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Australia’s Banks Face Uphill Battle to Restore Shredded Credibility

Australia’s Banks Face Uphill Battle to Restore Shredded Credibility

(Bloomberg) -- Brian Hartzer succumbed to the inevitable and resigned as Westpac Banking Corp. chief executive officer Tuesday, forced out by an investor backlash over allegations the lender committed the biggest breach of money-laundering laws in Australia’s 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, including allegations Westpac was used to funnel money to child pornographers in the Philippines, shines a spotlight yet again on governance failures in an industry lambasted earlier this year for a runaway culture of greed and poor behavior.

“Culture is a huge issue across the Australian banking sector,” said Steve Johnson, chief investment officer at Forager Funds Management Ltd. in Sydney. “Despite everything that’s happened over the last three years, they haven’t recognized that there is a systematic problem here, rather than individual instances of things going wrong.”

Australia’s Banks Face Uphill Battle to Restore Shredded Credibility

Hartzer joins an unenviable list of bank executives from around the world who’ve been ousted over compliance failures, with Danske Bank A/S and Swedbank AB removing their CEOs amid dirty-money probes and Wells Fargo & Co. CEO Tim Sloan departing over a range of scandals including fake customer accounts.

After largely escaping the opprobrium heaped on U.S. and European counterparts a decade ago in the wake of the global financial crisis, Australia’s banks now face their own uphill battle to restore their shredded credibility.

“We’ve sailed through pretty well, and now it almost feels like a bit of a delayed reaction and things are surfacing now,” said John Pearce, chief investment officer at UniSuper, whose fund manages A$80 billion ($54 billion) in pension savings.

Hartzer stepped down six days after the nation’s financial crimes agency accused the bank of more than 23 million breaches of money-laundering laws. Among the most serious allegations, the agency said Westpac failed to carry out proper due diligence on 12 customers whose accounts showed repeated low-value payments to countries in Southeast Asia, even though it knew such transactions were a red flag for possible child exploitation.

The suit sparked an outcry from politicians, triggered probes by two other regulators and wiped A$7.5 billion from Westpac’s market capitalization, before its shares made up some of the losses Tuesday.

Australia’s Banks Face Uphill Battle to Restore Shredded Credibility

Seeking to vent pressure building on Westpac, Chairman Lindsay Maxsted announced he will bring forward his own retirement to early next year. The bank will now conduct a search for both of their replacements, with Chief Financial Officer Peter King taking over as acting CEO.

Reputational Damage

The mammoth task of restoring the bank’s reputation comes at a time when profits are stuttering. The country’s second-largest bank earlier this month reported its first decline in earnings since the aftermath of the financial crisis, with billion-dollar customer compensation bills hitting profits already crimped by record-low interest rates.

“These events hurt the major banks’ franchise within the Australian community as well as its investor base,” S&P Global Ratings analyst Sharad Jain said. It is “likely to prolong, and potentially even deepen, the governance and risk management related difficulties” the banks are already facing.

While Hartzer’s departure has likely cauterized the immediate crisis, the bank faces a hard road ahead. In addition to the money-laundering lawsuit, Westpac is being investigated by the securities regulator and banking regulator -- both of which have the power to impose multi-million dollar fines.

Class action lawyers are also circling to see whether the bank’s disclosures ahead of its recent capital raising revealed sufficient detail about its interactions with the financial crimes agency.

And shareholders still have questions they want answered.

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

--With assistance from Angus Whitley, Matthew Burgess, Sybilla Gross, Jackie Edwards and Harry Brumpton.

To contact the reporter on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Edward Johnson, Peter Vercoe

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