- The royal commission into misconduct by banks dug deep into the case of two brothers who borrowed from the Commonwealth Bank-owned Bankwest to buy a pub in NSW.
- Questioning in a commission hearing brought an admission by the Commonwealth that the brothers had been treated unfairly.
- The bank’s chief risk officer said: “It is unfair to ask a borrower or demand from a borrower to pay for a report they have not received.”
The Commonwealth Bank’s chief risk officer, David Cohen, has come under forensic-like questioning in the financial services royal commission today about a loan it made to two brothers to buy a pub near Lithgow, NSW.
Brendan and Michael Stanford took out a $1.2 million loan over 20 years in 2006, having bought the Coronation Hotel in Portland for $1.6 million. But in 2014 the hotel was sold in receivership for $525,000, three years after a bank-ordered valuation said the pub was worth just $250,000.
In evidence today, the Commonwealth Bank agreed that the brothers had at times been treated unfairly, including charging them almost $10,000 for an investigatory accountant’s report without consulting them or providing a copy of the report.
In evidence to the commission yesterday, Brendan Stanford said turnover at the hotel slumped after the GFC and the brothers fell behind on their tax obligations before negotiating a payment plan with the ATO.
They got a $20,000 overdraft from the bank and continued to pay down the loan.
A new loan agreement was drawn up in mid-2010 requiring them to report their financials quarterly, but they refused to sign it and missed that first deadline, although because they’d not agreed on the new deal, the bank said it “regrettably” did not issue them with a breach notice.
Bankwest sent in investigative accountants PPB Advisory in 2011, who concluded the hotel was worth just $250,000. The pub had been valued at $1.55 million just two years earlier.
The bank decided the best course of action to recover the outstanding debt was for the pair to sell the hotel.
In January 2014, with around $1 million still outstanding on the loan, the bank entered a deed with the Stanfords to sell by June 30, however the suggested sale price was no more than $560,000.
But when they failed to find a buyer and the bank had rejected an offer from the pair of a one-off payment of $400,000 to reduce the loan, it appointed the same accountants, PPB Advisory, as receivers in by July 2014. They shut the pub, then sold it for $525,000.
Cohen described the language in an email from a banker rejecting their offer as “curt and unfriendly”, which he found “not acceptable”.
Today, the commission was told that Bankwest required the hotel to be revalued every three years to identify any risks in the event of a default in payments.
Cohen, the Commonwealth Bank’s chief risk officer, said the re-valuation looked at cash flow and operating conditions.
The business’s interest cover ratio was found to have been in breach with EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) below two times interest repayments.
The bank interest rate on the loan increased twice in 2010.
“There were concerns around the business, the operations of the business, the trading performance of the hotel and … the risk being taken by the bank as a result of the deteriorating performance was greater, and that was reflected in the new pricing,” said Cohen.
But in March that year, the Stanfords had made all their repayments and were even ahead on principal repayments.
Cohen conceded Hodge’s suggestion that by September 2010 Bankwest had decided selling the pub was the best course of action was largely correct but says at that point there should have been a “a more fulsome discussion” with the customer about how it reached that conclusion.
CBA had been assessing the risk levels in Bankwest loans as part of Project Magellan (a review of valuations for 1200 Bankwest loans started after the CBA took over the bank in 2008). The performance of hotel loan was considered satisfactory but closer management was needed and a further review concluded the business was losing value as earnings fell.
The Magellan review raised the risk grade and there was a recommendation that the Stanfords be encouraged to sell the hotel.
Cohen said he wasn’t surprised, given the deterioration in earnings, that Bankwest was recommending to the brothers that they sell.
However, internal Bankwest documents showed the bank’s relationship manager in September 2010 recommending the Stanford brothers loan be taken off the weak list because the loan risks were decreasing, not increasing.
Senior counsel assisting the commission, Michael Hodge, tabled emails showing the recommendation was rejected by the manager of that relationship manager.
One of the anomalies in the bank’s documents pointed out by Hodge, was that the loan had a projected debt servicing ratio over three years of 1.68, 1.64, 1.65 but an average of 2.0, a mystery Cohen could not explain.
Hodge also quoted from the report by accountants PPB Advisory, for which the brothers were charged almost $10,000 but were not allowed to see, which recommended they put the hotel up for sale and that, if they didn’t, the bank should move in to enforce its security on the property.
Cohen agreed with Hodge that it was unfair to appoint an investigatory accountant without consulting the Stanfords. A new rule, from 2016, at the Commonwealth requires customers to be consulted at all times.
“It is unfair to ask a borrower or demand from a borrower to pay for a report that have not received,” Cohen said.
Hodge pointed out to Cohen that the Sandfords had never missed an interest payment. However, Cohen said PPB had also found a lack of financial discipline, management skill, and the absence of a plan to improve operations.
Cohen also agreed it was unfair the Sandfords were given just seven days to respond to a letter about a “material adverse change” in conditions. He said the current policy required 30 days.
“The lack of discussion with the borrower, the lack of explanation as to why the sale of the hotel was the only option … I think that was not reasonable and not fair to the customers,” said Cohen.
“Unfortunately the fact is that the sale of an asset is always going to be extremely difficult.”
Cohen added that at that point the bank should hold “a full and frank discussion should be held with the borrower”.
Hodge asked whether the Stanford case fell below community expectations for the way a bank should act.
“I think community expectations today would require that the bank have a more open and transparent engagement with the borrower circumstances such as this,” said Cohen.
Commissioner Ken Hayne said that the customer would likely have kept thinking that they had been always making loan repayments, then the bank would not act.
“Would it had been better of the bank had said: ‘Maybe so, you have been paying principle and interest but interest cover and debt servicing ratios are out of whack. Those are warning signs showing us that this is a path to disaster’?” Hayne asked.
Cohen said: “Yes, I agree.”
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