WESTPAC has been hit by its first shareholder class action over the child exploitation scandal engulfing the nation’s second largest bank.

Meanwhile, analysts are warning the lender will suffer at the hands of the newly launched prudential inquiry into the company.

Phi Finney McDonald filed its action against Westpac in the Federal Court on Monday evening and the law firm’s director Tim Finney said the group had been approached by institutional investors “across the world” who were outraged by the millions of allegations of anti-money laundering breaches facing the bank.

“The governance issues raised in this case are extremely serious, and the losses caused to our clients are substantial,” Mr Finney said.

The lawsuit covers shareholders who bought shares between December 2013 and November 2019.

It claims Westpac did not properly assess its money laundering and terrorism financing risks and did not conduct proper due diligence on its customers, who authorities claim were using the lender to finance child exploitation material. It also claims the bank did not report transactions to the regulator Austrac and had deficient systems to obey the law.

Westpac said it would defend the claims.

The class action comes after the Australian Prudential Regulation Authority started its first compliance probe of Westpac under a new regimen that could see executives and managers banned and the bank hit with further fines.

Global ratings agency Fitch said APRA’s actions will “further challenge the bank” in the short term and lead to a downgrade of the bank’s rating if its earnings and profitability significantly weaken.Bell Potter analyst TS Lim said the APRA probe would increase the level of distracted management over the next 12 to 18 months and Westpac’s earnings would likely fall by 2 per cent because of the probe.