Westpac – Page 2 – Digital Finance Analytics (DFA) Blog

Westpac Responds To AUSTRAC But…

A statement by Lindsay Maxsted Chairman of Westpac:

The past week’s events have been deeply distressing.

The issue raised by AUSTRAC that weaknesses in our systems failed to detect criminal actions by customers is incredibly serious and unacceptable. This is not the company we aspire to be and I, again, apologise unreservedly.

As a long-time director, shareholder and customer of Westpac, I know we can – and will – do better for all stakeholders in meeting our Anti-Money Laundering and Counter-Terrorism Financing obligations. Being one of the country’s biggest financial institutions, we are alert to the critical role we play in helping law enforcement agencies such as AUSTRAC prevent criminals from carrying out illegal activity.

Today, we provided an update on how we are responding.

These build on several actions we have already been working on, including implementing a multi-year financial crime program, undertaking leadership changes in risk and financial crime and doubling the resourcing dedicated to financial crime to around 750 people, which we expect will further grow.

As a starting point, it’s important to note that we understand the gravity of the issues raised by AUSTRAC and the importance of – and focus on – accountability. To ensure we get all the facts and assess the issues fully, we will appoint an external expert to provide independent oversight of the process and will make the recommendations public. In the interim, all or part of the 2019 short term variable rewards for the full executive team and several general managers will be delayed, subject to the assessment of accountability.

We also understand the importance of urgently fixing the issues raised by AUSTRAC, lifting our standards, and doing this effectively. As a board, we treat our oversight responsibilities with the utmost seriousness.

Our response has been divided into three areas: immediate fixes, lifting our standards and protecting people.

Firstly, we need to step up to better assist law enforcement agencies in tracking and ultimately stopping payments that can facilitate wrongdoing. When we introduced our LitePay product in 2016, transaction monitoring was put in place to identify suspicious transactions. However, more advanced monitoring, including updated “typologies” from AUSTRAC regarding child exploitation were not put in place for LitePay payments to the Philippines until June 2018.

While the updated detection scenarios are now in place for the Philippines across the SWIFT payment channel, we accept this should have occurred earlier and was not handled appropriately.

As part of our range of immediate actions, we are now closing LitePay.

Where Westpac flags transactions that suggest potential child exploitation in high risk locations, these transactions are now prioritised for action and reported to AUSTRAC within 24 hours. This is faster than regulatory standards require.

We have re-reviewed the 12 customers highlighted by AUSTRAC and taken action and are working with authorities. We are also providing $18 million over the next three years to International Justice Mission, a global not for profit that protects vulnerable people from violence, to assist their critical work in Southeast Asia in relation to Online Sexual Exploitation of Children (OSEC).

On the separate issue of International Funds Transfer Instructions (IFTIs) – which make up the bulk of the 23 million alleged contraventions of the AML/CTF Act – we have closed the relevant Australasian Cash Management (ACM) product enabling these transactions with foreign banks and reported 99.99 per cent of all the relevant transactions to AUSTRAC with the remaining to follow shortly.

For context, the vast majority of the IFTIs we failed to report related to two overseas “correspondent” banks. These are relationships that we have with foreign banks and include them using our infrastructure to process payments, in this case predominantly foreign government pension payments to people living in Australia.

Again, we accept this problem, while unintended, should not have occurred and dates back to a series of human and technical errors in 2010-11.

In terms of the second area of our response, lifting our standards, we are establishing a dedicated Board sub-committee for financial crime, which will commission an external expert to independently review our financial crime program. We are also investing $25m to improve cross industry data sharing analysis capabilities, including via potential partnerships with industry and government partners.

But we understand banking affects real people, which goes to the heart of our belief that banking is a service business rather than a product business.

As such, we will convene an expert advisory roundtable and provide up to $10 million per year for three years on the subsequent recommended actions to support the prevention of online child exploitation. We will also match the Australian government’s funding for its SaferKidsPH partnership with Save the Children, UNICEF and The Asia Foundation, investing $6m over six years.

