Westpac Ltd (ASX: WBC) is one of the largest publicly listed banks in Australia. WBC has a market capitalisation of around A$58 billion.
What are Westpac losses to be included in the HY20 results?
Westpac today announced expected new and increased provisions (excluding impairment provisions) and asset write-downs totalling around $1,430 million after tax which will reduce HY20 cash earnings.
These items, along with their cash earnings impact, include provisions and costs associated with the AUSTRAC proceedings and response plan of $1,030 million after tax. This loss includes the expected AUSTRAC fine of $900 million and $130 million costs associated with implementing changes to improve Westpac’s financial crime program, support industry initiatives to enhance financial crime monitoring and provide additional support and resources to organisations working to eradicate child exploitation. This estimated of the AUSTRAC fine of $900 million is lower than market expectations and compares with the $700 million fine imposed on the Commonwealth Bank of Australia (ASX: CBA) in June 2018.
Other losses include an increase in provisions for customer refunds, repayments and litigation of around $260 million after tax, a reduction in the value of several assets costing around $70 million after tax and costs of changes in the provision of group life insurance of around $70 million after tax.
Westpac’s Tier 1 capital ratio was 10.8% at 31 December 2019. The impact of the losses announced today on Westpac’s Tier 1 capital ratio is estimated to be around 30 basis points which means Tier 1 capital falls to 10.5%.
Is Westpac expected to incur more losses?
Westpac also announced that it is undertaking detailed analysis to finalise its loan impairment provisions for HY20. The HY20 impairment charge is expected to include a significant collective provision increase that will lift the Group’s total provision balance in anticipation of credit losses that it expects to incur from the COVID-19 outbreak. Westpac plans to update the market once this impairment charge has been finalised and prior to the announcement of its HY20 results on 4 May 2020.
The size of these losses are likely to be large which will further erode Westpac’s capital position. Combined with the APRA announcement on 7 April 2020 indicating that banks should lower dividend payments in the current environment, this means that investors should expect a much dividend payment for HY20 compared with the most recent payment of 80 cents per share (fully franked). Westpac flagged lower dividends in today’s announcement but did not provide any guidance on how much lower dividend payments will be.
What is the market’s reaction?
Westpac’s share price is marginally higher today (up 0.3%) in a slightly stronger market (up 0.7%) and is currently around $16.00. Westpac’s share price has fallen by around 38% since mid-February, which is much more than the around 18% fall in the ASX200 over the same period 2020.