December 2, 2009 BENDIGO and Adelaide Bank raised the stakes on its defaulting Great Southern customers this week, hauling some of them up to credit rating agency Veda Advantage, in a bid to scare them into paying back some of the $510 million they owe.
If this doesn't work, the bank has warned that the next step is to start litigation and bankruptcy proceedings.
But it is a tactic that has opened up a can of worms for Bendigo from a regulatory point of view, a legal point of view and its PR push as a community bank.
On the legal front, the main law firm mounting a class action against the bank, MacPherson & Kelley, has lodged complaints with ASIC, has reported its actions to the Office of the Financial Services Ombudsman and has given the bank until 2pm today to remove listings with Veda or formally report it to the Privacy Commissioner for allegations of a breach of the Privacy Act.
MacPherson is also threatening to take action for any loss or damage suffered by a client from a listing with Veda.
Bendigo doesn't believe it has done anything wrong and is defending the Veda move vigorously. But it is a slippery slope, and if Bendigo pushes it too far, it could seriously damage its reputation.
In its latest presentation to investors, it highlights trust as a key competency. "Our retail brand is strongly differentiated and the bank enjoys high levels of consumer trust and advocacy. The trust that Bendigo earned is a key strength of Bendigo and its consumer base. In the wake of the GFC, trust is critical."
The collapse of Great Southern was always going to be a headache for Bendigo. While it had not directly lent money to Great Southern, or any of its subsidiaries, over the past six years it had lent more than $550 million to 8200 customers who had invested in managed investment schemes through Great Southern.
These loans are full recourse to each individual borrower, which means the loans are secured by woodlots, and if the bank can't get all of its money through a sale of the plantation trees or woodlots, it faces the messy and risky task of having to chase down each investor and get them to repay their loans individually. In some cases, this could mean the bank going after their homes.
To put it into perspective, Bendigo has a $38 billion loan book, and $510 million represents less than 1.5 per cent of that book. In 2009, their entire bad and doubtful debt charge was $80 million, with $24.5 million of specific and collective provisions held against the Great Southern exposure.
At June 30, 22 per cent of the Great Southern portfolio was in arrears, which is equivalent to $120 million. The specific provision balance of $15 million was only 12.5 per cent of the total arrears, which means that Bendigo at this date was expecting to recover the bulk of the outstandings on the arrears.
If Bendigo is wrong and is forced to write off $100 million in bad and doubtful debts from the MIS schemes, it would equate to 40 per cent of 2009 cash earnings.
Given Great Southern collapsed in May, and more and more law firms are preparing class actions on behalf of investors, it's a nightmare scenario. The more investors who enjoin the class action with MacPherson & Kelley, the more will default on their loan payments to Bendigo.
At last count there were more than 2000 customers enjoined in a class action, and the expectation is that it will get another leg up following a meeting on December 10 and December 23 when proposals concerning Pulpwood Plantations and Gunns ask investors to accept smaller distributions to complete the projects.
The legal cases challenge the validity of the loans on the basis that many investors were misled by Great Southern when they took out their loans.
Lawyers are trying to ascertain at what point Great Southern was obliged to tell investors it was in trouble - or insolvent. The feeling right now is that it was 2007, but it could have been as far back as 2005.
If these investors, plus others, are able to challenge the validity of the loans in the hands of Great Southern, then the bank has a $510 million problem on its hands.
Like other regionals, Bendigo is being squeezed by the cost of accessing the Government's guarantee on wholesale lending. It is also facing intense competition from the big banks in the residential home loan market and deposits.
It is no surprise then that its share price has gone backwards in the past year, in sharp contrast to the big four banks, which have enjoyed share price increases of more than 40 per cent over the same period.
Between bankrolling investors into MIS schemes and the rollout of community branches, some of which the company itself refers to as basket cases, the board will now, more than ever, need to protect its image.
