Tuesday, August 13, 2019

Westpac's Fed Crt win can also mean a Westpac downgrade: Asian investors would not consider Westpac a safe investment given Perram J's peculiarly Australian judgement

by Ganesh Sahathevan

Westpac was downgraded by UBS in April this year due to the concerns raised in the royal commission about the quality of the lender’s mortgage book. Perram J's decision is likely to add to the concerns, especially in Asia

In Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 (13 August 2019), Perram J said:

Whilst I accept that the ( National Consumer Credit Protection Act 2009 (Cth)) requires a credit provider to ask the consumer about their financial situation (s 130(1)(b)) and, in turn, to ask itself—and to answer—the s 131(2)(a) Questions, I do not accept that this has the further consequence that the credit provider must use the consumer’s declared living expenses in doing so.

While lawyers and judges may be able to perceive the wisdom and clarity of these words, to investors , especially from Asia, the words make little sense for they imply that a lender need not concern itself with what the borrower says about his or her living expenses ie his or her net cashflows.

Additionally, while ASIC's pleadings may well have been deficient (in Perram J's words “this case fails on the facts") the judgement does raise a question about what it is Australian courts consider to be relevant in matters that concern lending, if not net cashflows.

Consequently while Westpac can celebrate its victory over ASIC,investors, especially in Asia, are likely to re-assess Westpac's risk profile and the quality of its loan book,and in particular its consumer loan book. Of primary concern will be the quality of current loans.However there will also be concerns about future loan quality given the likely perception that Perram J's decision provides Westpac justification to grow its loan book unconstrained by considerations of borrowers' capacity to repay. His reference to spending on wagyu and shiraz, presumably in an attempt to quantify cash outflows, is not likely give investors any comfort.
Bankers who do not consider what their borrowers say they earn and spend to be relevant, while not uncommon in Asia, are also not considered a safe investment, either in shares or in deposits.

Australian courts have, even when considering insolvency, shown a tendency to disregard cashflows instead choosing to rely on their analysis of "all the circumstances of the case".

Perram's wagyu and shiraz explanation adds to the evidence that Australian lawyers and judges are not comfortable dealing with commercial matters, and worse, not capable of dealing with the increasingly technical nature of commercial transactions.


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