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Australian banks not absorbed into any of the major national banking groups

3.3 The Australian banking system

3.3.2 Narratives on Australian banks in data base

3.3.2.6 Australian banks not absorbed into any of the major national banking groups

injections of capital by R&I Holdings, the formal owner of R&I Bank on behalf of the state government. R&I Holdings itself had to borrow these funds.

The 1994 name change from R&I Bank to Bank of Western Australia (Bank West) led the way to the full scale privatisation of the bank. In December 1995, Bank of Scotland acquired a 51% cornerstone stake in Bank West with the balance floated to the public in February 1996. In the subsequent years Bank West’s Scottish owner steadily increased its holding. Finally, Bank of Scotland’s successor HBOS, which itself had been formed in 2001 as a result of the merger between Bank of Scotland and the Halifax, moved to full control in August 2003. Accordingly, Bank West no longer publishes detailed financial accounts. Some key figures of P&L and

balance sheet as well as the levels of provision are, however, disclosed as part of HBOS’s annual segment reporting.

3.3.2.6.2 Primary Industry Bank of Australia

Primary Industry Bank of Australia (PIBA) was created under the Primary Industry Bank Act 1977 jointly by the Commonwealth government, the four major trading banks and the state banks as part of an electoral promise to the rural sector to have its own bank (Metcalfe, 1984).

PIBA was operating purely as a refinance institution during the first decade of its existence, i.e.

the shareholding banks were lending on its behalf but could then refinance these rural loans at special terms with PIBA32. The characteristics of PIBA’s pre-1987 business means that its lending was not effectively subject to credit risks associated with the ultimate borrower before 1987 and no meaningful loss and provisioning data could thus be gathered for this period.

When the government indicated its desire to dispose of its PIBA stake in 1987, R&I Bank of Western Australia expressed an interest and the other shareholder agreed to sell their stakes as well. R&I Bank, later operating under the Bank West name, retained PIBA as a separate entity.

32 PIBA itself was provided financial assistance by the Commonwealth by means of low-interest deposits with the bank.

PIBA was granted full banking authority in June 1987 and initiated direct lending, diversifying into corporate and commercial loan segments. Its credit losses remained at moderate levels throughout the crisis of the early 1990s.

In the context of the privatisation of its owner Bank West (renamed from R&I Bank), PIBA was then sold to Dutch Rabobank Group (Rabo) in October 1994. Rabo continued to operate the business under the PIBA brand name for the subsequent nine years to 2003 when PIBA's name was changed to Rabobank Australia Limited (Rabobank, 2006). Unfortunately, PIBA ceased publishing full standalone financials once it became part of Rabo.

As to PIBA’s operations in New Zealand, these were initiated in 1989 with the granting of a banking license. By the time Rabobank became PIBA’s owner, it had grown the NZ loan book to NZD 150 million which it managed from Sydney. Its New Zealand presence provided Rabo an entry into the NZ rural finance sector.

3.3.2.6.3 Suncorp (formerly Suncorp Metway, Metway Bank)

Queensland-based Metway Bank started business on 1 July, 1988 following conversion from Metropolitan Permanent Building Society which had been founded 33 years earlier (Metway Bank Annual Report, 1992). In 1990, Metway Bank acquired Prudential Finance Limited and, in 1992, the Household Building Society (Suncorp, 2006). In 1996, the Queensland Government-owned insurance company Suncorp and Queensland Industry Development Corp (QIDC) entities were merged into the publicly listed Metway Bank to create the new banking and insurance group Suncorp Metway. The Queensland state government was initially the largest shareholder of the new group with a 68 percent holding but by 2000 it had sold its stake in a series of instalment note placements.

In the meantime, Suncorp has simplified its name by dropping ‘Metway’ from its logo in 2002 and currently claims to be the sixth largest banking group in Australia (Suncorp annual report 2005). Both its insurance and banking operations contribute about equally to its bottom

line. This dual structure increases the difficulty of extracting bank specific data for this entity even though segment disclosure has greatly improved over the past few years.

3.3.2.6.4 Bank of Queensland (BOQ)

BOQ was established in 1874 as The Brisbane Permanent Benefit Building and Investment Society, the first permanent building society formed in Queensland but soon thereafter, in 1887, converted to a bank and then in 1942, following mergers with other Queensland-based financial institutions, to a trading bank. The name Bank of Queensland was adopted in 1970, one year before it listed on the Australian Stock Exchange (BOQ, 2006).

In 1996, Bank of Queensland stayed independent and did not to join the merger of Suncorp and Metway Bank arranged by the Queensland government. This was despite the fact that, at the time, the Queensland government held 44% of the bank33. However resistance by the bank’s management, who saw Metway bank as a rival, as well as the possible need to buy out the remaining shareholders prevented the transaction (Bowen, Daley, & Huber Jr., 1982). As part of the merger arrangements, the Queensland government committed itself with the federal

authorities to disposing of its BOQ shareholding. This was completed through a public offering in December 1999 (Queensland Audit Office, 2000, p. 95).

