Westpac takes multimillion-dollar H1 hit from Austrac proceedings and COVID-19

The red and white bank saw a AU$1.9 billion drop in profit in H1.

Westpac Banking Corporation has announced a AU$1.9 billion hit to its first-half profit, with the 62% drop from the same period last year seeing the bank report just shy of AU$1.2 billion in net profit.

Revenue was up 6% to AU$10.6 billion and operating expenses for the six-month period totalled AU$10.6 billion.

The red and white bank told shareholders on Monday its first-half results included a significant increase in impairment charges due to the impact of the COVID-19 pandemic; costs associated with Australian Transaction Reports and Analysis Centre (Austrac) proceedings, including a provision for a potential penalty; as well as estimated customer refunds, payments, associated costs, which together reduced net profit before tax by AU$3 billion.

The anti-money laundering and terrorism financing regulator applied to the Federal Court of Australia in November, alleging Westpac was involved in "systemic non-compliance" with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) on over 23 million occasions.

Specifically, Austrac said the bank had consistently failed to: Assess and monitor ongoing money laundering and terrorism financing risks; report over 19.5 million International Funds Transfer Instructions (IFTIs) 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; keep records relating to the origin of some of these international funds transfers; and carry out appropriate customer due diligence on transactions in the Philippines and South East Asia that were related to potential child exploitation risks.

"While the group has systems, policies, processes, and controls in place that are designed to manage its financial crime obligations (including its reporting obligations), these have not always been, and may not in the future always be effective," Westpac said on Monday.

"This could be the case for a range of reasons, including, for example, a deficiency in the design of a control or a technology-related failure."

Westpac said it is currently undertaking a significant multi-year program of work to strengthen areas of control weaknesses in its financial crime management framework, including in relation to aspects of its money laundering and terrorism financing risk assessments and governance.

In addition to losing CEO Brian Hartzer, Westpac set aside just over AU$1 billion for Austrac proceedings. It comprises a provision for a potential penalty of AU$900 million and AU$127 million for a response plan.

During the first half, Westpac also dealt with additional investigations by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) on the matter, which saw APRA impose an additional operational risk capital overlay equal to AU$500 million.

Westpac also saw the launch of shareholder class actions in Australia and in the United States.

On the tech front, Westpac spent AU$1.2 billion, telling shareholders it was "building for the long term" through supporting customers, improving performance disciplines, and transforming the business using digital.

"Our significant investment in IT has allowed us to increase from an average of 1,000 to 22,000 Australian employees working from home, many in customer-facing roles," CEO Peter King said.

"We have been particularly focused on making it easier and faster for customers to sign up digitally and do their banking from home. This includes introducing new measures such as increasing the value of a cheque that can be deposited from our mobile banking app from AU$1,000 to AU$20,000, and increasing the tap and go payment limit from AU$100 to AU$200."

Westpac touted major technology initiatives such as the continued investment in protecting customers against cybersecurity risks and data and privacy breaches; ongoing strengthening of its core system resiliency with a reduction in incidents and outages; and a significant increase to its work from home capabilities, with over 22,000 of its employees working from home and the capacity to double this.

The bank's capitalised software balance as at 31 March 2020 was AU$2.3 billion, a AU$91 million increase compared to the same period last year.

Software amortisation expense increased AU$75 million compared to first half of 2019, as major investments became operational.

"COVID-19 has significantly impacted asset values globally and, as a result, the Group has revalued or reassessed the value of certain assets. This review resulted in $66 million of capitalised software being written down," it said.

For its consumer business, cash earnings were AU$1.4 billion, 18% lower than its second half 2019 results, due mostly to an increase in insurance claims associated with bushfires and severe weather events.

Its business arm saw cash earnings of AU$604 million, a 46% decline since H2 last year; Westpac Institutional Bank cash earnings came in at AU$175 million, a 63% drop; and Westpac New Zealand posted cash earnings of NZ$295 million, NZ$192 million lower than the second half of 2019.

Meanwhile, its group businesses recorded a loss of AU$1.4 billion in the first half of 2020. This was mostly due to the AU$900 million Austrac penalty provision and a AU$470 million impairment charge related to COVID-19.

On the Royal Commission, Westpac said of the 49 recommendations relevant to Westpac, 13 are implemented, 22 are being implemented, and 14 are awaiting further regulatory clarity.

Westpac last week decided that the drones it uses with Little Ripper Group to spot crocodiles in Queensland, help prevent people drowning in the ocean, and used alongside WIRES to help wildlife during Australia's summer of bushfires could be used to drown playgrounds in disinfectant as well.

"Through clever innovation, Westpac Little Ripper Lifesaver can help stop the spread of COVID-19. Our fleet of specialised drones will be able to spray environmentally-friendly disinfectant to ensure public spaces remain safe," the bank tweeted on Thursday.

"Help when it matters."

In its video, the bank said the drones could be used to spray schools, universities, child care centres, aged-care facilities, hospitals, and supermarkets.

Last week, Westpac finally gave customers access to Apple Pay, with the red and white bank making the iOS wallet available for customers who have an eligible Mastercard debit or credit card, or Eftpos Handycard.

Full-time employees in the first half totalled 34,199, up from 33,288 in September.

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