing a company and its debt on a credit watch or a negative outlook.
Westpac told the ASX in a statement that its 2019-20 earnings and growth are under threat with it facing mounting costs related to the continuing AUSTRAC money laundering scandal that engulfed the bank last year, with pressure added from the coronavirus crisis and the summer bushfires.
In the trading update, Westpac said the number of regulatory investigations and reviews into the group has arisen and the bank now expected to “incur additional expenses” related to this forcing it to “reconsider its current cost growth expectations”.
In a first-quarter 2020 capital, funding and credit quality update lodged with the Australian Securities Exchange on Wednesday, the nation’s oldest bank warned investors of the bottom-line implications.
“A number of factors have emerged since Westpac released its FY19 results on 4 November 2019 which are expected to have an impact on FY20 earnings,” the document stated.
The bank also flagged the ongoing investigations by the Australian Securities and Investments Commission and APRA related to the money-laundering allegations, claiming the “outcomes of these investigations [is] unknown”.
In the statement, Westpac provided an update on the progress of its response plan where three new bodies have been established to improve operations – a board committee for financial crime, an independent consultant engaged to determine management accountability and another panel to provide recommendations to the board on risk and compliance.
The bank says it has boosted up its screening and reporting system to ensure transactions “indicative of child exploitation” are reported to AUSTRAC within 24 hours. The financial crime team now reports directly to chief risk officer David Stephen.
In addition to fallout from AUSTRAC’s lawsuit, the bushfires, storms and coronavirus are expected to have an economic impact on the nation’s oldest bank that may “ultimately affect banking and growth”.
Insurance claims from the severe weather reached $140 million.
While the rise in claims will have a small impact on Westpac’s earnings, it is facing slower growth than previously estimated.
Westpac’s economics arm last week downgraded its GDP growth forecast from 2.4% to 1.9%. The update said tourism and education sectors would be most affected by the coronavirus.
Citi analysts cut its half-year (March 31) and full-year earnings (September 30) share estimates by 7% and 5%, respectively, after the update was issued.
Interestingly the rise in house prices has helped Westpac’s credit quality.
The bank pointed out in the update that its Australian mortgage 90+ day delinquencies were 0.86% of loans (down 2bps over the quarter) and that the bank had 472 properties in possession as mortgagor, down 86 over the quarter “as housing conditions continue to improve and some seasonality.”
Westpac’s shares fell 0.5% to $25.62.
