Westpac expects $2.2bn in impairment charges in H1 2020

Maria Nikolova

The impairment charge includes approximately $0.6 billion from individually assessed provisions and net write-offs plus approximately $1.6 billion of additional impairment charges mainly related to COVID-19 impacts.

Westpac today announces that it expects impairment charges of $2,238 million (pre-tax) in the first half of 2020. The impairment charge includes approximately $0.6 billion from individually assessed provisions and net write-offs together with approximately $1.6 billion of additional impairment charges predominantly related to COVID-19 impacts.

The $1.6 billion addition to the impairment charge has a relatively small impact on the Group’s common equity tier 1 capital ratio capital (11 basis point decrease). This is because the higher charge lifts provision levels and reduces the regulatory expected loss capital deduction to nil. Westpac’s CET1 capital ratio at March 31, 2020 is expected to be 10.8%.

The impairment charge of $2,238 million equates to approximately 62 basis points of gross loans (annualised). This compares to 13 and 9 basis points for the second half of 2019 and the first half of 2019, respectively.

The $1.6 billion in additional impairment charges has been principally based on three elements:

  • 1. Significant changes to base case economic forecasts linked to the COVID-19 pandemic. These include lower economic growth, higher unemployment, lower investment and a fall in residential and commercial property prices;
  • 2. Increasing the weighting applied to the downside economic scenario, reflecting a higher probability that economic conditions could deteriorate even further; and
  • 3. An overlay based on a top down, industry-by-industry assessment of additional stress that could emerge in relation to COVID-19.

Let’s recall that, as FinanceFeeds reported earlier in April, Westpac expects to make a provision of $900 million for its potential liability in relation to the AUSTRAC claim.

The Court’s decision on an appropriate penalty will involve balancing many different competing and complex factors and the exercise of discretion, Westpac says. The actual penalty paid by Westpac following either a settlement and joint submission on a penalty, or a hearing, and in each case as determined by the Court, may be materially higher or lower than the provision.

Further, Westpac expects approximately $130 million cash earnings impact of costs linked to the AUSTRAC response plan.

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