Australia's Westpac hit by Goldman downgrade over money-laundering scandal

By Byron Kaye and Paulina Duran

SYDNEY (Reuters) - Goldman Sachs became the first major investment bank to cut its target price for Westpac Banking Corp (AX:WBC) on Friday as Australia's No.2 lender faces allegations of massive breaches of anti-money laundering laws and billions of dollars in fines.

Goldman (N:GS) lowered its one-year share price target for Australia's oldest bank by a tenth, citing the contents of an explosive lawsuit from the financial crime regulator and potential knock-on effects including fines, class actions, loss of customers and capital concerns.

The regulator, AUSTRAC, this week accused Westpac of 23 million breaches of anti-money laundering laws, including allowing payments between known child exploiters, triggering calls for the resignation of Chief Executive Officer Brian Hartzer.

"In all cases, banks underperform peers in the 12 months after the incident by an average of 18%," the U.S. investment bank said in its report about Westpac.

The downgrade struck another blow to shareholders of Westpac, with shares falling a further 1.6% on Friday, taking the total value of its losses to A$6.4 billion since the lawsuit was announced. The broader share market (AXJO) was slightly higher.

Bill Bovingdon, chief investment officer of debt fund Altius Asset Management, which manages over A$2 billion ($1.36 billion), told Reuters the company had cut its credit risk of Westpac to "high" from "moderate" and started reducing its exposure to the bank's bonds.

A Westpac spokesman did not respond to a request for comment on Friday. Hartzer has said he accepted most of the regulator's assertions but "at a senior executive level, for the board, for me personally, in no way have we been indifferent on this".

Westpac had self-reported the breaches to the regulator and had since shut down the service at the center of the complaint which let customers and affiliate overseas banks process payments from Australia, Hartzer said.

The Sydney Morning Herald newspaper reported Westpac, which is scheduled to hold its annual general meeting in three weeks, had convened a board meeting on Friday, without providing further details.

SCALE OF WRONG-DOING 'INCREDIBLE'

Attorney General Christian Porter, meanwhile, said the seriousness of the Westpac lawsuit "looks like it's off the charts".

"You're obviously looking to ensure that whatever outcome occurs, that the people are held – and the organization is held – responsible in a big way for the size and scale of its misfeasance," the Australian Financial Review newspaper quoted Porter as saying in an interview.

"The size and scale of the wrongdoing here looks to be incredible."

A spokesman for Porter verified the quotes without providing further comment.

Some of Australia's big pension funds said they have started reviewing their positions in Westpac.

A spokesman for Christian Super, which manages the retirement money of religious organization employees, said the AUSTRAC allegations were "of significant concern (and) our team are currently reviewing the information available and will determine any actions in line with our investment framework".

Stuart Palmer, Head of Ethics Research at investment fund Australian Ethical, which holds Westpac shares, said the allegations were "very concerning, as are the delays in rectifying the issues once identified".