November 26, 2019 / 6:11 AM / 10 days ago

Breakingviews - Banks Down Under have further depths to plumb

Australia's Westpac Banking Corp's Chief Executive Officer (CEO) Brian Hartzer speaks during a media conference in Sydney, Australia, November 6, 2017. REUTERS/David Gray

HONG KONG (Reuters Breakingviews) - Australian banks can, and probably will, sink further. Westpac just became the latest of the country’s Big Four to part ways with its top brass. Days after it was hit by scathing allegations from regulators, Chief Executive Brian Hartzer has departed and Chairman Lindsay Maxsted accelerated retirement plans. Persistent rot suggests investors may be underestimating the cost of a cleanup.

    It has been a grim stretch for bankers Down Under. A spate of scandals and a widely watched 2018 public inquiry battered reputations. Now, Westpac stands accused by financial intelligence agency AUSTRAC of breaching money-laundering rules, with some payments potentially linked to child exploitation.

    Lenders do not seem to be learning their lessons. AUSTRAC said Westpac was made aware of risks in 2016, but failed to tighten up processes until 2018, well after Commonwealth Bank of Australia’s own similar troubles broke. Worse, even after the prime minister weighed in, Hartzer has been quoted by The Australian newspaper telling staff the problem was “not a major issue” for average citizens. It is a worrying development considering tough new rules on bank executive accountability.

   Westpac can expect to pay at least as much as CBA did in its record A$700 million ($475 million) settlement. With most of a A$2.5 billion capital raise already completed, Westpac should be able to cope. But that won’t be the whole tab.

    Australia’s prudential regulator is apt to have questions of its own. That could result in additional capital requirements. CBA was forced to hold an extra A$1 billion. And Westpac has already been told to top up while it fixes risk management.

    The fallout also will include higher compliance costs and tech investment, which have already been increasing dramatically. What’s more, a new CEO can be expected to root out additional buried problems. All of that is set against a cooling economy squeezing margins.

    Following publication of the final Royal Commission report earlier this year, battered bank shares made a recovery to early-2018 levels. Even after slipping in recent weeks, they are trading at a healthy premium to book value. The Westpac episode is a reminder that the costs of wrongdoing will pile up.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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