The Westpac Banking Corp (ASX: WBC) share price will be on watch on Thursday after announcing the results of its investigation into the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance issues. 

This follows the launching of civil proceedings against Westpac by AUSTRAC on 20 November 2019.

Westpac Chairman John McFarlane explained: “In line with the Board’s commitment at the 2019 AGM, we are now making public the results of reviews into the Bank’s AML/CTF compliance failings.”

“It’s been my experience since joining the Bank that Westpac deeply regrets this matter. Indeed, recognising the seriousness of the issues raised by AUSTRAC, the former CEO stepped down and the former Chairman brought forward his retirement. We are all committed to fixing these issues so they don’t happen again.”

What did Westpac announce?

Westpac has blamed its International Funds Transfer Instructions (IFTIs) non-reporting failures on a mix of technology and human error dating back to 2009.

Whereas the failure to properly adhere to AUSTRAC guidance for child exploitation risk occurred due to deficient financial crime processes. This was then compounded by poor individual judgements.

All in all, three primary causes of the AML/CTF compliance failures have been identified by Westpac. They are as follows:

• Some areas of AML/CTF risk were not sufficiently understood within Westpac.
• There were unclear end-to-end accountabilities for managing AML/CTF compliance.
• There was a lack of sufficient AML/CTF expertise and resourcing.

Board governance.

Westpac also released the Advisory Panel Report into Board governance of AML/CTF obligations and the promontory assurance letter on management’s accountability review.

The bank advised that the Advisory Panel has formed a range of views on financial crime related governance.

The report notes that the way the Westpac Board organised its general governance responsibilities was mainstream and fit for purpose.

However, with the benefit of hindsight, it feels that directors could have recognised earlier the systemic nature of some of the financial crime issues Westpac was facing. The Panel also noted that the reporting of financial crime matters to the Board was at times unintentionally incomplete and inaccurate.

Westpac’s new CEO, Peter King, advised that the bank has looked back over ten years and where fault was identified, appropriate action has been taken.

He said: “Consequences that have been applied to individuals include significant remuneration impacts and disciplinary actions. A number of relevant staff had already left the company.”

“A range of remuneration consequences were applied to 38 individuals. Consequences applied to prior year awards, including withheld FY19 short term variable reward, totalled approximately $13.2 million. In addition, cancelled FY20 short term variable reward, including for the CEO and Group Executives, is valued at approximately $6.9 million assuming an outcome of 50% of target opportunity,” he added.

What now?

Mr King has acknowledged the need for cultural change within Westpac.

He commented: “We recognise we need to change. We completely accept that some important aspects of Westpac’s financial crime risk culture were immature and reactive, and we failed to build sufficient capacity and experience in some important areas.”

“We have learned from this and are absolutely committed to making amends for this event,” the CEO concluded.

This brings to an end Westpac’s investigations. It will continue to work with AUSTRAC on the legal process, following the submission of its defence and admissions on 15 May 2020.

More reading

• ASX 200 jumps 1.8%, Australian headed for recession
• ASX 200 up 1%: Big four banks jump, Afterpay hits record high
• Is the Westpac share price a buy?
• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 down 0.1%: Big four banks drag ASX lower ahead of RBA meeting

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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The Xero Limited (ASX: XRO) share price has been a top ASX tech performer for quite some time. Shares in the Aussie software provider are up 11.66% this year while the S&P/ASX 200 Index (ASX: XJO) has slumped 11.11% lower.

But there’s one that thing that really stands out about Xero right now. The Aussie tech group’s shares trade at a price to earnings (P/E) ratio of 4,122.29. That’s a pretty astonishing number, but does it mean Xero is overvalued today?

Is the Xero share price overvalued?

Xero is currently trading at $89.33 per share. A P/E ratio of 4,122 means that for every $4,122 you pay for the share, you can expect the company to generate $1 worth of earnings.

That’s an incredibly high number. Let’s compare that figure that to a strong dividend share like Fortescue Metals Group Limited (ASX: FMG). Fortescue shares are currently valued at $14.66 with a P/E ratio of 6.04.

