Investors See More Pain Ahead After Westpac CEO Resigns

(Bloomberg) -- Brian Hartzer resigned as Westpac Banking Corp. chief executive officer Tuesday, bowing to investor pressure after the lender was engulfed by allegations it committed the biggest violation of money-laundering laws in Australian history.

The 52-year-old becomes the third of Australia’s big-four bank CEOs to be undone by scandal in the past two years. The laundering suit, which included allegations child abusers used the bank to funnel money to the Philippines, further tarnishes the reputation of an industry already sullied by years of misconduct.

Here’s how investors, policymakers, analysts and academics reacted:

Louise Davidson, CEO, Council of Superannuation Investors

“Investors want to see Westpac’s culture and governance strengthened to avoid a repeat of these issues,” said Davidson, whose Australian Council of Superannuation Investors represents 39 pension funds overseeing a combined A$2.2 trillion ($1.5 trillion). “We believe that this crisis warrants further board renewal in the new year to support rebuilding public trust.”

“It is still unclear how these significant issues came to occur, and why a fulsome investigation was not initiated earlier. We will be continuing to engage closely with Westpac to monitor its progress on remediation and improvement.”

Guy Debelle, RBA Deputy Governor

“It’s a serious allegation that Austrac’s got out there and I have confidence in my fellow regulators.”

“But the allegations are clearly incredibly disturbing and serious and that looks like to me the sort of response that you would expect given the nature of the allegations that are on the table.”

Josh Frydenberg, Treasurer

“These alleged breaches are of the most serious nature and there needed to be accountability.”

“These are going to be difficult days for the board and management of Westpac. But they will get through it and it will continue to play a vital role in our economy.”

Kyle Rodda, market analyst, IG Markets

“I think the biggest fear is that we haven’t cleared the rot out yet. We had the Royal Commission into financial services and banking, and it revealed some pretty horrific stuff throughout that whole process, and it affected bank shares, but it also obviously affected trust in the institutions themselves. Obviously, we’ve got pretty much an oligopoly when it comes to our banking system for big banks and they have a tremendous amount of power and sway over our stock market, but over our economy as well.”

“Perhaps we have not cleared the entire rot out of the Australian banking system yet, and perhaps there is more to come in terms of some of the indiscretions that we’ve seen. And that is obviously not good for the Australian economy and the financial system at large.”

Eleanor Creagh, strategist, Saxo Capital Markets

“Hartzer’s resignation has eased investor nerves somewhat but the problems are bigger than a couple of board changes and there is likely more pain ahead.”

“The allegations of indifference stemming from senior management harp back to a resounding finding of the Royal Commission which highlighted the pervasive culture of greed and regulatory indifference entrenched across the industry, stemming from upper management and permeating right through the Australian banking system. This presents a far more broad-reaching problem which spans the entire sector and is lacking any easy or quick solution.”

John Pearce, CIO, UniSuper

“I want to express total support for the Westpac board,” said Pearce, whose fund manages A$80 billion in pension savings.

“I know there will be criticism that the chair should have made this decision straight away. I think there was a case of the board just taking a deep breath, pausing and just taking stock of where they were at and they’ve acted really quickly.”

“A combination of this and the fact they are suspending bonus payments either partially or fully should be enough. I’d like to think that it’s a reasonable way to mitigating the backlash.”

Steve Johnson, CIO, Forager Funds

The next CEO “really needs to be an outsider,” Johnson said in an interview. “I think that’s super important and I don’t often say that. We normally -- especially the companies that we’re long-term investors in -- like to see internal succession and people working there for a long period of time.”

“Culture is a huge issue across the Australian banking sector, but in particular at Westpac.”

Rod Bristow, CEO, Clime Investment

“This clearly demonstrates just how deeply the issue has resonated with Westpac customers, regulators and the wider public, and the scale of the work required to rebuild trust in the industry following the Royal Commission.”

“In the medium-term these moves will be seen as positive, giving a new chairman the ability to select a CEO unencumbered by current issues.”

“The market’s initial response has been positive. Having said that, it has introduced much uncertainty and we expect more senior executive departures in coming months.”

Hugh Dive, CIO, Atlas Funds

“Some of the heat has been taken out of the situation after the heads have been mounted on pikes out the front of the Westpac offices.”

“With Westpac’s AGM on Dec. 12, the board was keen to limit voting against the five directors up for re-election and the bank’s remuneration report.”

Sharad Jain, analyst, S&P Global Ratings

The board and management changes should “stabilize stakeholder discontent,” Jain said.

“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.”

“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.”

Elise Bant, law professor, University of Melbourne

“What we really want is for them to fix the problems, rather than be in charge of the ship when the settings are discovered to have been way off target, then step down.”

“There have been some real problems with getting the penalty mechanisms right for corporate misconduct. You need to have penalties at a level where they actually sting in order to be effective. It’s about time that courts took seriously and regulators argue in favor of really significant penalties that will hurt.”

--With assistance from Michael Heath and Angus Whitley.

To contact the reporters on this story: Matthew Burgess in Melbourne at mburgess46@bloomberg.net;Sybilla Gross in Sydney at sgross61@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Peter Vercoe

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