Standard & Poor's: Westpac scandal will weigh on Aussie banking sector earnings

Outgoing Westpac Australia chief executive Brian Hartzer. Photo / File

Ratings agency S&P Global says fallout over the alleged 23 million breaches of anti-money laundering laws by Westpac Australia is likely to weigh on the entire Australian banking sector's earnings over the next two years.

Westpac announced earlier the resignation of chief executive Brian Hartzer and the early exit of chairman Lindsay Maxsted after the Australian anti-money laundering watchdog, Austrac, announced that it was laying civil charges against the bank.

In New Zealand, Westpac NZ said it was confident that it was complying with relevant New Zealand laws and regulations.

S&P Global said Austrac's action would affect the profitability of the entire industry for two years, and it would "aggravate" challenges already being faced by the Australian banks in the wake of the damning Royal Commission into the sector that concluded early this year.

It said the proceedings against Westpac "indicate that compliance and conduct issues are likely to remain a drag on the business and earnings for the Australian major banks in the next two years".

"Although significant, announced board and management changes should, in our view, stabilise stakeholder discontent, which has continued to mount since the Austrac allegations emerged," the agency said.

"These changes will also help clear the way for the board and management to address governance and risk management matters and return its focus to managing the broader business, through a period when the bank embarks on a search for a new chairman and CEO," it said.

"Furthermore, we consider that such lapses have generally been a reflection of overall industry weaknesses rather than bank-specific issues."

S&P said the Australian major banks' earnings were a "ratings strength".

"Nevertheless, in our view a significant weakening of Australian major banks' earnings over a longer period could weaken their creditworthiness in several ways.

"Lower earnings would erode the buffer for the banks to absorb any unforeseen losses.
In addition, lower earnings would reduce the support the banks receive from their equity investors," it said.

S&P said the strong political criticism of the Australian banks' lapses in recent times largely reflected rising community expectations.

"While Westpac will bear the direct financial penalties from the Austrac case, the broader damage from such lapses extends to all the Australian major banks, in our view.

"We consider that these events hurt the major banks' franchise within the Australian community as well as its investor base, which is likely to prolong, and potentially even deepen, the governance and risk management related difficulties that the Australian major banks have been facing since the Royal Commission," it said.

Westpac's shares staged a partial comeback after today's announcement. Photo / File

Westpac New Zealand said it had reviewed Austrac's statement of claim "to make absolutely certain" that Westpac New Zealand's systems and processes are robust and secure.

"The Austrac proceedings relate to Westpac Banking Corporation and Australian AML/CFT laws.

"The proceedings do not relate to Westpac New Zealand which is subject to independent oversight by the Reserve Bank of New Zealand under New Zealand AML/CFT laws. We have a range of controls in place to identify and prevent financial crime," Westpac NZ said.

"The RBNZ supervision in New Zealand includes onsite visits and monitoring. We regularly engage with the RBNZ on these issues and will continue to do so," the bank said.

Austrac alleged, in its statement of claim, that Westpac had failed to adhere to laws combating money laundering and terrorism financing.

The 48-page document was littered with details of transactions that were "indicative of child exploitation".

In New Zealand, the Reserve Bank said last week that it was working closely with its offshore regulatory counterparts on the matter.

Austrac said that since at least 2013, Westpac was aware of the heightened child exploitation risks associated with frequent low-value payments to the Philippines and Southeast Asia, both from Austrac guidance and its own risk assessments.

Westpac, Australia's oldest bank, said the current chief financial officer, Peter King, would take over as acting chief executive from Monday.

Maxsted also confirmed he will bring forward his retirement as chairman to the first half of next year.

In a statement, he said: "As CEO I accept that I am ultimately accountable for everything that happens at the bank. And it is clear that we have fallen well short of what the community expects of us, and we expect of ourselves."

In addition, long-standing director Ewen Crouch has decided he will not seek re-election at next month's annual meeting.

Australian media said Hartzer had bowed to pressure from politicians and big institutional shareholders after earlier downplaying the severity of the scandal in closed-door meetings with bank executives.

The Australian newspaper said Hartzer had told his executives just hours before his resignation that the bank's paedophile money scandal was "not an Enron or Lehman Brothers", and mainstream Australia was not overly concerned so "we don't need to overcook this".

Last year, ASB Bank's Australian parent, Commonwealth Bank of Australia, was fined A$700 million for similar breaches of the same laws.

National Australia Bank, which owns Bank of New Zealand, said in its annual report that it too is facing an Austrac investigation.

Westpac's share price dropped by 8 per cent in the aftermath of last week's revelations, but the dual listed stock rallied by 42c or $26.23 after the spill.