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Westpac share price: where next as APRA launches its own investigation

APRA, Australia’s financial services industry regulator, has today revealed that they will immediately increase Westpac’s add-on capital requirements by $500 million.

Westpac Banking Corporation – Australia’s second largest bank – is now under siege from all fronts. Though given the gravity of the allegations against the bank, this is likely of little surprise to investors and casual onlookers.

Building on this, APRA – Australia’s financial services industry regulator – today announced that it has formally commenced its own investigation into Westpac (ASX: WBC).

Unsurprisingly, Westpac’s share price fell in response to this news – dropping 0.78% a little after the open.

Focusing on the fallout of AUSTRAC’s own civil penalty orders against Westpac – which alleges that the bank breached Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act 23 million times – APRA’s investigation will centrally aim to:

‘Examine whether Westpac, its directors and/or its senior managers breached the Banking Act – including the Banking Executive Accountability Regime (BEAR) – or contravened APRA’s prudential standards.’

Ultimately, APRA is concerned with making sure that Westpac is taking adequate steps to address and correct the issues recently highlighted by AUSTRAC. The regulator further stresses that where appropriate, those who allowed these issues to occur and persist will be held ‘appropriately accountable.’

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Westpac share price: more capital now needed

All of that aside, maybe the most significant aspect of APRA’s new investigation and the adjoining media release was the revelation that the regulator would:

‘Impose an immediate increase in Westpac’s capital requirements of $500 million, to reflect the heightened operational risk profile of the bank.’

All up, this brings the total capital add-ons that APRA requires Westpac to hold to $1 billion.

The ‘capital question’ – that is, whether Westpac would be required to raise more capital has been a central one for some time now.

APRA’s own 'unquestionably strong' capital requirements, RBNZ’s latest capital decision, the potential of a sizable fine from AUSTRAC (estimated in the realm of $1.0bn to 3.0bn by analysts) and now APRA’s $500m add-on requirements – have all compounded this ‘capital question.’

Indeed, Westpac’s response to news of APRA’s latest investigation centrally highlights the bank's emphasis on its capital position, saying:

'The additional $500 million operational risk capital requirement, which will be implemented through an increase of risk-weighted assets, will apply from 31 December 2019. This change is expected to reduce Westpac’s Level 2, common equity tier 1 (CET1) capital ratio by approximately 16 basis points, based on the Group's balance sheet as at 30 September 2019.'

Prior to today’s release, Westpac’s CET1 ratio was above APRA’s ‘unquestionably strong’ 10.5% capital ratio.

APRA reflects: a long process ahead

Speaking of this latest investigation, APRA’s Deputy Chair – John Lonsdale – commented that:

‘AUSTRAC’s statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia’s second largest bank.’

And though Mr Lonsdale pointed out that, ‘Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed.’

Looking at the timeline for this investigation to be completed, it was noted that it was potentially set to be a lengthy affair.

The Westpac Banking Corporation (ASX: WBC) share price currently trades at the $24.59 mark.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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.

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