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Why the banks dragged the ASX 200 down last week

Lina Lim
Chalkboard Graph Up Dow

The S&P/ASX200 (INDEXASX: XJO) finished last week down 88 points or 1.3% while the US markets lingered around all-time highs. So what was behind the slump?

Why did the Australian stock market underperform?

Australian anti-terrorism regulator AUSTRAC reported that it has applied to the Federal Court of Australia for civil penalty orders against Westpac Banking Corp (ASX: WBC). This resulted in a significant sell-down of the financials sector. Other sectors including materials, information technology, healthcare, telecommunications and utilities also finished the week in red. 

The ASX 200’s weighting is dominated by the big four banks. Last week saw the Commonwealth Bank of Australia (ASX: CBA) share price down 0.9%, the Australia and New Zealand Banking Group (ASX: ANZ) share price down 2.5%, the National Australia Bank Ltd (ASX: NAB) share price down 4.44%, and Westpac down 6.5%. 

What happened to Westpac?

According to AUSTRAC, Westpac has failed to:

  1. Appropriately assess and monitor the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships.
  2. Report more than 19.5 million international funds transfer instructions (IFTIs) to AUSTRAC over nearly five years for transfers both into and out of Australia.
  3. Pass on information about the source of funds to other banks in the transfer chain, which AUSTRAC said “deprived the other banks of information they needed to understand the source of funds to manage their own AML/CTF risks”.
  4. Keep records relating to the origin of some international funds transfers.
  5. Carry out appropriate customer due diligence on transactions to the Philippines and south-east Asia that AUSTRAC said “have known financial indicators relating to potential child exploitation risks”.

Could this be a buying opportunity for the Big 4 Banks? 

There should be no rush to load up on bank shares, even if their share prices have copped a heavy discount. Last week’s news out of Westpac adds further insult to injury to already frail earnings, slim net interest margins and increasing capital adequacy demands. Investigations are currently only targeted at Westpac, but they could put the whole sector on edge.

For Westpac, it has announced a response plan to address the issues raised by AUSTRAC. This response plan is expected to cost the company at least $80 million and will be included in cash earnings and treated as notable items. This does not include any potential penalties that may arise for Westpac in the future. The last thing a bank needs is extra costs that may further deteriorate its ability to maintain a steady dividend yield in the short–medium term.

The post Why the banks dragged the ASX 200 down last week appeared first on Motley Fool Australia.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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