CBA 'clawback' motivation dismissed at banking royal commission

Australian Financial Review May 21 2018 5:42 PM

James Eyers

The banking royal commission has demolished a conspiracy theory raised by a group of aggrieved Bankwest borrowers that Commonwealth Bank, which took over the struggling lender during the financial crisis, defaulted their loans to "clawback" part of the acquisition price.

However, the Hayne inquiry will still investigate whether CBA's mistreated Bankwest borrowers as it managed the integration of its loan book into CBA over several years following the deal.

Price adjustment clauses are normal in merger and acquisition deals that are done quickly, in order to protect a buyer from impaired assets which cannot be uncovered during limited due diligence periods.

Since it bought Bankwest, CBA has been dogged by allegations it used such a clause to "clawback" part of its $2.1 billion purchase price of Bankwest.

Various parliamentary inquiries that have examined the claims over many years (none found them to be valid) and CBA has consistently and strenuously denied it was motivated to default customers by any clawback.

Several former customers of Bankwest,including Airlie Beach developer Rory O'Brien, were hoping the commission would delve into the theory.

The claims have had a sympathetic ear from senior members of the Coalition, including former Liberal MP Philip Ruddock, who prompted the launch of a parliamentary joint committee inquiry into loan impairments following approaches from Liberal Party branch presidents in his electorate.

But on Monday, senior counsel assisting Michael Hodge, QC, said "this 'ulterior motive theory' is not supported by either the facts or the operation of the contractual mechanism".

"Based on our own analysis, we share the views of the [small business] ombudsman that the clawback ulterior motive theory is incorrect," he said.

CBA still has questions to answer

The commission reviewed 67 loans made by Bankwest that CBA argued should have been provisioned for, or further provisioned for, on the date the Bankwest deal completed. "On any view these were already distressed loans," he said.

Furthermore, the clawback motive "cannot have anything to do with events after July 2009, because after that date Ernst & Young [arbiters of claims to adjust the purchase price] had delivered their determination and the price adjustment mechanism had no more work to do."

The commission has also knocked on the head an alternative theory raised by the small business ombudsman that CBA could have been motivated to reduce 'risk weighted assets' after the CBA board lifted the internal "Tier 1 capital ratio target" above 7 per cent in February 2009.

But Mr Hodge said this ratio was already well above 7 per cent at that date and APRA had provided analysis to the commission showing "impairing and provisioning alone does not improve a bank's tier 1 capital ratio. Rather, it reduces the bank's tier 1 capital ratio."

Yet the commission said CBA still has questions to answer relating to Bankwest. Mr Hodge said case studies will be presented, probably early next week, to examine whether CBA's response to its perception of increased risk in its loan books was unconscionable or fell below community standards.

Mr O'Brien, who listened to the commission webcast on Monday, said: "They have shut the two motivations down, but the elephant in room is clearly that something went on, whatever it is. Too many people have been screaming for too long and not are going away until it's resolved."

CBA told a parliamentary inquiry in 2015 it wrote off $1.7 billion of Bankwest loans in the 6½ years after its acquisition of Bankwest of borrowers who had been meeting their obligations to the bank at the time of the deal.