DBRS Morningstar: Westpac: Spotlight on Risk Governance Remediation and Weaknesses in Liquidity Management

DBRS Morningstar has released a commentary discussing risk governance shortcomings at Westpac. Addressing non-financial risks continues to be an important challenge for Westpac Banking Corporation. On 3 December 2020, Westpac confirmed it has entered into an enforceable undertaking (EU) with the Australian Prudential Regulation Authority (APRA) on risk governance remediation.

Key Highlights include:

• APRA has indicated that Westpac has not demonstrated the expected improvements in its remediation program. DBRS Morningstar views Westpac as being committed to delivering organisational and cultural change as demonstrated by a change in management. Nevertheless, 2020 was a challenging year for all banks in Australia, with the need to manage the impact of the bushfires and the global health crisis, and DBRS Morningstar now expects Westpac to make substantial and swift improvements to its processes and reporting to minimise any future issues with the regulator.

• APRA is also taking action for breaches of APRA’s prudential standards on the Group's liquidity, predominantly relating to Westpac New Zealand Limited. At the same time in the context of a COVID-19 environment, that has prompted significant support from central banks and government, we note liquidity has been ample. In the case of Westpac, in the year to end-September 2020 customer deposits increased by AUD 31 billion or up 6% year-over-year (YoY), meanwhile Westpac reported an Liquidity Coverage Ratio of 150% at end-September 2020.

“Local regulators play an important role in communicating to the market when they see shortcomings. From DBRS Morningstar's perspective, it is concerning that the Australian Prudential Regulation Authority has indicated that Westpac has not demonstrated the expected improvements in its remediation programs. DBRS Morningstar views these identified weaknesses as a challenge for the Group, but considers the existing Negative trend on the ratings sufficiently captures these shortcomings in operational risk management.” said Vitaline Yeterian, Senior Vice President.