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Westpac share price on watch after $1.43 billion earnings hit

The Westpac Banking Corp (ASX: WBC) share price will be on watch on Tuesday after releasing an update relating to its half year results.

What did Westpac announce?

This morning Westpac announced expected new and increased provisions (excluding impairment provisions) and asset write-downs.

These provisions total approximately $1,430 million after tax and will reduce its first half FY 2020 cash earnings and statutory net profit after tax accordingly.

The bank also warned that it is undertaking detailed analysis to finalise its impairment provisions for the half.

The impairment charge is expected to include a significant collective provision increase that will lift its total provision balance. This is in anticipation of credit losses that it expects to incur from the coronavirus pandemic.

Australia’s oldest bank will update the market once this impairment charge has been finalised and prior to the announcement of its results on May 4.

What is included in its provisions?

These items include provisions associated with AUSTRAC proceedings, customer refunds, litigation, asset depreciations, and cost changes.

The release advises that a provision of $1,030 million after tax is related to the AUSTRAC proceedings and its response plan.

Provisions for customer refunds, repayments, and litigation have increased by around $260 million after tax.

It also includes a reduction in the value of several assets costing around $70 million after tax, and costs of changes in the provision of group life insurance of around $70 million after tax.

What impact will this have on its capital position?

At the end of December Westpac’s CET1 capital ratio was 10.8%.

The impact of the items disclosed today on Westpac’s CET1 capital ratio is estimated to be around 30 basis points. Not all items have an impact on capital as they are already capital deductions.

The bank’s new CEO, Peter King, commented: “Having spent much of the last decade strengthening our capital we are well placed to respond to the unfolding environment.”

And in response to the AUSTRAC provision, the CEO pledged to fix the processes that led to the issue.

“In addition to closing relevant products and recruiting an additional 200 people in financial crime and compliance, I am putting in place a clearer accountability regime that will speed up decision making, improve implementation and more clearly define responsibility and its associated risk management,” Mr King added.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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