The latest furore around abrupt changes to customer redraw accounts on home loans only perpetuate the shortcomings in the bank’s ability to execute effectively. This column understands the Australian Prudential Regulation Authority has had a heightened level of engagement with ME over the past few years on the implementation of a new Temenos banking system. That included operational issues for some term deposit products and credit cards, which weren’t working properly. After a period of more active engagement with the regulator those issues have now been ironed out.
APRA and ME wouldn’t comment. To be clear, ME’s issues do not centre on its capital adequacy or banking performance, which are sound. The bank is profitable and well capitalised, so the problems are also unrelated to the federal government’s early access scheme for superannuation.
ME, owned by 26 industry super funds, had a common equity tier-one ratio of 9.79 per cent in the six months ended December 31, up from 9.54 per cent a year earlier. Total assets stand at $30.2bn.
ME seems, though, to have underlying problems with systems implementation and execution. The recent controversy around making changes — and adjusting limits down — on customer mortgage redraw facilities are just the latest example.
A letter by ME chief executive Jamie McPhee to customers this week said the changes were made with the “best of intentions” to protect some customers from the risk of redrawing too much money and putting them behind in repayments. But he then admits ME “messed up” by not explaining the product and the process adequately to customers. The changes related to older home loan products.
Banking executives canvassed by this column said customers should have received at least six weeks to three-months notice of any significant changes, which banks are entitled to make. That should particularly be the case while many borrowers navigate the COVID-19 crisis.
From the customer complaints expressed publicly, ME fell well short on this measure with some having just days of notice or receiving the notice after the redraw changes were made.
Sources at ME have a different version of events around their APRA interactions and customer communications on redraw, but public opinion is a strong force.
That is particularly the case for a bank that bases its marketing on being squarely in the customer’s corner. Its 2019 campaign was based on the slogan “Bank-xiety”.
The bungled redraw change also begs the question as to why the industry fund owners — including AustralianSuper, HESTA, and Sunsuper — continue to feel compelled to own a bank.
ME was founded in 1994 and at the time it offered home loan discounts to members and was built around creating real, and much-needed competition, to the major banks. The situation now is a lot different as others have entered the space and the specific discounts are gone.
In addition, the industry fund owners haven’t earned dividends from the investment, and several hold the stake in their private equity portfolios. As long as assets go up at ME industry funds can say the value of their investment is rising, but members should be asking if it’s in their best interest that their superannuation fund owns a holding in a small bank.
ME reported a 26 per cent rise in statutory first-half net profit to $52m for the six months ended December 31, compared to a year earlier. Its home loan book grew 5.5 per cent to $26.7bn and deposits rose by 5.3 per cent to $16.4bn.
That followed a tough fiscal 2019 when ME was hit by a string of one-off charges, including impairments for its credit card business, where it dumped expansion plans, and technology decommissioning and remediation costs.
In 2020 ME has to learn from, and fix, its execution issues. Its reputation is at stake.
It will be interesting to see if ME maintains the redraw changes or winds them back.
Executive watch
Bank of Queensland is down to short strokes in its search process to hire a new head of business banking. This column understands it’s up to two final external candidates and a decision shouldn’t be far off.
Headhunter Egon Zehnder is running the process as CEO George Frazis looks to fill the vacancy on his front bench. A new recruit would fill the shoes of Peter Sarantzouklis — a former Westpac banker — who exited the regional bank in January after just five months in the role.
With COVID-19 putting many businesses in a tenuous position and business banking being a key division for BoQ, the sooner someone is in the hot seat the better. Like it’s bigger rivals, BoQ’s interim results last month increased its provisioning for potential bad loans, citing the impact of the pandemic. That includes a $10m “overlay” in its first-half with BoQ estimating the annual range at $49m‐$71m.
Pershing’s woes
The corporate regulator had a win this week against trade clearing group Pershing this week when it pleaded guilty to mishandling client monies.
Pershing is the first company in Australia to face criminal prosecution for breaching client money provisions. Among other things, it failed to pay funds it received into an account and satisfy its requirements. The case is disturbing because Pershing clears trades on behalf of a long list of local stockbrokers. The firm was also hit with additional licence conditions.
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Industry fund-owned ME Bank’s operational and technology issues go back several years to when the bank faced teething problems around its core banking system upgrade.