These initiatives and actions are just the start and the board will continue to provide updates, including on accountability, while working constructively with AUSTRAC and other agencies.

As the board of Australia’s oldest company dating back more than 200 years, we are committed to showing all our stakeholders we can – and will – address these issues so we can continue playing our critical role for the economy into the future.

This seems to me, too little too late, and an attempt to “manage” the PR aspects of the issue. Frankly, senior heads need to roll. They do not get how much their brand has been trashed, and this stems from a basic set of cultural norms which are not aligned to community expectations. Behaviours, which are unfortunately widespread across the sector.

Westpac Hit By AUSTRAC Court Action

AUSTRAC, Australia’s anti money-laundering and terrorism financing regulator, has taken Westpac to court, alleging the major bank violated anti-money laundering and terrorism regulation on over 23 million occasions. Via Australian Broker.

According to AUSTRAC CEO Nicole Rose, the decision to commence civil penalty proceedings came on the back of a detailed investigation into Westpac’s non-compliance.

The regulator has alleged Westpac’s oversight of its program intended to identify, mitigate and manage money laundering and terrorism financing risks was deficient.

AUSTRAC has found the failures led to “serious and systemic non-compliance” with the AML/CTF Act.

“These AML/CTF laws are in place to protect Australia’s financial system, businesses and the community from criminal exploitation. Serious and systemic non-compliance leaves our financial system open to being exploited by criminals,” said Rose.

“The failure to pass on information about IFTIs to AUSTRAC undermines the integrity of Australia’s financial system and hinders AUSTRAC’s ability to track down the origins of financial transactions, when required to support police investigations.”

Westpac allegedly failed to:

Appropriately assess and monitor the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships
Report over 19.5m International Funds Transfer Instructions to AUSTRAC over nearly five years for transfers both into and out of Australia
Pass on information about the source of funds to other banks in the transfer chain, depriving them of information needed to manage their own AML/CTF risks
Keep records relating to the origin of some of these international funds transfers
Carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks

AUSTRAC aims to build resilience in the financial system and ensure the financial services sector understands, and is able to meet, compliance and reporting obligations.

“We have been, and will continue to work with Westpac during these proceedings to strengthen their AML/CTF processes and frameworks,” Rose said.

“Westpac disclosed issues with its IFTI reporting, has cooperated with AUSTRAC’s investigation and has commenced the process of uplifting its AML/CTF controls.”

Westpac is a member of the Fintel Alliance, a private-public partnership established by AUSTRAC to tackle serious financial crime, including money laundering and terrorism financing.

Westpac 2019 Profit Down 16%

What ever way you look at the 2019 results, out today, Westpac had a bad year in a low growth, low interest rate, high customer remediation environment. Their statutory net profit was $6,784 million, down 16%, while cash earnings were $6,849 million, down 15%.

In FY19 and FY18, the Group raised provisions called “notable items” of $1,130m which relate to Customer remediation Provisions of $958 million (after tax) in FY19, $281 million in FY18.

The majority of the provisions relate to remediation programs for:

Ongoing advice service fees associated with the Group’s salaried financial planners and authorised representatives
Refunds for certain customers that had interest only loans that did not automatically switch, when required, to principal and interest loans
Refunds to certain business customers who were provided with business loans where they should have been provided with loans covered by the National Consumer Credit Protection Act
Other items as part of our get it right, put it right initiative Wealth reset In March 2019, the Group announced its decision to reset its Wealth business. In FY19, provisions for restructuring and transition costs were $241 million (after tax $172 million)

Cash earnings per share was 198.2 cents, down 16%. Westpac’s return on equity (ROE) was 10.75%, down 225 bps. The Final fully franked dividend is 80 cents per share, down 15% from 94 cents per share.

Their net interest margin was 2.12%, down 10 bps

Their common equity Tier 1 (CET1) capital ratio was 10.7%, still above APRA’s unquestionably strong benchmark.

Even if you exclude the “one-offs”, cash earnings were $7,979 million, down 4% and the ROE at 12.52%, is down 94 bps.

