Banking royal commission: Commonwealth Bank says Bankwest wasn't up to scratch

Australian Financial ReviewMay 29 2018 9:00 PM

James Frost

Bankwest's aggressive pursuit of business on the east coast left its business loan portfolio in a far worse state than CBA had anticipated and prompted it to rapidly shrink its commercial property loan book by 20 per cent, the royal commission has heard.

CBA chief risk officer David Cohen said reviews conducted of the bank after the purchase raised significant concerns about both the quality of the business loan book and the processes used to grant the loans.

"It was both at the business level and at the risk management function level," Mr Cohen said.

CBA's Mr Cohen has been asked to explain the bank's role in relation to a series of case studies that put a spotlight on Bankwest's expansion into, and then rapid retreat from, small business loans with large property exposures.

The parlous state of the loan portfolio bought by the bank at the height of the GFC would be revealed to CBA over a period of 18 months. However Bankwest's CEO Jon Sutton saw early warning signs within four months of the purchase.

A internal strategy memo dated April 1, 2009 from Mr Sutton – who would go on to become CEO of BOQ in 2012 – stated "the quality of the Bankwest business asset book is poorer than original expectations and we are actively de-risking the portfolio".

Mr Sutton made a more fulsome assessment of the operation CBA had acquired and its processes a year later, on March 17, 2010, when he said "there was no real credit review process in place". A document attached to the email noted "sound credit quality and practise have been absent in NSW and VIC".

CBA launched Project Magellan in February 2010 to reduce the bank's exposure to commercial property, which would see the bank review 878 loans worth $7.7 billion. The bank would target pubs, clubs, hotels, aged care facilities and anything with a valuation over $5 million.

The lack of rigour in Bankwest's credit processes would spawn a project name of its own.

"Project Columbus was to add additional resources and improve the operating procedures of the credit management asset team within Bankwest," Mr Cohen explained.

Mr Cohen said his bank believed Bankwest was not as diligent as CBA and there were a limited number of people with the skills needed to properly manage business loans throughout the the life of the loan.

This led CBA to perform a rapid review of the book in order to ensure it was adequately provisioned for the following financial year.

When CBA bought Bankwest in 2009 Bankwest's total committed exposure to commercial property was $14.2 billion, or 50.3 per cent of total loans. This in turn pushed CBA's exposure to the sector from 8.5 per cent to 9.9 per cent which was uncomfortably close to its cap of 10 per cent.

Bankwest had embarked on an expansion strategy from its home base in WA that saw the bank aggressively chase business on the east coast and grant loans that may not have been approved otherwise.

In the aftermath of the acquisition the Bankwest loan book saw a three-fold increase in impaired assets and a thirteen fold increase in specific provisions.

This would lead the bank to make a decision to reduce its exposure to the sector from $14.8 billion to $14.25 billion in the six months to December 31, 2009. The bank would also seek to reduce Bankwest's overall exposure from 50.5 per cent as of June 30, 2009 to 45 per cent by December 31, 2009 and 40 per cent by December 31, 2010. [Nice try, AFR, but none of this explains why CBA foreclosed on all those performing loans. –RJB]

Earlier in the day CBA's chief credit officer Peter Clark appeared to answer questions about the bank's role in two specific case studies that included hotel owners.

Mr Clark conceded there were some issues with the way in which they were handled but did not agree the process was flawed.