Westpac Banking Corporation

WBC Details

Findings during the Royal Commission and impact from change in lending standard: Westpac Banking Corporation (ASX: WBC) has been under the scrutiny during the Royal Commission as other major banks. The bank came under further pressure with the latest revelation that an independent review by PwC in 2017 exposed the bank to have effectively operated only one out of 10 lending controls as required by the prudential regulator, Australian Prudential Regulation Authority. In fact, it was highlighted that the bank may witness a class action litigation during a downturn impacting the basis for loan security. Moreover, the bank has been accused of breaching trust with the regulator on APRA’s criticism that the bank has been an outlier with respect to high risk lending. Further, Westpac’s head of advice Michael Wright is being questioned on Mr Andrew Smith (former Westpac financial planner), alleged to have breached his duties to customers and why the instances were not reported to the corporate regulator. With these updates, the bank’s stock has been down 7.6% in last three months, as at April 19, 2018. Further, the recent tightening of lending standards that is expected to have a direct impact on the marginal buyers, has been hovering over the future prospects. Housing Industry might be experiencing additional losses due to the tightening of lending policies, affordability constraints, and weak household income growth with increased supply acting in relation to keep prices under pressure. While the bank is now succumbing to what is being seen during the findings of Royal Commission, the group has been working on improving the asset quality to reduce risk weighted assets. Its CET1 Capital Ratio also witnessed an improvement of 108 bps over the last year. Given the series of events, we recommend avoiding any buying in WBC and give an “Expensive” recommendation on the stock at the current market price of $ 28.590, with the penalties being flagged against the bank.
 

Commonwealth Bank of Australia

CBA Details

CBA enters into EU on Advice Fee Refund program: Commonwealth Bank of Australia (ASX: CBA) has been accused of charging customers for advice fees even after their deaths. In an example, one planner charged a dead customer almost $1000 a year for advice for over 10 years. Guilty of being charging fees for no service, the bank has come under immense scrutiny along with other majors. Meanwhile, CBA announced that it has entered into an Enforceable Undertaking (EU) with the Australian Securities and Investments Commission (ASIC) in relation to an Advice Fee Refund program. As part of the EU, CBA is taking all necessary steps to improve financial advice such as making a community benefit payment of $3 million, appointing EY to do independent verification of its current service delivery processes whether it is meeting the standards the community and regulators expect or not, and finally, following the review, CBA will provide a public update on the work completed to address the issues identified in businesses.


Financial Overview (Source: Company Results)
 
On the other hand, Commonwealth Bank intends to pursue an initial public offering of Colonial First State Global Asset Management (CFSGAM) on the Australian Securities Exchange (ASX) by the end of calendar year 2018, subject to market conditions and necessary approvals. Despite the stock price fall seen in past few days, CBA still looks to be “Expensive” at the current price of $ 72.060, amidst the high level of investigations into the bank.
 
 
WBC Vs CBA Price Movement in last five years (Source: Thomson Reuters)

 
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