Ann: Westpac acknowledges civil proceedings by AUSTRAC, page-299

Private Client Research

25 November 2019

Westpac Banking Corporation

AUSTRAC response plan

Over the weekend, Westpac Banking Corporation (WBC) announced a response plan to the allegations set out by the Australian Transaction Reports and Analysis Centre (AUSTRAC) last week. The alleged breaches include deficiencies in its corresponding banking relationships, as well as inadequate oversight of its anti-money laundering and counter-terrorism financing (AML/CTF) program.

(Please note that on Tuesday morning, the departure of CEO Brian Hartzer and early retirement of chairman Lindsay Maxsted were announced to the market.)

Westpac has committed to closing the LitePay product, lifting staff levels in its AML/CTF team, increasing investment in industry data sharing, changing reporting lines and appointing an external expert. The pre-tax expense impact is estimated at $80 million for FY20, representing a 0.8% underlying expense headwind. Westpac also will withhold all or part of the 2019 short-term variable reward from the executive team.

The board does not believe there has been any indifference by the executive team, including the CEO, but said a more detailed review is required to investigate the facts.

The bank has lost about $6 billion of its market capitalisation over the past three days, which substantially prices in the risk and impact from the AUSTRAC action. We maintain our Hold recommendation and $26.70 target price, however, given prolonged uncertainty and the broader earnings challenges facing Westpac.

• Westpac response plan – The plan includes the following key items:

• – Immediate fixes: 1) Shut down the LitePay product, which was the source of alleged breaches with respect to child exploitation payments; 2) Add a further 200 staff to the 750 sitting in the AML/CTF function in 2020 (staff numbers have already been doubled over the past two years).

• – Lifting standards: 1) Introduce a Board Financial Crime sub-committee; 2) Appoint an external expert to review Westpac’s program; 3) invest $25m to improve cross-border and cross-industry data sharing and analysis; 4) Elevate the financial crime function to report directly to the chief risk officer.

• – Actions to reduce the human impact of financial crime: 1) $18m of funding over three years for the International Justice Mission to tackle Online Sexual Exploitation of Children (OSEC); 2) $6m of funding over six years for its SaferKidsPH partnership with Save the Children, UNICEF and The Asia Foundation; 3) $10m of funding over three years for programs to support the prevention of online child exploitation.

  • Remaining questions – The response plan has addressed a number of problems, although we believe only time will resolve the following issues: 1) The size of the penalty – CBA’s $700m settlement with AUSTRAC remains the most relevant benchmark we have; 2) Whether a further permanent increase in compliance costs is likely; 3) Whether any other AML regulators have jurisdiction with respect to the breaches; 4) Whether the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission (ASIC) will launch their own action or inquiries; 5) Any potential revenue impact – we are not aware of any material revenue impact on Commonwealth Bank (CBA, Hold) from its own AUSTRAC issues; and 6) Whether any of the other banks will be faced with similar action. We note National Australia Bank (NAB, Accumulate) has had a contingent liability note on AML uplift or breaches reported to AUSTRAC for some time, although the note is quite general in nature and NAB management talked at its recent FY19 result about the cooperative engagement it has had with AUSTRAC on the issue. We are not aware of any disclosure from ANZ Bank (ANZ, Hold) on potential breaches.

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