Banking royal commission: Pressure to sell pub ‘not surprising’ despite clean repayment record

Bankwest pressure to sell a pub despite a clean payment history wasn’t surprising, CBA’s chief risk officer has told the inquiry.

It was “not surprising” that Bankwest employees wanted to force two brothers to sell their pub, even though they had not missed a single payment, CBA chief risk officer David Cohen has told the financial services royal commission.

The commission has been probing what happened to a $1.2m loan Bankwest made to brothers Michael and Brendan Stanford to buy the Coronation Hotel in Portland, near Bathurst in NSW.

Yesterday, Brendan Stanford choked back tears in the witness stand as he tried to describe the effect of the bank’s repossession and sale of the hotel, for about a third of what they paid for it, in 2014.

Mr Cohen admitted that it was unfair for the bank to call in investigating accountants from PPB, who recommended the sale, without first informing the Stanfords.

But he defended the bank’s conduct in reviewing the loan as part of Project Magellan, a purge of the Bankwest lending book CBA launched after buying the bank from its teetering parent HBOS during the global financial crisis.

Mr Cohen said it was “not entirely” surprising that a Project Magellan panel that looked at the loan in April 2010 recommended the hotel be sold.

“Given that there were concerns about the level of trading at the hotel which was adversely affecting the EBITDA [earnings before interest, tax, depreciation and amortisation] … the value of the hotel was deteriorating,” he said.

“In light of those facts I would have expected Bankwest to form the view that potentially the only way for the borrower to repay the loan was to sell the hotel and sell it sooner rather than later.”

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This recommendation came only a month after the Stanfords raised concerns with their relationship manager at Bankwest, Gary Goldsmith, that the bank wanted them out of the pub.

Mr Goldsmith reassured them this was not the case.

The bank again reviewed the loan as part of Project Magellan in September 2010.

An internal report on the loan said the bank should “encourage [the] customers to put hotel up for sale”.

It said this had previously not been seen as practical and a “difficult conversation” but was now a live option due to poor trading at the hotel and “the sometimes contrary nature of the client”.

The Stanfords had a mixed credit history and had failed to provide the bank with information it wanted about the financial results of the hotel business but their “payment history is first class”, the report found.

Bankwest customer Brendan Stanford leaving the banking royal commission in Melbourne yesterday. (David Geraghty/The Australian)

At the time, the Stanfords had not missed a single loan repayment, but had fallen into arrears with the Taxation Office, which had put them on a payment plan.

Asked by counsel assisting the commission, Michael Hodge, QC, whether it was surprising that the bank wanted to sell up a borrower with a 20-year loan and a first class payment history, Mr Cohen said: “No, it’s not surprising in this case.”

“The financial indicators provided via the ratio, for example, the arrears with the tax office, the deteriorating performance of the hotel, all would have been live indicators to Bankwest that although payments were being maintained … the financial position of the borrower was deteriorating.”

A September 16, 2010, credit report shown to the commission reveals that state manager Ray Beshara thought that “this connection needs to be exited immediately”.

“Lack of customer’s ability to provide regular information and the trading being far below valuer’s assessment of maintainable earnings is of concern,” he said in the report.

Mr Goldsmith disagreed, telling Mr Beshara in an October 2010 email that he did “not agree with the fact we have to exit file”.

Kenneth Hayne

Key players

Commissioner. A former High Court judge, married to current High Court judge Michelle Gordon. During the hearings he has been tough on banks slow to cough up information required by the commission and dropped hints he is concerned about whether they have a willingness to comply with the law of the land.

Rowena Orr

Key players

Senior counsel assisting the commission. A Melbourne QC with razor-sharp cross examination skills and a background focusing on the intersection between the criminal and commercial worlds.

Philip Crutchfield

Key players

Melbourne QC representing AMP. The wealth manager is in the commission’s sights in this round of hearings, which focus on the scandal-prone financial planning sector.

Matt Collins

Key players

Melbourne QC - and president of the Victorian Bar - representing ANZ. Best known for his defamation work, including representing actress Rebel Wilson in her multi-million-dollar win over Bauer Media.

Charles Scerri

Key players

CBA’s counsel is a Melbourne QC who specialises in representing the big end of town and government agencies. The bank’s well-known track record of scandal in its financial planning business is set to get another airing at the commission.

Neil Young

Key players

NAB’s long-time go-to QC is not to be confused with the Canadian singer-songwriter of the same name - but is very much a rock star at the commercial bar.

Bankwest asked an investigative accountant to review the hotel and did not show the report to the brothers — but still asked them to pay the accountant’s fee of $9,900, he said.

Mr Cohen admitted this was not fair and the bank now shows most investigating accountant reports to customers — but would still withhold sections dealing with management skill.

Mr Hodge repeatedly asked Mr Cohen during cross-examination about the Stanford’s sterling repayment record.

The commission has heard they did not miss any payments until 2011, well after the bank put them under pressure to sell the hotel.

Mr Cohen admitted that demanding the sale of an asset even though payments were made on time would now fall below community expectations of bank behaviour.

“If payments continue to be paid then the bank should not be taking any action,” he said.

Yesterday, Brendan Stanford told the commission that while being treated for leukaemia in 2012 he stepped away from being involved in the business.

The brothers tried to sell the pub in the lead up to a June 2014 deadline. Despite a “paper valuation” of $1.2m he was told the hotel was only worth in the $900,000s.

Even an offer from his brother’s partner to invest $400,000 did not sway the bank.

Receivers ultimately sold the hotel but Mr Stanford said he did not find out the price until much later, which he believed to be just $525,000.