Westpac May Need to Raise Funds to Pay Money-Laundering Penalty

(Bloomberg) -- Westpac Banking Corp. may be forced to raise more funds from shareholders to help cover the cost of a fine stemming from allegations of the biggest violation of money-laundering laws in Australia’s history, according to analysts.

The bank is facing allegations from Australia’s financial crimes agency that it has breached rules more than 23 million times, including failing to detect payments to child pornographers. Brian Hartzer yesterday resigned as CEO and will be replaced by Chief Financial Officer Peter King from Dec. 2 ahead of a global search for a permanent CEO.

Here’s What analysts are saying:

Jefferies:

• Westpac’s brand has been ‘tarnished’ which may make it harder to raise back book mortgage rates, cut costs and retain its best staff
• May need to show more public contrition, including cut in director fees; Settlement of Austrac allegations ‘must be the priority’
• ‘Thinly capitalized’ Westpac doesn’t look well placed to pay an about A$1 billion ($679 million) fine without raising more CET1 capital; Share purchase plan may not raise as much as expected due to ‘disillusioned’ retail investors
• Westpac’s operational performance, share price have underperformed sector and broader market under Hartzer’s tenure; While Peter King is rated highly, strategic reset under externally appointed CEO may be on the cards
• Maintain underperform; PT cut to street-low A$22.40 from A$23.80

Morgan Stanley:

• A further capital build may be required for any potential Austrac fine; Risk of another dividend cut has increased; Now see penalty in order of A$1 billion
• Additional funds likely to come via dividend reinvestment plan; Austrac fine of more than A$3 billion may force an extra capital raising
• Westpac facing period of leadership uncertainty, making it harder to restore operating momentum
• Maintain equal weight; PT lowered to A$24.50 from A$25.50

UBS:

• Hartzer is third CEO of major bank to resign in past two years; King is ‘highly regarded’ in investment community and may be a potential permanent replacement
• Limited basis to forecast extent of likely fine; A$1 billion estimate based on Commonwealth Bank’s A$700 million charge
• “We believe it is now clear the Australian banks have been global laggards
  in addressing AML and compliance issues since the Financial Crisis”; Remain concerned about the outlook for the banking sector
• Westpac may need to spend hundreds of millions to address anti money laundering compliance
• Forecasts have been cut to account for potential fine, compliance spending and reputational damage
• Raised to neutral from sell as shares approach price target; PT A$24.50

ISS:

• Recommends against two Westpac directors and to vote against remuneration report, but not backing board spill
• Shareholders should consider that all directors share in accountability for governance and risk factors; Backs vote against Nerida Caesar and Peter Marriott
• ISS Calls for More Westpac Directors to Go, Vote Against Pay

To contact the reporter on this story: Tim Smith in Sydney at tsmith58@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Naoto Hosoda

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