Federal Court Refused To Approve Westpac’s $35 Million Penalty

Australia's second-biggest bank Westpac Banking Corporation (ASX:WBC) could escape an agreed $35 million fine over its lending practices after the Federal Court refused to approve the penalty for Westpac, despite the bank admitted it breached responsible lending laws. Further, Westpac’s share price tumbled over 5% intraday on 13 November 2018 on account of selling by investors as the stock went ex-dividend today.

Westpac and the ASIC had agreed to the fine of $35 million after Westpac accepted it had wrongly assessed the ability of borrowers to repay mortgages. Westpac was assessing the ability of borrowers to repay mortgages by using household expenditure measure (HEM) to automatically calculate a customer's ability to repay a loan, and it was found out that a lot of home loans automatically approved under the HEM method should have been referred to a credit officer for further assessment. But on 13 November, Justice Nye Perram of federal court said neither Westpac nor the ASIC was able to explain why the bank decided to use that particular method and he further added that admirable ingenuity had been applied by Australian Securities and Investments Commission and Westpac's lawyers to gloss over the very real differences which exist between them.

Even though the Australian regulator and Westpac agreed the many loans provided under HEM were unlawful, Justice Perram said that it was not enough to approve the settlement as the declaration does not provide any information about when the use of the HEM is permitted and when it is not. The federal court has also raised questions over the appropriateness of the proposed penalty stating that it was unworkable to assess the reasonableness of the penalty if it is not known what is to be penalized. Both the parties will return to court on 27 November 2018 for further proceedings.

In FY18, the Cash earnings of Westpac were $8,065 Mn which was almost flat as compared to FY17. During FY 2018, the banking group invested more than $800 Mn in system upgrades, digital transformation, and innovation. On the division-wise, the cash earnings of Westpac New Zealand increased by 5 percent to NZ$1,017 Mn in FY18 as compared to FY17. In FY18, the Business growth of Westpac was sound with loan growth of 4 percent, average funds increased by 4 percent, and Life Insurance premiums 20 percent higher. Westpac Institutional Bank (WIB) recorded a 6 percent decline in the cash earnings to $1,086 Mn mainly because of lower Markets revenue. The Board declared a fully franked dividend of 94 cents per share with dividend ex-date of 13 November 2018 and Dividend Pay date of 20 December 2018. This summarized a total dividend payment of 188 cents per share for the full year, representing a payout ratio of 80% of cash earnings.

In the last six months, the share price of Westpac declined by 7.59 percent as on 12 November 2018, traded at a PE level of 11.680x. WBC shares traded at $26.230 with a market capitalization of circa $95.28 billion as on 13 November 2018 (AEST 1:37 PM).

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