Banking royal commission: Bendigo Bank subsidiary Rural Bank admits conduct would’ve breached code

A banker at Bendigo Bank subsidiary Rural Bank suppressed information to sell credit to a Queensland farmer, inquiry hears.

The chief witness for Bendigo Bank’s wholly-owned subsidiary Rural Bank failed to include in her royal commission witness statement, minutes of a board meeting which discussed an explosive report by the chief risk officer that detailed significant lending failures in the Queensland cattle market.

Among the cases of questionable lending heard at the royal commission yesterday, a Rural Bank staff member suppressed facts to sell credit to a Queensland cattle farmer who had taken out a $1 million margin loan from Macquarie Bank to secure a bigger loan with the lender. The conduct, which Rural Bank admitted would have breached the banking code of ethics — had it been a signatory to the code — came during a period of aggressive expansion into the Queensland farming market just on the cusp of a severe downturn that ended up pushing 156 farmers into debt mediation with the bank.

At hearings for the baking royal commission in Darwin today, Alexandra Gartmann, chief executive of Rural Bank, said she did not know why the 2011 board meeting minutes were not included in her witness statement, but dismissed the findings in the review of lending standards, saying the risk officer would “always view things as a glass half full as opposed to the full executive team”.

This prompted Royal Commissioner Kenneth Hayne to interject and ask Ms Gartmann if she thought the bank’s chief risk officer was doing his job correctly. It was the second time Ms Gartman had rebuked evidence tendered with the royal commission submitted by Rural Bank, after she said former Bendigo Bank chief executive Mike Hirst had been “quite harsh” in his assessment of misconduct at the bank that he submitted to the year-long banking inquiry.

The royal commission heard the board of Rural Bank in 2011 called for a review of its lending practices after the prudential regulator APRA noted it was seriously concerned about the findings from an independent KPMG report. KPMG had found that of the five bank managers it closely audited, all five bankers had suppressed information “pertinent” to the borrowers credit quality, all five had “misrepresented” data into the bank’s system and two had failed to verify information provided by a customer.

The bank’s chief risk officer Taso Corolis told the chairman, in his explosive report, that a downturn in the Queensland property market was not “in the main” the causal factor leading to defaults but a series of failures by bankers to lend prudently.

Ms Gartmann rebuked the findings from Mr Corolis, which prompted counsel assisting Rowena Orr to ask why she didn’t believe her former chief risk officer was “taking an objective view”. Ms Gartmann said there were “some challenges” in the cultural alignment between Elders and Rural Bank. Rural Bank was established in 1998 as a joint venture between Elders and Bendigo Bank, but in 2010 became a wholly-owned subsidiary of the regional lender.

In his report, Mr Corolis said the bank had not assessed the ability of borrowers to repay loans, particularly in a significant sample of distressed lenders. He said the had a “strong bias” to lending on the assumption that rural property values would continue to increase and that a fire sale of the farmland would provide a “comfortable first way out” in the event of default. He said bankers did not disclose “poor previous credit history” of borrowers, the bank was lending against “defective and poor securities”, that “bank statement anomalies” were overlooked and that land values were being “inflated”.

“Based on my view, a number of these issues were clearly systemic and not isolated and have been a significantly material contributor to the credit issues currently faced by the bank,” Mr Corolis said.

Ms Gartmann took issue with the findings, saying that “broad systemic issues” would have sparked more defaults than the bank handled. When asked why Rural Bank failed to submit the minutes from the board meeting where the report was discussed, Ms Gartmann said she did not know.

At that meeting, the bank’s chairman said the “current credit situation was not satisfactory and there appeared to be cultural issues” at the bank. The chairman noted that a presentation was made to the bank five years earlier — just before the global financial crisis — that the value of Queensland cattle properties were heading into a “pure asset bubble” and the warning appeared to be ignored.

Ms Gartmann defended Rural Bank’s “aggressive” move into the Queensland farming market, noting that the industry as a whole was growing in the state’s farming finance sector.

Commissioner Hayne interjected: “I don’t understand why that makes it any better or any worse.”

Ms Gartmann responded: “We were following the crowd, unfortunately.”

The bank’s expansion into Queensland resulted in 62 cases where there had been questionable lending conduct. In one case, a Queensland cattle farmer, who had been a customer with the bank since 2003, was initially knocked back for a $2.7 million loan on the basis it was for a “speculative purpose” and after the bank raised questions around whether the borrower could repay the loan.

But after the farmer resubmitting an application for a loan of $1.7m, and noting that is Aunt would contribute another $1m, the loan was approved as a “special matter” along with the “strong support” from two regional bank managers. However, the loan from the Aunt was a margin loan provided by Macquarie bank, which was known by the Rural bank mangers but not disclosed to the head office. The farmer ended up with a peak debt of $2.155m.

Ms Gartmann said had Rural Bank been a signatory to the banking code of ethics, it would have breached conduct rules.

She said the banker was no longer with the business, but was “unaware” whether the customer had been informed of the conduct.

Mr Hirst, who was replaced by new Bendigo chief executive Marnie Baker on Monday, had told the royal commission in December a number of instances of conduct that fell below community expectations in his December submission, including not ensuring “valuations were accurate and independent” and a “failure to physically visit and inspect livestock and properties”.

“Loan performance was exacerbated by inadequate loan management, with evidence of a failure to follow up of excesses, arrears and out of order accounts, failures to conduct timely reviews and collect updated farm performance information, failures to otherwise detect signs of financial distress at an earlier point in time and failures in relation to our enforcement process,” Mr Hirst said.

Ms Gartmann said Mr Hirst was “being quite harsh in his assessment”, noting that valuations had been impacted by the global financial crisis, the government’s live cattle export ban.

The royal commission heard Rural Bank’s staff lacked any identifiable training before the global financial crisis, signed up customers to risky loans, and then failed to properly discuss with farmers their situations when they fell into distress.

While Bendigo Bank had signed onto the industry’s code of ethics, the Banking Code of Conduct, when it was first introduced in 1993, Ms Gartmann said Rural Bank delayed signing onto the code in November 2017 to avoid “change fatigue” among the lender’s staff.

Ms Gartmann was appointed head of the Rural Bank in late 2015, and committee the bank to sign onto the code but said compliance required a raft of technological investment

It was “very hard to identify what training and development was in place” before 2008, Ms Gartmann said. “From 2011 there was a substantial increase and training which indicated to me that there was insufficient training delivered,” she told the royal commission.

Ms Gartmann told the hearing bankers were required to grow their assets by about 10 per cent each year, which equated to roughly four customers. This differed from the parent Bendigo Bank, which had turfed performance incentives since 2002.