Bankwest was overly optimistic about its business loans and failed to act on early warning signs of problems, forcing its new owner the Commonwealth Bank to go "back to basics".
Within a few months of buying Bankwest for $2.1 billion at the height of the global financial crisis in December 2008, CBA discovered the Perth-based bank's business portfolio was in an even poorer state than it had expected.
Bankwest aggressively targeted loans for commercial property, particularly on Australia's east coast, when the market was at its peak before the GFC, the banking royal commission heard.
CBA chief risk officer David Cohen agreed that one of the problems was Bankwest was overly optimistic in managing its business loan exposures.
CBA's 2010 review of 1200 Bankwest business loan files - Project Magellan - led to a 15-20 per cent reduction in security valuations across the business portfolio reflecting the poor quality security for loans on the east coast.
The valuations relied on to support the loans were undertaken at or near the top of the cycle in 2006 to 2008 and there had been a significant deterioration in asset valuations, a July 2010 Bankwest document noted.
The commission heard there was evidence of a failure to take decisive action on early warning signs, such as loan covenant breaches and earnings shortfalls, against expectations there would be independent reviews or revaluations of assets.
Mr Cohen said the ongoing management of loans, before they became troublesome or impaired assets, was lacking.
"The lack of active ongoing monitoring of a loan had led to a failure to take action when early warning signs arose," he said on Wednesday.
After Project Magellan, Australia's largest bank embarked on another project - Sonic - to implement a "wholesale change of strategy" for Bankwest that included training its business bankers and the type of commercial loans it wrote.
"That new strategy was known as straightforward banking and it was, in effect, a return to the basics of business banking by Bankwest business banking," Mr Cohen said.
Project Magellan led to total provisions for loan losses being increased from $1.28 billion to almost $2.1 billion in the 2009/10 financial year, with an auditor concluding the process adopted by management was robust and prudent.
CBA's treatment of Bankwest business customers has been the subject of much controversy over the past decade, but the royal commission rejected claims Australia's biggest bank had some ulterior motive when it called in a number of commercial loans.