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Are Australian banks facing a new great crisis?

Tom Richardson

Westpac Banking Corp (ASX: WBC) shares are now down 15% over just the last month as the bank faces a perfect storm of disappointing earnings numbers and diabolical publicity. 

The first wave of bad news came on November 4 when the bank revealed a weaker-than-expected cash profit of $6,849 million.  That was down 15% on the prior fiscal year.

The dividend also fell 15%, with the bank’s net interest margin and return on equity also falling.

Westpac also announced a $2.5 billion cash call in order to bolster its capital adequacy reserve ratio. Any capital raising is of course dilutive to earnings per share going forward. 

On November 5 Westpac sold 79 million new shares to institutional investors at $25.32 per share. 

Unfortunately many of those institutional investors are upset with the shares now trading at $24.44 on the back of a regulatory compliance scandal.

On November 20 Westpac admitted AUSTRAC has launched proceedings against it for up to 23 million breaches of its financial transaction reporting requirements. 

Already business commentators are speculating that Westpac may face the biggest fine in Australian corporate history as a result of its compliance failings. 

It’s a wonder then that share price hasn’t fallen any further. 

Is it crisis time for Westpac?

As an aside on October 30 (just before Westpac unravelled) I enjoyed lunch with David Morgan the ex-Westpac CEO and a number of other heavy hitters in Australian finance.

At the time I commented how bearish Mr. Morgan seemed on the outlook for Australian banks. 

Mr. Morgan even stated he believed Australian banks were facing their “fourth great crisis” due to the regulatory pressure being exerted. 

The first three ‘great crises’ being deregulation and the arrival of overseas competitors in the mid 1980’s, the early 1990’s recession, and the GFC.

At the time Mr. Morgan’s comments struck me as over-the-top, but I suppose you shouldn’t doubt someone as well connected as Mr Morgan.

Given Mr Morgan’s views have proven on the money so far, tomorrow (time permitting) I’ll write up some of the other views he offered on Australian bank shares. 

The post Are Australian banks facing a new great crisis? appeared first on Motley Fool Australia.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019