ASX Banks’ Uncharted Territory; Westpac flags $1.4b hit

ASX Banks’ Uncharted Territory; Westpac flags $1.4b hit

Three of the four major banks had closed the first-half year on 31 March 2020. These banks are popularly known as the big four, including National Australia Bank Limited (ASX:NAB), Australia & New Zealand Banking Group Limited (ASX:ANZ) and Westpac Banking Corporation (ASX:WBC).

Share prices of the major banks have been on a downtrend. Over the year-to-date period to 14 April 2020, (ASX:CBA) is down by 21.44%, (ASX:WBC) has cracked 32.74%, (ASX:NAB) is down by 32.68%, and (ASX:ANZ) is down by 31.65%.

The falls in the share prices of major banks is reflecting the fact that the COVID-19 led economy deterioration is intensified as consumer-facing businesses and non-essential businesses have been shut down to prevent the spread of the virus.

Australian Government has responded actively to prevent the spread of the virus, starting with the ban on travel from/to China. Presently, the debate is that Australia may have seen the worst of the virus as infections might have peaked in the country.

Likewise, the greater good lies in returning to the normal life for Australians as well as businesses, while contrary to that could spark additional damage to the economy, which would impact the people’s faith on elected leaders or legislators.

Although the management commentary of Westpac hasn’t indicated anything concrete about the impairment charges, the major banks are likely to have higher provisions given that AASB 9 requires banks to make forward-looking provisions.

As COVID-19 has caused severe disruptions to businesses as well as households, the impairment provisions could be large as AASB 9 weighs in. Which is why the end to lockdowns and a return to normal life remains crucial for the economy as well as banks.

An end to public health measures would provide better clarity for the banks for the ongoing second half for the major banks. A range of measures introduced by banks to support the economy during this COVID-19 crisis would deteriorate the operational flexibility of the banks.

Investors have been suggesting banks to preserve capital as did the regulator. APRA had asked banks to undertake high-level stress testing prior to announcing any dividend, while it also wants the banks’ dividends to be materially lower. Some suggest undertaking the underwritten dividend reinvestment plans, which would mean issuing shares instead of paying dividends, thereby increasing core capital.

An expectation of 50% fall in the banks’ dividends has become a new normal in the street, and markets participants are bracing for this sort of cut in dividends by the major banks, which is likely leave to dents in the pockets of retirees who have dividends as a source of cash flows.

Westpac kept aside $1.43 billion

Recently, Westpac Banking announced the major items affecting the first half of the 2020 results. It expects increased provisions and asset write-downs to be around $1.43 billion, excluding impairment provisions.

WBC noted that these items would impact statutory net profit after tax, while the bank is undertaking detailed analysis to finalise impairment provisions for the half-year. It expects significant collective provisions in the impairment provisions for the half-year period due to potential credit losses as a result of COVID-19.

The bank is going to update the market with the finalised impairment charges before the announcement of half-year results on May 4, 2020. WBC has raised $2.8 billion during the half-year, paid 2019 final dividend, after which its CET1 capital ratio was 10.8% at the end of last year, i.e. 31 December 2019.

The items totalling $1.43 billion would have an impact of 30 basis points on the CET1 capital ratio, and these items include:

  • $1.03 billion (post-tax) provisions associated with AUSTRAC case and response plan.
  • $260 million post tax provisions related to (customer refunds, repayments and litigation)
  • $70 million after tax related to the decrease in the value of numerous assets.
  • $70 million after tax provision associated with the cost of changes in the provision of group life insurance.

On AUSTRAC matters, CEO of Westpac, Peter King, noted that the management was committed to fixing the processes that led to AUSTRAC issues. WBC has updated accountability regime for a hassle-free decision making, while also defining responsibility and associated risk management.

With these items and expected impairment provision, the cash earnings of the bank would be lower in the first half of 2020 that would hamper the dividends as well. The Board of the bank would be making dividend announcements during the results release.

Westpac is also undertaking changes to the presentation of the first-half results. It would not release the result template and reporting changes. However, the bank would streamline the investor discussion pack, and results release would be conducted online and by teleconference.

The $1.03 billion provision is related to AUSTRAC includes a $900 million provision for the expected penalty with respect to AUSTRAC proceedings. Additional court procedures have been scheduled for 8 and 15 May 2020, and the bank noted that the actual penalty could be materially lower or higher than the $900 million provision.

$260 million provision includes a $105 million impact to net interest income arising out of refund to business customers, $130 million impact to non-interest income related to BT customers, $90 million incurred in the remediation of these programs, and $40 million in litigation matters.

On 15 April 2020, WBC last traded at $16.29, up by 0.123% from the previous close.

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