The cost of remediation mounts up

John Kavanagh Financial institutions / Big five & fintech
A CFO and CEO finessing a dividend problem: Westpac's Peter King and Brian Hartzer
A CFO and CEO finessing a dividend problem: Westpac's Peter King and Brian Hartzer

Macquarie Securities has forecast that the big banks will pay out additional adviser remediation costs of between A$1.2 billion and $1.8 billion over the next four years, with hits of between 3 per cent and 5 per cent to their bottom lines.

On Monday, Westpac announced that its half-year cash earnings would be down by about $260 million due to provisions arising from further work on its customer remediation programs.

The latest Westpac provisions exclude allowance for refunds to customers of authorised representatives in relation to ongoing advice services, which are still being determined.

Macquarie’s note to clients said: “With additional disclosure from Westpac, we have increased our remediation expenses over the next four years. This results in downgrades to earnings per share estimates for 2018/19 of 3 to 5 per cent.”

The numbers line up this way:
•    ANZ has paid $753 million of remediation to date and still has an estimated $1.5 billion to pay. Based on its revised figures, Macquarie has cut its earnings per share forecast for 2018/19 by 3.8 per cent and for 1.7 per cent for 2019/20.
•    CBA has paid $1.2 billion of remediation to date and still has $1.6 billion to pay. Macquarie has cut its EPS forecast for 2018/19 by 2.5 per cent and for 2019/20 by 1.3 per cent.
•    NAB has paid $435 to date and still has $1.8 billion to pay. Its EPS forecast has been cut by 5.4 per cent for 2018/19 and by 2.3 per cent for 2019/20.
•    Westpac has paid $549 to date and has $1.1 billion to pay. Its EPS forecast has been cut by 5.2 per cent for 2018/19 and by 1.1 per cent for 2019/20.

Macquarie said the banks’ scope for capital returns, particularly for ANZ and Commonwealth Bank, was also diminished.

“We continue to expect NAB to cut its dividend in the upcoming result. In the case of Westpac, the implied 2018/19 payout ratio has increased to around 88 per cent, suggesting that the bank will need to support its capital position with dilutive DRPs or a dividend cut,” the note said.
A sky high fuill-year payout ratio of 94 per cent was something one big bank, NAB, got away with last year, so Westpac have a precedent to follow.
Macquarie said it was significant that Westpac highlighted that over 50 per cent of aligned adviser revenue at issue over the past ten years relates to advisers who are no longer part of its network, suggesting that getting hold of required documentation would be more challenging.

A Deutsche Bank research report on the remediation issue argues the banks’ problems could widen into other areas of their operations.

Deutsche said: “Much of the remediation costs so far relate to misconduct issues in the wealth management space that were revealed in the royal commission. However, we see increasing risk that further misconduct could be uncovered in other areas of banking, thus giving rise of more remediation costs.”

It nominates responsible lending, lenders mortgage insurance premiums and consumer credit insurance as risk areas.