Westpac said credit quality remains sound and impairment charges remain low at 11 basis points of loans. Nevertheless, they have seen a rise in 90 day mortgage delinquencies over the year, in part due to low wage growth and slowing economic activity. A number of factors are evident:

Existing 90+ day borrowers remaining in collections for longer due mainly to weak housing market activity in most of FY19 –
A greater proportion of P&I loans in the portfolio (70% of portfolio at 30 September 2019)
NSW/ACT delinquencies rose 6bps in 2H19 (16bps higher over FY19) to 69bps at 30 September 2019 (NSW/ACT represents 41% of the portfolio)–
Seasoning of the RAMS portfolio, as this portfolio has a higher delinquency profile

70% of Australian home loan customers are ahead on their repayments including offset accounts. Australian properties in possession increased over the year by 162 to 558. Properties in possession continue to be mostly in WA and Qld. Loss rates are 3 basis points. In their “stressed” scenarios losses would rise to ~57 basis points.

They say negative equity remains low based on dynamic calculations using Australian Property Monitors data. Not clear at what level data is applied.

Looking at the segments:

Consumer cash earnings were $3,288, 4% lower due to a decline in non-interest income and increased impairment charges. Mortgage lending increased 1% and deposits rose 2%. Net interest margin was down 3bps due to lower mortgage spreads from increased competition and lower interest only lending.

Business cash earnings were $2,431 and performance was impacted by notable items ($270 million after tax). Excluding these items, cash earnings were $60 million or 2% lower from a reduction in non-interest income and higher regulatory related costs. Deposits rose by 3% over the year. Non-interest income was down 11%, mainly due to provisions as well as lower wealth income from new platform pricing and product mix changes.

Westpac Institutional Bank cash earnings was $1,014. Lower cash earnings were primarily due to a $78 million movement in derivative valuation adjustments, no contribution from Hastings and a $62 million turnaround in impairment charges. (2019 impairment charge of $46 million). In FY18, Hastings contributed $203 million to non-interest income, $158 million to expenses and $29 million to tax.

Westpac New Zealand was the brighter spot, with cash earnings ($NZ) of
1,042 3 (12) Cash earnings growth was supported by a gain on the sale of Paymark and a $10 million impairment benefit. Loans increased 5% with growth evenly spread across mortgage and business lending, while deposits
also grew 4%. RBNZ gaave their NZ IRB model the tick today, after 18 months remediation!

The CEO Brian Hartzer said:

We expect system credit growth in the year to September 2020 to lift from 2.7% this year to 3%. That will be largely driven by housing where we expect a lift from 3.1% to 3.5%, although business credit growth is expected to slow somewhat from 3.3% to 3%.

By my calculations, that would not be sufficient to reverse Westpac’s decline.

Westpac successfully completes RBNZ remediation process

Westpac New Zealand Limited (Westpac) has retained its accreditation as an internal models bank following completion of an extensive remediation process required by the Reserve Bank.

In 2017 the Reserve Bank required Westpac to undertake an independent review of its compliance with internal models obligations. The review found that Westpac was using a number of unapproved models and that it had materially failed to meet requirements around model governance, processes, and documentation.

The Reserve Bank imposed a precautionary capital overlay in light of the regulatory breaches, and gave Westpac 18 months to remedy the failures or risk losing its accreditation as an internal models bank.

Deputy Governor Geoff Bascand says that following the remediation process, Westpac is now operating with peer-leading processes, capabilities and risk models in a number of areas.

“Westpac has taken the findings of the independent review as an opportunity to make meaningful improvements to its risk management, and we commend it for its co-operative and constructive engagement in working with Reserve Bank over the remediation period.

“The changes that Westpac has made to its internal processes, governance and resourcing, as well as a suite of new credit risk models for which it has sought approval, have given us confidence in its capital modelling and compliance and satisfied us that it now meets the internal models bank standard.

“Looking forward, we will continue to hold all internal model banks to the same high standards.”

Internal models banks are accredited by the Reserve Bank to use approved models to calculate their regulatory capital requirements. Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank’s directors and management.

