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CBA VS WBC: can the Westpac share price rebound?

We examine how the Commonwealth bank of Australia's run-in with AUSTRAC might compare to the unfolding Westpac-AUSTRAC situation.

CBA VS WBC share price Source: Bloomberg

‘Those who do not learn from history are doomed to repeat it.’

At the start of 2018, the Commonwealth Bank of Australia agreed to pay a staggering $700m fine for serious breaches of the anti-money laundering and counter-terrorism financing (AML/CTF) Act.

Currently, that fine represents the largest civil penalty in Australia’s corporate history – though if analysts are correct may soon be eclipsed by the fine looming for Westpac.

The main part of this case involved Australian police identifying ‘that CBA’s [Intelligent Deposit Machines] IDMs were being used to launder the illicit proceeds of crime.’ All up, this saw CBA contravene the AML/CTF Act on 53,750 occasions.

CBA’s share price was hammered in response; and its CEO – like Westpac’s – stepped down in the wake of the scandal.

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CBA VS Westpac share price

Speaking to the lessons one may gleam from the CBA-AUSTRAC debacle, Morgan Stanley analysts noted that the Commonwealth Bank of Australia’s (ASX: CBA) share price fell approximately 10% within the first month of their AUSTRAC scandal.

Subsequently, it underperformed its big four peers over the next 6 to 12 month period. The investment bank also pointed out that the majority of this underperformance occurred during the first month of trade following the emergence of AUSTRAC's allegations.

By comparison, the Westpac (ASX: WBC) share price has fallen around 4.48% since the AUSTRAC civil penalty order news broke. This is framed against deeper declines mind you: since November 11 WBC’s stock is down more than 11% – after the bank pursued a capital raise and cut its dividend as part of its FY19 results.

Yet it should also be noted that a number of analysts are predicting that Westpac’s fine is likely to be higher than that of CBAs.

Bell Potter analysts estimate that this fine could run as high as $3.7bn. Morgan Stanley seems to be suggesting that a fine in the realm of $1.0bn is most likely; though they’ve also flagged that a fine in the realm of $3.0bn is a possibility – one that could significantly damage WBC’s currently strong capital ratio.

Ultimately, Westpac is also alleged to have breached the AML/CTF Act on 23 million occasions – significantly more than CBA.

Can the Westpac share price rebound?

With the Westpac (ASX: WBC) share price currently trading at the $24.54 mark, the average analyst 12-month target price of $26.08 does imply potential upside for investors – at current price levels at least – according to Bloomberg Data.

Whether analysts will prove correct – and whether such a rebound would come to pass – is another matter entirely, however.

Overall, the breakdown of this consensus sees three analysts rating Westpac a buy, ten a hold and three a sell.

Jefferies is the most bearish on Westpac's prospects, hitting the beleaguered bank with an underweight rating, and a dour 12-month price target of $22.40 per share.

Morningstar, by comparison has a decisively bullish stance, with a share price target of $29.00 and a buy rating.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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