Via Financial Times

Westpac will take a A$1.4bn ($900m) hit to first-half profit as a result of provisions linked to a money-laundering investigation by Australian regulators and customer refunds related to separate scandals involving its business and wealth customers.

Australia’s second-biggest bank by market capitalisation said on Tuesday that it expects to pay a A$900m fine — the country’s largest-ever civil penalty — in relation to a scandal that highlighted how compliance failures potentially facilitated child exploitation by paedophiles.

Westpac said it had held talks with Austrac, Australia’s financial crime regulator, but cautioned a final settlement must still be agreed by the Federal Court.

Shares in Westpac fell 2 per cent to A$15.64 in early trading while the S&P/ASX 200 was up 0.7 per cent. 

Peter King, chief executive, said the bank would take additional provisions linked to credit losses associated with the spread of coronavirus. He added the bank was undertaking a detailed analysis to finalise its impairment charges for the first half of 2020, and that they would be announced before its results on May 4.

However, he said Westpac’s capital position was strong enough to withstand the crisis. “Having spent much of the last decade strengthening our capital we are well placed to respond to the unfolding environment,” said Mr King.

In November, Westpac raised A$2.8bn in capital, pushing its tier one capital ratio — an important measure of a bank’s financial strength — up to 10.8 per cent as of end-December. The bank said the provisions announced on Tuesday will reduce its capital ratio by about 30 basis points, to the 10.5 per cent “unquestionably strong” target threshold set by the prudential regulator.

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Australia has stepped up enforcement of laws against money laundering and terrorism financing in the past three years.

Commonwealth Bank of Australia was fined A$700m in 2018 for compliance breaches that enabled drug traffickers to use its banking network to launder money. Last week HSBC revealed it had self-reported compliance breaches to Austrac.

Austrac initiated its legal case against Westpac in November, alleging the bank failed to report international fund transactions worth more than A$11bn between 2013 and 2019 in a timely manner as required by law. Disclosures that some of these payments may have facilitated child exploitation by paedophiles forced the resignation of chief executive Brian Hartzer. 

Mr King said he was committed to fixing the processes that led to the breaches in money laundering compliance, including recruiting another 200 people in financial crime and compliance and “putting in place a clearer accountability regime that will speed up decision making”.

Westpac said it also would make a A$260m provision to cover an increase in customer refunds linked to business and wealth customers, and a reduction in the value of several assets. There are additional provisions linked to customer refunds, litigation costs, revaluation of several assets and life insurance charges. 

Nathan Zaia, an analyst at Morningstar, said a A$900m fine was close to the A$1bn the research firm had pencilled into its forecasts but that the scale of provisions for customer refunds was “disappointing, and higher than we expected”.

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Mr Zaia added: “We can only hope the new CEO Peter King is looking to get all the bad news out as soon as possible.”