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Westpac shares collapse after poor lending practices conceded in internal documents

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Westpac’s share price plunged after the release of explosive documents detailing widespread failures not only in the quality and risk of its home loans, but also in the way they are handled.

An internal memo filed with the Royal Banking Commission showed that Westpac had performed very poorly in a targeted review of home loans demanded by the Australian Prudential Regulation Authority.

“Westpac’s performance in the APRA Targeted Review was poor, both absolutely and relative to our peers,” Portfolio Integrity Officer David Watts wrote to his boss George Frazis, CEO of the consumer banking branch, in a note last July.

The review of the mortgage lending practices of the accounting giant PwC was commissioned by APRA following consultation meetings with all the banks in early 2017.

APRA President Mr. Wayne Byres noted that Westpac was a significant outlier in our proportion of high LVR [loan-to-value] and you [interest only] ready, ”Watts wrote.

“APRA also questioned the availability of strong data and the effectiveness of analysis and monitoring to fully understand the risk profile of all exposures.

The PwC review was a dismal outcome for Westpac.

“The PwC report has disturbed APRA and there is no easy answer to rebuilding trust with them in this area,” Watts said.

APRA has already used the findings of its review to drop its 10 percent “speed limit” on investor credit growth in favor of more targeted lending controls, focusing on loan quality and creditworthiness. overall household debt.

UBS launches a “sale” on Westpac

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UBS banking analyst Jonathan Mott analyzed figures from PwC’s Westpac report and found:

  • 29% of minimum income checks (for example, paychecks) were not completed
  • 66 percent had not itemized the living expenses collected
  • Median estimated household living expenses were only 23% of household income
  • 30 percent of the sample the borrower’s financial situation was suggested to have been distorted
  • 9 percent of the sample, the loan would not have been approved if “real financial information” had been used in the health assessment.

Mr Mott said the data raised questions about the quality of Westpac’s $ 400 billion mortgage portfolio.

“While Westpac has undertaken significant work to improve its mortgage underwriting standards over the past 12 months, we expect it and the other majors to further refine underwriting standards in light of the Royal Commission concerns. regarding responsible lending, ”he said.

“Advice and direction [are] likely to be much more risk unfavorable, further tightening of underwriting standards is very likely across the industry. “

The credit crunch and deteriorating asset quality have left UBS with a very cautious view of the Australian bank as an investment.

Westpac’s failures in the APRA Targeted Review were enough for UBS to give the bank a “sell” rating and drop its target price from $ 31 per share to just $ 26.50.

Investors got it, and Westpac shares fell nearly 4% to a two-year low of $ 28.13 at 3 p.m. AEST.

Contrasting views

Westpac’s memo highlighted the contrasting views between banks and APRA on responsible lending standards.

“Poor performance by lenders may not translate into losses right now, but, according to APRA’s assumptions, that could change in the event of a significant cyclical downturn,” Mr. Watts wrote.

“To date, most of the industry’s thinking on the consequences of responsible lending failures has centered on the potential for fines, reputational damage, and the costs of any remedies necessitated by a breach.

“It is now clear that the thinking needs to broaden.”

Mr Watts warned Mr Frazis of the dangers of not acting quickly to resolve APRA’s concerns.

“APRA expects improvements to be made urgently and has indicated that it will work with ASIC. [Australian Securities and Investments Commission] on the next steps and the answers to be provided to the industry, ”he said.

Failure to respond appropriately could lead to a more formal investigation, appointing a third party to manage the bank’s affairs and prohibiting senior executives from holding managerial positions in the banking industry.

Westpac exposure unclear

Mr Watts said the bank’s exposure to customers was unclear.

“If management is correct in their reasoning and there have been few instances where loans have been made to clients who cannot afford them, and assuming the securities are sound, the potential costs of the remediation program should be limited and the main underlying loan should be be secure, ”he said.

“But what if customers who are not stressed now become stressed later, not because repayments have always been unaffordable, but because they are victims of a general economic downturn, and if do the responsible lending violations at the time of origination have an impact in one way or another on the integrity of the bank’s security vis-à-vis these customers? “

Mr Watts said in this case the bank’s exposure would be less benign.

So far, the bank has reimbursed its customers $ 38 million through the end of fiscal 2016, which Watts said was the first time that Westpac had been able to track actual costs in the lack of a remediation framework.

In the Westpac pipeline, there are 22,000 other homeowner loans and 42,000 investor loans that may require compensation, according to the PWC report.

ABC has problems too

A separate targeted review of the Commonwealth Bank’s APRA, also conducted by PwC, found that more than a third of the sample – 94 of 271 loans verified – did not meet the bank’s verification procedures, mainly by due to inadequate documentation.

Among the unfavorable findings, the PwC report found that borrowers are not required to confirm the details, completeness or accuracy of information used in their maintenance agreements.

The report also questioned the ABC’s use of the income-adjusted household expenditure measure (HEM) in health assessments.

“Living expense claims provided by borrowers are not subject to verification or evaluation beyond comparison with HEM,” PwC found.

“This approach does not encourage borrowers to focus their efforts on the completeness and accuracy of their spending estimates.”