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The royal commission has heard that several customers of Bankwest were left in financial distress as a result of the bank’s failure to properly assess and manage its credit risk.
Stretched over several days of hearings, the banking royal commission heard testimony from four former business leaders — Michael Doherty of hospitality development firm Doherty Group; Stephen Weller who had run the Nambucca Hotel; Brendan Stanford who operated the Coronation Hotel in central western NSW; and Michael Kelly, a former Bankwest employee turned Perth property developer — about how they were negatively impacted by Bankwest’s decision making.
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During the course of the week, the commission heard that these customers faced financial stress after the risk profiles of their loan facilities were re-assessed, with one customer forced to declare bankruptcy.
The commission alleged that Bankwest’s loan re-assessments were prompted by CBA’s “Project Magellan”, which involved a review of more than 1,000 business loans in Bankwest’s business loan portfolio to reduce CBA’s exposure to commercial property, following its acquisition of Bankwest in 2008.
CBA’s group chief credit risk officer, David Cohen, testified to the commission that there had been a 13-fold increase in specific provisions for distressed commercial loans at the time of its acquisition, and that the quality of Bankwest’s business banking loans were not of the calibre it had expected.
One key concern CBA had was an over-exposure to property developments nationally as well as hospitality venues like pubs, particularly in NSW.
Project Magellan sought to address this over-concentration of loans in these particular fields and reduce the risk of loans held on its books.
However, Bankwest’s approach seemed to be forced liquidation or receivership, by reportedly falling back on the now illegal clause permitting it to make unilateral modifications to the loan agreement.
Across the testimonies of the four businessmen, Bankwest was repeatedly described as “arrogant” and lacking in transparency, forcing up the borrowers’ operating costs, dragging out application times for finance extensions, making incorrect assessments of the businesses’ profitability and refusing to consider alternative strategies that would have allowed the businesses to continue trading.
One claimed to have spent more than $500,000 on chartered accounting fees in a bid to help the bank understand its financial position and operating forecasts. Another testified that Bankwest hired independent investigative accountants to conduct a review of his business, then hit him up for the $9,900 bill — despite withholding their final report, and the accountants’ invoice, from him.
CBA’s Mr Cohen conceded that Bankwest had insufficient skilled staff to deal with loan provisioning, that its business relationship managers did not fulfil their duties diligently and that its credit assessment processes were below par.
After Mr Cohen acknowledged such failings, counsel assisting the commission Michael Hodge asked Mr Cohen whether he believed they were a sign of failings in CBA’s risk function.
“Does it follow then, from what you are saying, if you are identifying some of the issues that have been faced by CBA as intersecting with the risk functions, that there has been some failure of the risk function over time?” Mr Hodge asked.
Mr Cohen replied: “Well, I think it’s fair to say that the risk function has not always performed as it should have. So, in that sense of a failure, yes.”
The third round of hearings began on Monday (21 May) and focuses on loans to small and medium-sized enterprises, with responsible lending and unfair contract terms coming under the spotlight.
The fourth round of hearings, which will begin on 25 June, will focus on issues affecting Australians who live in remote and regional communities, including farming finance, natural disaster insurance and Aboriginal and Torres Strait Islander Australians’ interactions with financial services entities.
[Related: Regional finance to come under royal commission scrutiny]
