APRA, the Reserve Bank and ASIC should act today to force the board of the Bendigo and Adelaide Bank to fully disclose the entire exposure the bank has to the collapsed management investment scheme industry, not just the failed Great Southern.

But Great Southern will be the best place to start, especially with administrators for the failed group expected to detail the first estimates of losses and asset values at a meeting of creditors and investors in Melbourne today (it was due to start at 11am).

At the same time, a banking analyst at Citigroup has questioned the adequacy of Bendigo Bank’s provisions for potential losses on its $615 million of loans to investors in Great Southern, and the bank’s understanding of the concentration of risk in its loan book.

Citi’s Craig Williams wrote this morning:

While the market was aware that the ADB Portfolio funding business (in the old Adelaide Bank, which merged with Bendigo) had some substantial “partner” relationships, the end customers were claimed to be relatively diversified – hence mitigating perceived concentration risk.

However it is now clear that the performance of the “partner” is key to the ongoing performance of the end customers. As a result, concentration risk appears more abundant than management may have realised.

With the MIS schemes in jeopardy and returns to investors now dubious, it is likely that some will choose not to meet outstanding commitments on otherwise unsecured loans.

While it is impossible to quantify how much of the $600m exposure is at risk, the bank’s current individual and collective provision coverage of $78m (excluding GRCL of $79m) looks small by comparison.

His client note was issued after the bank’s disclosure yesterday that 8,200 customers had loans totalling $615 million for investments in Great Southern, while an associate, Adelaide Managed Funds, revealed on Monday that a further 4,200 investors had loans totalling more than $82 million.

Bendigo and Adelaide Bank is the responsible entity for Adelaide Managed Funds, and in February proposed a takeover of the funds management group.

That was knocked on the head in March by the key regulator, APRA, without further explanation to the market:

“In discussions with Australian Prudential Regulation Authority (APRA), APRA has advised the Bank of APRA’s position that it will not allow the Bank to proceed with the proposal,” Adelaide Funds Management’s statement said in part.

The Bendigo Bank and Adelaide Funds Management have so far not told the market why the regulator rejected the merger, one of the few that has been publicity knocked on the head in recent years.

Could the Great Southern involvement, and other funding of Managed Investment Schemes be a reason for this APRA rejection of the takeover? In any case, APRA, the Bank and the fund management company need to make a statement, especially now that there’s some unease about Bendigo’s level of exposure.

This morning in the Sydney Morning Herald, Elizabeth Knight revealed a further addition risk when she reported:

The list of victims of the failed managed investment scheme Great Southern continues to grow as new information paints a picture of a company that in the weeks before its demise was desperately attempting to stay afloat.

A couple of weeks before the end Great Southern undertook a partial sale of its loan book, to what is believed to be Bendigo Bank, for 38 cents in the dollar.

In other words, in a last-ditch move to raise money, it sold the loans made by it to investors at a discount price. It was an act of desperation by a company that was hanging on by its fingernails.

This raises the question: if it is Bendigo Bank, why was it so eager to keep Great Southern alive that it effectively ‘factored’ in a loan to Great Southern by buying receivables at a discount?

Were these loans picked up from great Southern included in yesterday’s statement? How many loans were purchased and will Bendigo have to make any cut in asset values as a result of Great Southern’s demise?

Bendigo itself signalled what it thought of the quality of the loans by buying them at a 62% discount. If it wasn’t Bendigo, then who bought the loans?