Westpac to be hit with $2.2 billion impairment charge

Westpac to be hit with $2.2 billion impairment charge

The impact of Covid-19 will result in a $1.6 billion impairment charge in 1H20 for Westpac (ASX: WBC).

Combined with a $600 million impairment charge from individually assessed provisions and net-write offs, the total impairment charge for the half will reach $2.2 billion.

This impairment charge comes after $1.4 billion in slashed earnings announced just two weeks ago relating mostly to costs associated with an AUSTRAC money laundering compliance scandal. This brings Westpac's total combined reductions to the bottom line into the range of $3.6 billion for the half.

Though the charge is substantial Westpac says its solid cash buffer will absorb the impact of the hit. This is because the higher charge will lift provision levels and reduces the regulatory expected loss capital deduction to nil.

At 31 March 2020 Westpac says its common equity tier 1 (CET1) ratio will be at 10.8 per cent, right where the Australian Prudential Regulation Authority expects banks to be.

The bank also recently raised $2.8 billion of capital to have on hand for a situation just like this.

"Having materially strengthened capital over the last decade, building significant buffers, we are well positioned to absorb this increase and respond to future developments in the environment," says Westpac CEO Peter King.

"The world is going through a once in a life-time health and economic crisis and we are committed to assisting as many customers as possible to bridge this shutdown period.

"Our packages are already providing relief to individual and business customers. It is however unfortunate that some customers will not be able to navigate the financial and economic changes of this crisis and may not re-open. Nevertheless, we will work closely with those customers to help them through that process."

Westpac says the impairment charge of $2,238 million equates to approximately 62 basis points of gross loans. This compares to 13 and nine basis points for 2H19 and 1H19 respectively.

Earlier this month the bank announced its earnings would be slashed as a result of a money laundering compliance scandal investigated by AUSTRAC.

The company announced on 14 April its cash earnings for the first half of 1H20 would be hit to the tune of $1.03 billion in AUSTRAC-related matters, including $900 million for a potential penalty and $130 million for a response plan.

Other costs took the total earnings impact to $1.4 billion, including around $260 million in additional provisions for customer refunds and payments, as well as associated costs and litigation.

The bank also flagged $70 million in other asset write-downs, noting the group has had to reassess certain asset values given Covid-19 has significantly impacted asset values globally.

The bank is expected to announce its 1H20 results on 4 May 2020.

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