Remediation bills continue to pile up at Westpac, with the bank revealing yesterday several new compliance problems likely to wipe the shine from future earnings results.
In the 12 months to the end of September 2018, Westpac incurred A$380 million in customer remediation costs, which translated into a $281 million hit to the bottom line.
A fresh remediation item disclosed in the notes to the 2018 accounts may be a pointer to compensation headaches for each of the major banks.
The composition of Westpac's remediation provisioning indicates that regulators are already grilling the major banks over the controversial repricings of interest-only loans in the middle of last year.
Westpac revealed yesterday that it booked a $49 million contingent provision to compensate thousands of owner-occupier borrowers for delaying their migration from higher priced interest-only home loans to principal & interest mortgages.
"Following an error in the group's systems, certain customers with an interest-only home loan did not have their loans automatically switched to principal and interest repayments at the end of the interest only period," the bank explained in a note to the accounts.
"The group is undertaking a program of work to remediate this issue for affected customers and is engaging with ASIC on potential remediation costs. While we have provided our best estimate of these amounts, there remains a risk the final outcome may exceed this estimate."
Chief financial officer Peter King confirmed that the company was working through the problem but could not say how many customers were in line for compensation.
This remediation issue plays into a potentially bigger problem for Westpac and the other major banks after their decisions to reprice their interest-only loans to existing customers in the middle of last year.
The APRA-inspired rises are controversial because they were applied to existing borrowers at a time when the prudential regulator was trying specifically to establish limits on the level of new interest-only lending by the banks.
In other words, Westpac's repricing of the back book would have achieved nothing towards meeting APRA's requirement for new interest-only lending to account for no more than 30 per cent of all new mortgages.
Notwithstanding, Westpac's head of consumer banking George Frazis attributed the bank's 34 basis point hikes on all interest-only loans to APRA's crackdown on lending.
"APRA?s limit on new interest-only lending is 30 per cent of new residential mortgage lending, so we have to continue to make changes to our interest-only rates and lending policies to meet this benchmark," Frazis said back in June 2017.
The effect of the June 2017 repricings was to widen the pricing differential between Westpac's interest-only and P&I variable rate mortgages to 59 basis points for owner-occupiers.
Westpac's interest revenue take would have increased significantly over the September quarter last year and it stood to boost interest-related earnings, the longer it took borrowers to migrate to the cheaper P&I mortgage product.
Those rate hikes are now part of an investigation by the Australian Competition and Consumer Commission into home loan competition.
Findings and recommendations from that inquiry are to be presented to the federal government on 18 November and there is speculation in parts of the banking industry that it could include a call for bank lenders to unwind the June 2017 rate rises on their interest-only back books.
If that happens, the major banks would collectively be facing one of their steepest compensation bills on record, with remediation costs likely to run into the many hundreds of millions.
Such an outcome would also test institutional investor support for ASX-listed bank stocks. Westpac's results yesterday lifted its share 0.6 per cent to $26.65, on a day where investors switched out of CBA stock in NAB and ANZ.