BANKSIA Securities may have been trading insolvent for some time before the lender collapsed due to outdated and lazy valuations of its mortgage portfolio.
And it has emerged that the corporate regulator raised concerns about Banksia's position as early as May - five months before the board and trustees froze more than $660 million in assets and appointed receivers. While the non-bank lender was profitable in the past three years it had underestimated bad debts by about $34 million, was "thinly capitalised" and had "significantly understated" its impairments to regulators, according to an investigation by receivers McGrathNicol.
"From our analysis of [Banksia's] loan book . . . it is clear that the company is insolvent and may have been insolvent for some time prior to our appointment," noted a report to debenture holders released on Friday. Banksia's property valuations were based on property prices in 2008 and 2009 and were often based on council rates notices.
This caused irregular valuations and made Banksia underestimate potential defaults because property prices in regional areas have decreased significantly in the past four years. About 46 per cent of Banksia's money was loaned out for residential properties, which are normally low risk.
"[However], we note that many of these properties are development projects, vacant land, unimproved land (residential subdivisions) and are based in regional locations," the receivers found.
Both the Australian Securities and Investments Commission and Banksia's trustees, The Trust Company, raised concerns about the lender's financial reports in May, according to McGrathNicol. On October 24, Banksia management revealed its own internal review found bad debts were likely to rise from an expected $6.45 million to $40 million - putting Banksia into the red. Receivers were appointed the next day.
Receivers have since found that $82 million worth of loans were already in default at this date and a further $146 million were overdue by between six and 90 days.
Debenture holders were paid 20? on Friday for every dollar they invested in Banksia and should get another 5? to 10? by June 2013. They have been told to expect a maximum of 65? in the dollar. McGrathNicol said it planned to sell the loan portfolio in early 2013 if the bids are better for debenture holders than waiting for the loans to be paid off naturally,
It has also emerged that Banksia invested $2.5 million in collateralised debt obligations issued by former Wall Street investment bank Lehman Brothers and a $400,000 stake in another regional lender Southern Finance Limited. Southern Finance and Banksia have the same trustees, who recently took court action to freeze Southern Finance's assets until it is sold to Bendigo and Adelaide Bank.