Westpac faces potential further negative rating action

19 December 2019

The recent announcement from the Australian Prudential Regulation Authority (APRA) regarding an increase in Westpac Banking Corporation’s capital charge and the commencement of an investigation into possible breaches of the Banking Act will be viewed as credit negative, according to Fitch Ratings.

The credit ratings agency, which captures this as well as other credit issues factoring in a wider range of weaknesses in governance and controls, said that there was potential for further negative rating action.

According to Fitch, APRA's actions would further challenge the bank, but should ultimately result in WBC being better placed to address evolving industry risks, it said.

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“Adverse findings by APRA are likely to require further remediation on top of an already extensive remediation programme and increase the bank's costs,” the firm said in a press release.

 “We see the key risks as lying in further management distraction and potential instability, which could hurt WBC's core operation and franchise. This could lead to a downgrade of the bank's ratings if its earnings and profitability significantly weaken relative to that of peers.”

Also, the agency noted that further potential operational risk charges, management changes and remediation could arise should the bank's deficiencies in non-financial risk management exceed the regulator's expectation or if breaches of the Banking Act, were found. According to Fitch, this would place further pressure on the bank’s ongoing business.

“APRA's additional capital charge raises WBC's total operational risk capital add-on charge to AUD1 billion, placing it on par with Commonwealth Bank of Australia (AA-/Negative/aa-). WBC expects the capital charge to reduce its common equity Tier 1 ratio by 16bp, however, we do not believe this will affect the bank's ability to meet APRA's 'unquestionably strong' minimum of 10.5%,” the firm said.

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