Westpac Share Price – Talk of the Town

Summary

• Westpac has undertaken a rigorous review in the wake of AUSTRAC claims.
• New leadership is inclined to promote renewed culture in the bank.
• Strengthening non-financial risk management remains a priority for management and a new role has been created to promote efficient non-financial risk management.
• Employees and senior leaders are more accountable now than they were before.

Westpac Banking Corporation (ASX: WBC) has reported the results of its investigation into the compliance issues raised by AUSTRAC. These investigations were launched last year when the bank caught attention of markets as AUSTRAC revealed its statement of claim.

In light of the issues, the bank’s then Chairman and CEO stepped down from the positions. John McFarlane was appointed as new Chairman of the Board, and Peter King was appointed as CEO of the bank.

The Board has identified that AML/CTF risks were not adequately understood within the bank. There was a lack of accountability in managing the AML/CTF issues, and insufficient expertise and resource for the AML/CTF compliance.

General governance responsibilities organised by the Board were fit for the purpose, but the Directors could have recognised the level of financial crime faced by the bank much earlier. The escalation of financial crime to the Board was unintentionally incomplete and inaccurate, at times.

Leaders also looked past ten years to identify roots of the fault. As a result, individuals have faced significant disciplinary and remuneration actions, and a number of relevant staff has left the company as well.

Related: Westpac to Raise Capital Buffer in Wake of AUSTRAC Crisis

Mr King stated that around 38 individuals were slapped with remuneration actions, applied to prior year periods as well. This included blocking of short-term variable incentives in FY19, totalling ~$13.2 million.

Although there was no evidence of intentional wrongdoing, serious compliance failures had faults of omissions. The bank’s remediation plan emphasises on improving non-financial risk management in the business.

The Board has accepted recommendations of the Advisory Panel report that are being implemented and are well-advanced in the process. A new Board sub-committee has been formed to focus on compliance, regulatory and legal matters.

A new executive position for financial crime compliance was established and filled, while additional organisational changes were undertaken as well. Westpac has started its transformation program to implement a cultural change, and leadership expects no tolerance for preventable adverse events.

Mr King accepted that Westpac had failed to build capacities in some important areas, and financial crime risk culture was not up to the level of expectations. The bank would continue to engage on the legal process with AUSTRAC.

Related: The tale of Westpac Share Price; WBC Yielding 7.1%

Promontory has affirmed that the bank’s review of accountability for the failures was robust, backed by accurate facts and sound methodology to arrive at conclusions. It was noted the review was adequate to investigate AUSTRAC allegations. Information available with the review team was sufficient to develop a methodology for the review. Interviews taken by the review team were enough to identify the causes.

Executive retirement and departures

In late-May, the bank announced that Westpac Institutional Bank CEO Lyn Cobley has updated about her intentions to retire. Most recently, the institutional division has worked tirelessly with the government and customers to provide support in the wake of the pandemic.

She noted her intentions of transition from executive positions to Board positions now, following a very long executive career across market cycles. Westpac is looking for a new boss for its institutional division.

Group Treasurer, Curt Zuber will take the responsibility and head the Institutional Bank temporarily starting from 1 July. Mr Zuber has been associated with the bank since past 25 years and in financial markets for over 30 years. Joanne Dawson would be taking the position of Group Treasurer during this period, who is the CFO of Institutional Bank & Treasury.

During mid-May, the bank announced departure of David Lindberg and Craig Bright, who were said to be taking up new roles overseas. Mr Lindberg was the Chief Executive of Consumer business and Mr Bright was the Chief Information Officer of the bank.

Westpac also revealed a new role to bolster financial crime, compliance and management capabilities of the bank. The position of Group Executive, Financial Crime, Compliance and Conduct was filled by Les Vance, who was working as Chief Operating Officer of Consumer Division.

The new role would enable Chief Risk Officer to emphasise on financial risk management, particularly in the credit portfolio as COVID-19 pandemic has exhibited renewed risks.

It was noted that Mr Vance would bring a forensic approach to strengthen the financial crime and compliance management of WBC, which intends to improve its non-financial risk management as well as financial crime capabilities.

1H FY2020 performance of the bank

In half-year ended 31 March 2020, the bank reported statutory net profit after tax of $1.19 billion, down by 62% and cash earnings at $993 million, a decline of 70%, both over the previous corresponding period.

1HFY2020 results were impacted by credit provisions, AUSTRAC provision as well as customer remediation, refunds, payments, associated costs and litigation. Due to COVID-19, WBC has increased expected credit loss provisions to $5.8 billion, and this also includes around $1.6 billion in provisions to account for COVID-19.

At the end of the period, Westpac’s CET1 ratio was 10.8%. To maintain a strong capital position, the bank refrained from paying dividends in June 2020. However, Board remains committed to consider dividend options this year.

Since last year, Westpac has been under pressure, owing to Royal Commission led customer remediation expenses, AUSTRAC claims and most recently due to COVID-19. An earlier than expected recovery could act as a tailwind for the banking sector but returning to pre-crisis level earnings will likely take time.

On 4 June 2020, WBC last traded at $18.18, up by 1.28% from the previous close.

(All currencies in AUD unless or otherwise stated)