The high-profile Royal Commission into Australia’s banks has turned the spotlight on commercial practices – particularly the wake of foreclosures on pubs by Bankwest post-GFC.
The controversial practice of ‘non-monetary default’ clauses has been in discussion at the Commission, prompted by testimony of former Bankwest customers owing commercial loans on hotels.
Testimony has centred on incidents between 2010 and 2013, where it’s reported the bank aggressively tightened forecasts and called defaults around LVRs (loan to value ratios).
Over 1,000 commercial loans were thought to be re-assessed as the bank looked to reduce its exposure to commercial property.
This mandate reputedly came from a directive by CBA, which was purchasing Bankwest from British HBOS.
It was rumoured at the time that high-risk or in-default commercial loans could be deducted from CBA’s purchase price, and that this is what sparked a campaign known as Project Magellan, to dramatically lessen this portfolio.
Late 2009, Bankwest’s commercial books showed $14.8bn. Around $1.4bn of this (9.5 per cent) was subsequently ruled troublesome or impaired, and by the end of 2009 the total had been reduced by $550 million.
The Commission heard the case of former accountant Stephen Weller, who in 2008 borrowed $3.7 million for 15 years to buy out his business partner at the Nambucca Hotel.
In 2010, with slow trading hitting much of the western world, although he had never missed a payment, the bank exercised conditions, issuing a ‘variation’ on the loan proposing a far higher interest rate, and expiry in two years, which was later reduced to one year.
Unable to meet the new obligations and unable to sell the pub, despite a complaint with the Financial Ombudsman, receivers were appointed in 2014.
Similarly, in 2006 brothers Brendan and Michael Stanford took a $1.2 million loan on the $1.6 million purchase of the Coronation Hotel in Portland. A re-evaluation in 2009 put it at $1.55 million.
In 2010, despite continuing to service their loan, a request to switch to interest only was denied and the brothers fell foul of tax obligations and became overdrawn. Bankwest sent PPB Advisory, which charged $10k to determine the business was now worth just $250,000 (a fall of 84 per cent).
Brendan Stanford testified that his lawyers sought explanation of the valuation, but one was not provided. The brothers offered to make payments up to $400k to reduce the loan, financed by a partner, but this was refused.
Bankwest appointed PPB Advisory as receivers, which shut and sold the pub for $525,000, but in seeming contradiction to its prudency, did not seek to recover the loan balance.
The Royal Commission is not the first to investigate Bankwest’s dealings at this time, a Federal Senate enquiry in 2012 hearing many stories from disgruntled former customers.
Sean Butler owned the National Hotel in Fremantle and Lighthouse Beach Resort, and was dubbed a ‘model customer’. He told the enquiry that despite record profits and forward bookings mid-2011, Bankwest slashed the book value on his property before demanding he repay the balance within two months, under threat of 18 per cent interest.
After failing to divest his hotels for enough to pay out the loans, receivers Taylor Woodings were appointed, charging over $1 million across 9.5 months to manage the pubs, before selling them for a collective $5 million less than the offers Butler had recently turned down.
CBA’s chief risk officer, David Cohen, is due to appear before the Commission to further explain the workings of ‘Project Magellan’.