CBA threatened customer with 18pc interest

Commonwealth Bank told a customer of Bankwest that it would charge him a sky-high interest rate of 18 per cent.

Michael Kelly leaves the banking and financial services royal commission in Melbourne yesterday. Picture: Aaron Francis

Commonwealth Bank told a customer of Bankwest, which it took over during the global financial crisis, that it would charge him a sky-high interest rate of 18 per cent, even though internally it had settled on a rate 10 percentage points lower, the banking royal commission has heard.

The treatment of Michael Kelly, a former Bankwest executive, came as CBA struggled to digest a Bankwest lending book that was more than half commercial property. Documents revealed the gigantic property lending binge embarked on by former owner HBOS, which was rescued by the British government.

Property lending had ballooned to 50.3 per cent of Bankwest’s commercial loan book by 2009 — some $14.2 billion — sparking internal worries at CBA and a push to cut the bank’s exposure to commercial property to 45 per cent, a confidential risk committee submission shows.

“Continued stress is evident, a number of new watch list and high risk exposures reported in residential construction mainly due to cost and time overruns and failure of QPS to settle,” a March 2009 risk committee meeting was told.

The focus on Project Magellan, CBA’s review of loans it had acquired as part of the Bankwest takeover, comes as the commission looks at how banks have treated small business ­borrowers.

Counsel assisting Michael Hodge QC last week ruled out “ulterior motive” theories — that CBA either wanted to reduce the price it paid HBOS for Bankwest or improve its capital ratio — as explanations for why the bank treated borrowers badly during Project Magellan.

He said the “hidden bias” in the theories created ”a distraction from the substantive questions that are worthy of consideration”.

Mr Kelly’s case showed how bank employees tried to change interest rates on loans and move them between different departments — its credit and asset management division (CAM), known colloquially in banking as “bad bank”, and the property division.  With a syndicate, Mr Kelly had established a string of companies that were pushing ahead with property development projects on two sites.

He took out two loans at an interest rate of the bank bill swap rate plus 1.75 per cent — a total rate of 7.5 per cent.

In 2008, the bank reviewed both loans and lifted the margin on one to 2.25 per cent. He twice received valuations that showed the value of the property had increased.

Even so, the bank was hesitant to refinance the loans once they expired as CBA was trying to exit commercial property loans and not offer extensions.

“We’re longstanding customers … I had banked there all my life, sort of thing. And to go into a meeting where we — all upbeat about our project — and then to cut us off at our knees and to say, ‘No, we don’t want to extend our facilities, you’ve got to go’. There was a bit of a shock,” Mr Kelly told the commission. If the loan had been considered in default, the bank would have lifted the interest rate to more than 18 per cent. But an internal document showed that in January 2011 the bank applied a discount of 10 percentage points so the rate was similar to before.

However, in March 2011, the bank sent Mr Kelly a letter telling him it would apply the 18 per cent rate to one loan, of $4.9m, after all.

“So I phoned Omar from the bank just to confirm what rate they were going to apply to this facility because, given it had expired and we hadn’t accepted the letter. And he said apply a 10 per cent discount to each of the limits to bring it back to 8.1 per cent instead of 18.18,” Mr Kelly told the commission.

Commonwealth Bank general manager of group credit structuring Brett Perry said the bank’s email to Mr Kelly informing him of the 18 per cent rate was “inconsistent” with an internal file note explaining the discount.

Mr Kelly said the syndicate had already told the bank that the group could service its loans.

The commission also heard from Stephen Weller, the former owner of the Nambucca Hotel in regional NSW. He said he took out a loan with Bankwest to buy the hotel and another to buy out his business ­partner.

“We were always up to date with our payments,” he said.

But the bank hit him with notices of non-monetary breaches, saying the value of the business and property had fallen and he would need to inject fresh funds.

After attempting to sell some poker machine entitlements to Coles to raise money, Bankwest hit him with another breach notice — which it refused to withdraw when the sales proceeds came through three days later.

Mr Weller complained to the Financial Ombudsman Service.

“I reckoned I knew what the bank was on about,” he said.

Mr Weller also sold his family home — but did not pass proceeds to the bank — before it appointed receivers and sold the hotel.