Banks are required to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses.

The Reserve Bank will amend Westpac’s conditions of registration from 31 December to remove the two percentage point overlay applying to its minimum capital requirements.

As a condition of retaining its accreditation Westpac will need to satisfy several ongoing requirements, which it has committed to resolving, Mr Bascand says.

ASIC wins appeal against Westpac companies

In a fresh blow to Westpac, the Federal Court this morning delivered the corporate regulator a win in its appeal against a previous ruling on Westpac’s telephone campaigns. Via Financial Standard.

The full court this morning said ASIC’s appeal will be allowed with costs, while Westpac-related companies’ cross-appeal will be dismissed.

The matter relates to whether or not Westpac’s telephone sales campaigns amounted to advice and if that advice was personal or general in nature.

In 2014 and 2015, Westpac ran telephone and snail-mail campaigns to encourage customers to roll over external superannuation accounts into their existing accounts with Westpac Securities Administration Limited and BT Funds Management.

ASIC was primarily concerned with the telephone calls.

The corporate regulator claimed that the two Westpac companies had breached their FoFA-stipulated best interest duty by advising rollovers to Westpac-related super funds without a proper comparison of options, as required by law.

And so, it initially launched civil penalty proceedings against the two Westpac subsidiaries in December, 2016.

The Federal Court handed down its judgment in January this year, with a mixed outcome. It decided that ASIC had failed to demonstrate that the two Westpac companies had provided personal financial product advice to 15 customers in regards to the consolidation of superannuation accounts.

However, the judge added the Westpac subsidiaries contravened the Corporations Act in 14 of 15 customer phone calls by implying the rollover of super funds into a BT account was recommended. This came about through a “quality monitoring framework” where BT staff were coached in sales technique.

ASIC appealed the January judgment. Westpac also made a counter appeal.

Westpac Enacts Series of Credit Policy Changes

Westpac yesterday announced a number of changes to its credit policy, which have also gone into effect across its subsidiaries: BankSA, Bank of Melbourne, and St George Bank. Via Australian Broker.

Investor lending

Effective 22 October, the maximum loan to value ratio for interest-only investor loans was raised from 80% to 90% – including any capitalised mortgage insurance premium.

The update applies to new purchases, refinances within Westpac Group or externally, and loan variations such as switching from P&I repayments to interest-only.

However, the current switching policy will continue to apply, with customers only able to switch to interest-only repayments post 12 months of loan drawdown.

The changes will not apply to interest-only owner occupier loans, which will maintain their maximum LVR at 80%.

HEM calculations

Also effective yesterday, referral to credit will no longer be required in instances where expenses are greater than 130% of HEM and no other reason that requires credit assessment is triggered, a change the group expects to save brokers time and deliver faster outcomes to customers.

Updated resources

The group also launched an enhanced version of its Assess calculator, “developed in response to broker feedback.” It crafted the updated tool to be more intuitive and streamlined, making the completion of assessments “much quicker” and saving brokers valuable time.

Westpac plans to remain receptive to feedback moving forward, inviting brokers to “give it a go” and share their thoughts on their experience.

The older version of the Assess calculator will not be available for use after 15 November 2019.

Westpac Revises Broker Remuneration Policy

Westpac Group has announced that it will remove the claim process for upfront commissions paid on post-settlement drawdowns on broker-originated home loans, via InvestorDaily.

For all subsequent upfront commissions payable from 1 January 2020, brokers and third-party introducers will automatically receive remuneration.

Westpac revealed that subsequent upfront commission will remain payable for each eligible home loan following the 12-month anniversary of the loan settlement.

“This change delivers on our commitment to continue to review and improve the broker commission model,” Westpac stated.

Westpac’s announcement comes amid calls from broking industry stakeholders for more equitable remuneration arrangements.

Last month, Connective director Mark Haron noted the impact of contrasting remuneration policies adopted by lenders off the back of the Combined Industry Forum’s move to limit the upfront commission paid to brokers to the amount drawn down by borrowers (net of offset).

