Bankwest was overly optimistic about its business loans and failed to act on early warning signs of problems, the banking royal commission has heard.
Bankwest aggressively targeted business loans for commercial property, particularly on Australia's east coast, in the lead-up to the global financial crisis.
Within a few months of buying Bankwest for $2.1 billion at the height of the GFC in December 2008, the Commonwealth Bank discovered the Perth-based bank's business portfolio was in a worse state than it had expected.
A detailed review of 1200 Bankwest business loan files, dubbed 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.
The royal commission heard one of the issues identified by mid-2010 was Bankwest was overly optimistic in managing its business loan exposures.
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, a July 2010 Bankwest document shows.
CBA chief risk officer David Cohen agreed a problem with the Bankwest loan book was there were a lot of loans made on the east coast in the lead-up to the GFC, when the market was at its peak.
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, Project Magellan found.
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," Mr Cohen said on Wednesday.
Mr Cohen is the most senior executive of any bank to appear at the royal commission.