APRA has announced it’s taking action against Westpac Banking Corp (ASX: WBC).
What happened?
Yesterday, the Australian Prudential Regulation Authority (APRA) announced that it has taken enforcement action against Westpac due to material breaches of APRA’s prudential standards on liquidity.
APRA explained that the breaches, identified during 2019 and 2020, relate to the incorrect treatment of specific funding and loan products for the purposes of calculating the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
The regulator said that whilst these breaches have been rectified and don’t raise major concerns about Westpac’s overall liquidity position, APRA thinks this has demonstrated weaknesses in the risk management and oversight, risk control frameworks and risk culture.
What is APRA going to do?
APRA will require independent third parties to comprehensively review Westpac’s compliance with APRA’s liquidity reporting requirements and fixing its control framework for liquidity risk management. Until this is addressed, APRA will also require Westpac to apply a 10% add-on to its net cash outflow component of the LCR calculation. APRA is making sure Westpac has ample liquidity.
APRA Deputy Chair John Lonsdale said: “In taking these actions, our objective is to obtain assurance that Westpac is complying with APRA’s liquidity requirements. It also sends a message to the wider banking industry that breaches of prudential standards are not acceptable, and APRA will respond as appropriate, including by imposing penalties.”
What did Westpac say?
Westpac CEO Peter King said: “We acknowledge the findings of APRA’s review and accept the need to work faster to address our shortcomings.”
Westpac said that APRA has indicated Westpac hasn’t demonstrated the expected improvements from its programs. It wants a program to address the full scope of financial and non-financial risk issues, and their root causes. And APRA wants a stronger assurance over delivery.
The major bank said that it expects to enter into an enforceable undertaking and it will work constructively with APRA on the details.
Summary thoughts
I think this shows the pitfalls of not doing the correct thing in the first place, which has resulted in Westpac being penalised. Whilst I understand the attraction to banks (largely being the dividend income), I don’t think they can generate outperformance over the long term. That’s why I’m looking at other ASX dividend shares such as Brickworks Limited (ASX: BKW) which also benefit from the ‘opening up’ theme.
