Despite provisioning for potential loan losses, the bank could still take massive hits as a result of enforcement and the worsening economic outlook.
On 28 May, Westpac announced an impairment charge of $2.23 billion, of which $1.6 billion stems from the decline in economic activity related to the COVID-19 pandemic. And while the bank expects that impairment will have little impact on its common equity tier 1 capital rations, the cost of its loan losses could be set to rise.
“This is a large and confronting number when compared with loan impairment expenses of just $800 million in fiscal 2019, but a jump was expected,” Morningstar wrote. “Our full-year loan impairment expense forecast of $3.6 billion implies another $1.2 billion in provisions in the second half.”
While NAB has already been forced to launch a $3.5 billion equity raise – and Westpac could “sing from a similar hymn sheet” – Morningstar believes it starts from a stronger capital position and will wait until its short-term capital needs become clearer before raising equity. However, that could change if the ultimate bill for its AUSTRAC misdeeds rises above the projected $1 billion.
“The statement of claim made by AUSTRAC regards breaches of anti-money laundering and counterterrorism finance laws was more material than we expected, and as such appears likely to result in a material penalty,” Morningstar said. “While we do not [expect] additional breaches to come to light, it remains a risk.”
Westpac has set aside more than $900 million to deal with the AUSTRAC penalty, the final amount paid could be “materially higher or lower than the provision”. While the global pandemic – and the fact that Westpac has opened its coffers to small businesses – could mean the bank gets a stay of execution, it’s unlikely that AUSTRAC will let it go entirely unpunished.
The bank is also facing a slew of class action lawsuits from both domestic and international firms representing hundreds of shareholders irate about the impact the AUSTRAC affair had on their holdings.
But despite the gloomy outlook, new CEO Peter King also remains optimistic about the bank’s prospects.
“Having spent much of the last decade strengthening our capital we are well placed to respond to the unfolding environment,” Mr King said.