BOQ’s retail banking activities have always been its core focus despite some small scale diversification of its earning stream. Most of its branches, whose number has doubled over the past five years, are still in Queensland. Much of this recent growth has been achieved through a franchising scheme called ’Owner-Managed Branches (OMB)’, mainly set up to originate mortgage loans, including in other states of the East coast.

33 The Queensland government held slightly less than 50% of BOQ throughout the 1980s and up to this transaction (from BOQ annual reports)

3.3.2.6.5 Bendigo Bank / Elders Rural Bank

Bendigo Bank (Bendigo) is a regional bank operating predominantly in Victoria which has its roots in the Bendigo goldfields. It was founded there as the ‘Bendigo Permanent Land and Building Society’ in 1858 (Bendigo Bank, 2005). Since the early 1980s it has expanded through a number of acquisitions, mainly of other building societies. By the time it converted to a bank in 1995, it had grown into Victoria's biggest building society. Unlike other building societies in its home state, e.g. the Pyramid group of building societies which had to rescued by the state government in 199034, Bendigo came out of the recession relatively unscathed. This is reflected by the support it received from the Victorian government which helped it acquire two other building societies at the time (Bendigo Bank, 1996, p. 5).

A special innovation of Bendigo have been the so-called community banks where since 1998 smaller local communities, many of whom had lost their local bank branch through closure, are able to form a company to operate it as a franchised Bendigo Bank branch. Bendigo provides banking support and revenue is shared with the locally owned company. By August 2005, 159 of these branches were operating, i.e. more than half of the total 310 Bendigo branches at the time (Bendigo Bank, 2005).

Finally, Bendigo is associated with Elders Rural Bank which it owns in a 50/50 joint venture together with Futuris Corp., the holding company of Elders group35. Elders Rural Bank, a specialist rural financial service provider and lender, was incorporated in January 1999 and the banking licence granted in 2000. Bendigo provides it with the banking systems and Elders with a

34 During the mid-1980s, competing with banks and offering attractive interest rates, the Pyramid Building Society’s problem was that it branched out from its traditional lending area - namely, a building society lending for home loans - and lent money to developers of projects such as hotels, motels, guest houses, office buildings, caravan parks and other resorts around Australia (K. Davis, 2004, p. 242, 243).

The building society was then not able to sustain the crash on the commercial market as many of its borrowers had gone broke in the recession.

35 Bendigo Bank accounts for Elders Rural Bank under the equity method, i.e. without full consolidation.

network of more than 400 branches in all Australian states (status March 2006). Elders Rural Bank had AUD 2.6 billion in assets in June 2005 compared to AUD 13.3 billion in assets for Bendigo.

3.3.2.6.6 Adelaide Bank

Adelaide Bank is a South Australian based institution born out of the building societies movement36. Incorporated as the Co-operative Building Society of South Australia in 1900, it had a relatively conservative risk profile going into the economic crisis of the early 1990s. At this time, it merged with, or rather de facto acquired two other South Australian building

societies, the larger Hindmarsh Adelaide Building Society and the small REI Building Society37, both of them struggling with the impact of the recession. This transaction almost doubled the co-operative’s size and provided the basis for its listing on the ASX and then conversion to become Adelaide Bank at the beginning of 1994 (Adelaide Bank, 2006).

Most of Adelaide Bank’s exposure is still to the housing market, although with only 25 branches it originates most of its loans through third party mortgage brokers. This means it is largely a wholesale mortgage lender. Currently, it has lending exposure to all Australian states and just a quarter of the lending is to South Australian borrowers. A substantial part of its lending is of non-prime nature by way of more risky so-called ‘low-doc’ mortgage loans38.

The institution has two other special features. Firstly, it is involved in margin lending which started in 2000 with its acquisition of Leveraged Equity Ltd., the margin lending business

36 It is completely separate from Bank of Adelaide which had to be rescued by ANZ in 1979.

37 The SA Government directed the Co-operative to take over REI after accounting irregularities had been uncovered that overstated REI's profits and an audit had determined that more than half of REI’s assets had evaporated within a year.(Baker, 2000, p. 66; Darvall, 1991).

38 Low-doc or low documentation loans are loans to borrowers like self-employed people who do not have the documentation required to get traditional home loans.

of stock broking firm Ord Minnett. Secondly, starting in 1996, Adelaide Bank has become increasingly reliant on funding through securitization of loan assets. By mid 2005, Adelaide Bank serviced off-balance sheet securitized assets of AUD8 billion, corresponding to just below 60% of its total assets. Under new international financial accounting standards (IFRS) these off-balance assets will be recognized on the off-balance sheet with the annual accounts of 2006.