Westpac Bank could be fined up to $3 billion for AML breaches
Westpac is in the process of raising $500 million from retail shareholders who have virtually no idea of the extent of the financial damage that will be inflicted on the bank by Cyclone AUSTRAC.
It’s rare to see investors trading in such an uninformed market. So large is the information vacuum that subscribing to take stock in Westpac’s current share purchase plan is tantamount to a crapshoot.
On Thursday the corporate regulator, the Australian Securities and Investments Commission (ASIC), intervened on behalf of retail investors. As a result, mum and dad Westpac shareholders that had already applied for their entitlement for shares were able to withdraw and have the money refunded.
Since ASIC launched its legal action eight days ago, the share price has fallen most days and $6 billion has been wiped off the value of Westpac shares – that’s an amount almost equal to its annual profit.
The $2 billion placement to institutional shareholders has already been priced and those who participated are already underwater thanks to Westpac’s falling share price. The retail share issue will be priced at a 2 per cent discount to the average share price over a five-day period that began on Tuesday.
Investors need to make a judgment on whether Westpac’s share price will stabilise next week or continue to fall.
The slide in the price over the past week represents a big price recalibration considering the market hasn’t got any firm idea of the size of the fine that Westpac will negotiate with AUSTRAC.
While there is an emerging consensus that $1 billion is the number, this feels more like an echo chamber than a forensic/legal conclusion.
It could be less than this but could just as easily be far bigger. Bank analysts are running worst-case scenarios on a fine as large as $3 billion.
That’s not an existential number but nor is it an amount that’s reflected in Westpac’s current share price.
All the public and the analysts have to go on is a statement from Attorney-General Christian Porter that the bank should expect an AUSTRAC fine "well over" the $700 million imposed on the Commonwealth Bank last year for more than 53,000 breaches of anti-money laundering and counter-terrorism laws.
Further muddying the water is the fact the nature of the alleged breaches made by the Commonwealth Bank and Westpac are quite different in many respects.
Thus using the CBA fine as a guide might be ill-conceived.
What history does tell us is that in the month after AUSTRAC hit the Commonwealth Bank, its share price fell 10 per cent and it underperformed its bank peers over the next 12 months.
Even assuming the $1 billion fine, there are a bunch of cascading financial consequences – some of which are difficult to predict.
Here are a few of the "known unknowns".
The first is Westpac’s capital position. Any AUSTRAC fine will reduce its Tier 1 by the same amount. Westpac bagged $2 billion from institutional investors but we don’t know how much of the $500 million from retail investors will be received.
So is Westpac sufficiently capital fortified?
"There is a growing risk that WBC [Westpac] needs to come back to raise yet more capital, at the even lower share price which dilutes existing shares even more," says Jefferies banking analyst, Brian Johnson, who has told clients Westpac’s ability to raise more capital to fund the AUSTRAC penalty would be "challenging".
Analysts including Johnson and Morgan Stanley’s Richard Wiles point to the threat of the Australian Prudential Regulation Authority (APRA) imposing an additional capital buffer. It did so in response to the Commonwealth Bank’s AUSTRAC breaches.
The next item is profit. Wiles has downgraded his earnings per share estimates by 14 per cent in 2020 and 3 per cent in 2021. And while he thinks Westpac will want to retain its dividend the risks that it will be cut have increased.
Analysts believe that as earnings per share fall, retaining the dividend will push the payout ratio higher (ie more than 80 per cent) above Westpac’s sustainable medium-term range of 70 to 75 per cent.
Another of the unknowns is the outcome of ASIC’s investigation into Westpac’s disclosure and whether it pursues the bank for breaches of the Corporations Act.
And then there is the issue of brand damage – something that’s near impossible to estimate.
In reducing its earnings per share estimate for 2020 by 11 per cent, UBS analyst Jonathan Mott said this reflected a $1 billion AUSTRAC settlement, a $50 million increase in compliance costs in each half and a small reduction in volume growth due to reputational damage.
Morgan Stanley trimmed its housing loan and deposit growth for Westpac by 1 per cent and 2 per cent respectively in 2020 due to "adverse customer response and management distraction". (via Sydney Morning Herald)