Westpac's lagging view of credit risk 'challenging'

Westpac’s manual and cumbersome reporting systems obscured its ability to monitor and report on its commercial property portfolio raising questions about what the bank learned from its near death experience in the 1990s.

According to a review performed by consultants EY in 2017, the data from the bank's commercial property portfolio was drawn from “manual spreadsheets” and “paper based files” and therefore "time consuming".

"Data used for risk reporting is difficult to extract due to the disparate sources, and in some cases, data residing in systems outside systems," the review found.

“This recently occurred with APRA’s requests regarding commercial property exposures ... it indicates pockets of a lack of systemisation and granularity of relevant risk data across divisions and portfolios."

While EY applauded the bank for its ability to drill down and conduct “deep dives” into its residential property portfolio on a suburb by suburb basis, it was having difficulty in responding quickly to requests from the regulator for more information about commercial property risks.

“Determining a view of the total credit risk exposure for Westpac via risk aggregation is challenging,” the review says.

“Group executives noted that CRO reporting across divisions is not consistent, making it difficult in practice to aggregate risk exposures across divisions and draw conclusions on where the total credit exposure for Westpac may be trending.”

EY says the issues were not dissimilar to those found within its mortgage approval processes after the bank discovered only one in ten of its lending controls was working after APRA launched a targeted review of the bank.

"This was partly attributed to the complexity of systems, multi-brand strategy and a lack of clear end to end process documentation for mortgage originations," the review said.

Despite being unable to respond to requests for more information about its commercial property risks in a timely fashion, EY would conclude the bank’s risk management framework was “overall adequate, appropriate and partially effective for an institution of its size and complexity.”

The notion that Westpac was not watching commercial property like a hawk twenty-five years after its near-death experience in the early 1990s seems almost unfathomable with one observer who declined to be named saying the corporate amnesia could only be the result of “greed and short termism”.

The Australian Financial Review understands the process to modernise the collection of commercial property data at Westpac is underway. The bank’s commercial lending team are experienced and take the view that the riskiest part of any commercial property transaction is at its origination.

The findings are part of a report conducted by EY under a regulatory standard known as CPS 220 which banks were required to conduct every three years. The 2020 update has been postponed until 2021 due to the coronavirus outbreak.

Macquarie University’s Elizabeth Sheedy said risk is a highly profitable sector for consultants leading many to pull their punches because they are afraid of upsetting the status quo.

“You need to communicate these matters with a bit more emotional impact,” Professor Sheedy said.

“In a lot of these reports the content is mildly critical and they go about it in such a gentle way. They don’t want to be seen as going too hard because they want to make sure they get the job next time around.”

Worryingly, the issues of financial risk within the bank weren't contained to commercial property risk either.

While EY's review of market, liquidity and funding risk was largely complimentary, describing it as "active in the management of its balance sheet", it did find systems in need of urgent replacement.

"There are instances where market risk systems are out of support with no clear decision for replacement," EY said.