Mr Haron said that some lenders had opted to withhold the payment of commission for additional funds arranged by a broker, which are utilised by a borrower after a pre-determined period post-settlement.

The Connective director added that the disparity in the application of the CIF reforms had increased risks of “lender choice conflicts”, which could hinder compliance with the newly proposed best interests duty.

Loan Market’s executive chairman Sam White, has also noted his concerns with existing net of offset arrangements.

Mr White called for an arrangement that better aligns with existing clawback provisions, which, under the federal government’s newly proposed bill, would limit the clawback period to two years.

“Our belief is that net of offset should mirror clawback provisions,” Mr White said.

“If it is good enough for banks to claw back the money over two years, it should also be good enough to increase the upfronts over that same time period.”

Like Mr Haron, Mr White revealed that Loan Market would also be lobbying for reform to existing net of offset arrangements as part of the consultation process for the government’s best interests duty bill.

The push for reforms to net of offset policies follow the release of the Mortgage & Finance Association of Australia’s Industry Intelligence Service report, which revealed that, over the six months to March 2019, the national average annual gross value of commissions collected per broker dropped by 3 per cent when compared to the previous corresponding period, falling to a historic low of $128,709.

The decline was driven by a 10.6 per cent fall in the average upfront commission received by a broker, down from $75,604 to $67,554 – offset by a 6.9 per cent increase in the average annual gross trail commission received per broker, from $57,189 to $61,155.

Reductions in commission revenue have also prompted calls from both industry associations and aggregators for “fair and equitable” clawback arrangements.

Mr Haron and the Australian Finance Group’s head of industry and partnerships Mark Hewitt, recently indicated that they would be lobbying for clawback reform during the consultation period for the federal government’s proposed best interests duty bill.

Westpac tipped to cut dividend by 12%

Analysts believe the major banks will be forced to reduce dividend payments amid slower growth, margin squeeze and significant remediation costs, via InvestorDaily.

In a research note published on Wednesday (25 September), Morningstar analyst Nathan Zaia forecast Westpac’s 2020 dividend will be reduced by 12 per cent to $1.66 from $1.88.

The analyst believes that the bank may struggle to meet its January 2020 capital deadline.

“When Westpac reported first-half earnings in May, the bank appeared in good shape to meet APRA’s 10.5 per cent unquestionably strong target by January 2020,” Mr Zaia said.

“However, we estimate capital headwinds, new and previously known, will detract around 44 basis points from Westpac’s common equity Tier 1 ratio by December 2019.”

Morningstar believes that if Westpac maintains its final dividend of $0.94 a share, which is paid in December, its CET1 capital level will fall below 10.5 per cent. To offset this, the research house assumes that the major bank will partially underwrite the dividend reinvestment plan (DRP).

NAB used the same strategy in May when it partially underwrote $1 billion on top of the $800 million received through ordinary DRP participation by shareholders.

The capital headwinds are largely being driven by remediation programs among the big four banks. In July, APRA announced a $500 million operational risk overlay for the banks. This applied to all majors except CBA, which was asked to hold an additional $1 billion in capital. These capital burdens will remain in place until the banks have completed their remediation programs and strengthened risk management.

Last month UBS analyst Jonathan Mott warned that the majors will be forced to cut dividends as net interests margins become unsustainable.

Mr Mott explained that with interest rates entering ultra-low territory, the ability of the banks to generate a lending spread and return on equity (ROE) has become significantly challenged.

“If the housing market does not bounce back quickly this could put material pressure on the banks’ earning prospects over the medium term, implying that the dividend yields investors are relying upon come into question once again,” he said.

UBS now believes the majors will be forced to cut dividends in the next two years.

“We believe the significant revenue pressure the banks are facing as interest rates fall and NIMs decline will force the banks to review their dividend policies,” Mr Mott said.

UBS expects CBA, Westpac and Bendigo and Adelaide Bank to cut their dividends over the next two years if the RBA cuts the cash rate to 0.5 per cent or undertakes any alternative monetary policies like QE.