Of course, we have to compare apples with apples. This means it might be more appropriate to evaluate the Xero share price against that of its WAAAX peers. The Altium Limited (ASX: ALU) share price, for example, currently trades at a P/E ratio of 62.16. Therefore, on the surface it might appear that Xero shares are grossly overvalued.

However, I don’t think it’s that simple. The Xero share price has consistently climbed over the years and investors continue to buy into the company. The group continues to sign big clients and I think small and medium business clients will rely on Xero software throughout the COVID-19 crisis. 

Furthermore, many ASX tech shares don’t actually post positive earnings or ‘profit’. That means the earnings component of the P/E ratio is useless and won’t provide any decisive value. However, if a company posts a 1 cent per share profit, all of a sudden their P/E ratio will be enormous.

Foolish takeaway

I don’t think it’s wise to just use P/E ratios to value the Xero share price, particularly in the current climate. If Xero retains key customers and manages to reduce churn, the ASX tech share could still be a good buy in 2020 and beyond.

More reading

• 5 things to watch on the ASX 200 on Thursday
• 3 high quality ASX shares to buy and hold for decades
• These ASX 200 shares could be perfect for a retirement portfolio
• The latest ASX 200 stocks to be upgraded to “buy” amid the recession
• Why I’m not afraid to invest in shares during this recession

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium and Xero. 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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Is Australia in a recession? According to Federal Treasurer Josh Frydenberg, we are.

Strictly speaking, a recession is defined as two consecutive quarters of gross domestic product (GDP) contraction. This is something Australia has miraculously avoided for 29 years.

But with the Australian Bureau of Statistics reporting a 0.3% contraction in first quarter GDP on Wednesday morning, Mr Frydenberg recognises that a recession is now inevitable.

When quizzed at a press conference about whether the country was now in a recession, Mr Frydenberg said: “Yes, that is on the basis of the advice I have from the Treasury Department about where the June quarter is expected to be.”

Why is GDP certain to contract in the second quarter?

Although there is almost a month before the end of the second quarter, the pandemic-related shutdowns that occurred in March and April are understood to have materially impacted GDP during the quarter.

While the reopening of Australia sooner than many expected will be a boost, it certainly won’t be enough to offset the economy grinding to a halt at the height of the pandemic.

One positive is that Sarah Hunter from BIS Oxford Economics believes the country will escape a Great Depression-like scenario.

In a note, courtesy of the ABC, she said: “With the health outcomes tracking better than expected [which has allowed an earlier-than-anticipated end to lockdown conditions] and the government packages providing a significant support to household income, the decline in GDP in the first half of 2020 will be relatively small when compared to other economies.”

But how small is “small”? Hunter and her team are expecting “the peak-to-trough fall in GDP to be significantly less than 10 per cent.”

When will Australia’s recession end?

The economics team at National Australia Bank Ltd. (ASX: NAB) believe that Australian second quarter GDP will be down 8%. After which, it is expecting a recovery to start from the third quarter, ultimately leading to a 4.3% decline in GDP for the year.

A return to growth is then forecast for 2021, with a full recovery achieved by 2022.

The bank explained: “Looking forward, we expect a much larger fall of around 8% in Q2 where strict containment measures were in place in the first half of the quarter. Beyond that we expect a small rise in GDP in Q3 before a more substantial pickup in growth in Q4. That sees a year average fall in GDP of 4.3% this year, followed by growth of around 4.0% in 2021.”

“Despite the rebound in growth, we do not see the level of GDP fully recovering to its pre-virus levels until mid-2022. Therefore, while we see unemployment improving over 2021 from its peak in coming months, it should remain elevated for some time,” it added.

More reading

• ASX 200 jumps 1.8%, Australian headed for recession
• Is the NAB share price cheap today?
• How to value the big four ASX banks
• How bankable are the big four ASX bank shares in 2020?
• ASX 200 up 0.6%: NAB charges higher, ACCC investigates Qantas acquisition

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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