Westpac losses hit home in $1.2 billion of charges

Westpac charges COVID-19 anti-money laundering breaches AML ASX WBC
Westpac’s earnings took a $1.2 billion hit over money laundering charges.

The cost of carelessness and COVID-19 continues to mount for big four bank Westpac with write-downs, a remediation bill and anti-money laundering breaches set to cost it $1.2 billion.

Before its results are released on November 2, Westpac (ASX: WBC) has flagged the $1.2 billion hit to earnings which include a write-down in the value of its life insurance business of $406 million, a loss from the  bank’s disability insurance business of $260 million, an extra $182 million to compensate customers who were sold incorrect loans, overcharged or provided with poor advice and the largest fine in Australian corporate history – $1.3 billion – for 23 million breaches of anti-money laundering and counter-terrorism financing laws.

Buy now, pay later helps Westpac

There was one glimmer of good news in the early disclosure as the valuation of the bank’s shareholding in buy now, pay later platform Zip Co (ASX: Z1P) rose by an impressive by $303 million – an amount that is now liquid after Westpac sold its shares last week.

Westpac has now partnered with ZIP competitor Afterpay (ASX: APT), which was a pioneering buy now, pay later company.

The other slightly positive news was that the hit to the bottom line was not as bad as it could have been because $900 million had already been set aside for the AUSTRAC breaches of anti-money laundering and counter-terrorism financing laws, so an extra $415 million was required rather than the full amount.

Weak monitoring systems prove very expensive

Westpac recently received Federal Court agreement that it should pay the $1.3 billion fine following negotiations with watchdog AUSTRAC over the 23 million breaches.

Some of the failures to notify AUSTRAC of breaches were linked to child abuse in south-east Asian countries and resulted from serious and systemic weaknesses in its systems of monitoring suspicious payments.

COVID-19 bumps up insurance payouts

The COVID-19 pandemic also played a part in the asset write-downs with disability insurance losses now widespread across the industry with the prudential regulator APRA last month threatening to hit insurers with a capital charge unless they stopped selling unsustainable disability insurance products.

Premiums for disability insurance look set to rise after a KPMG report found that Australian life insurers reported a total loss of $1.3bn in the 12 months to 30 June, with 40% of life insurers reporting a loss during this period.

The same report found that retail income protection policies caused $1.1 billion in losses due to overly generous terms that were offered.

Bad news for retail investors as dividends set to remain weak

Banking analysts said the Westpac provisions showed the dangers of banks moving into too many different areas away from their core banking operations but many were hopeful that 2020 could mark the low tide mark for bank profits, with Westpac potentially bouncing back under new management.

In the meantime, the coming Westpac full-year result looks like being another bitter disappointment for retail investors who rely on bank dividends for income, with most analysts tipping Westpac will now pay only a small second-half dividend.

Westpac is slated to report its full-year result on Monday, November 2.

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