Executive Interview – Michael Rowan & John Vivian – Directors, First Commercial
(24 August 2004 – Australia) Financial services consultancy firm First Commercial Limited was created in 1998 to provide loan management services to Asian banks that had been impacted by the financial crisis a year earlier. The firm was formed around a nucleus of Michael Rowan, who held a number of senior management roles at Westpac, including five years as chief manager, Strategic Planning, for the bank’s international operations, and John Vivian, formerly of Citibank and one of Australia’s foremost experts on payments systems.
First Commercial’s concept lies in engaging consultant bankers with specialised skills and experience, who are given responsibility for the design, implementation and skills transfer on the projects they work on. According to the firm, its expertise is rooted in a "fundamental understanding of the operations, technologies, rules and regulations surrounding banking and finance".
The firm has worked extensively with financial institutions across Asia Pacific. Last year, it worked on the economic governance paper for the multi-donor task force in the Solomon Islands, prior to the arrival of the Australian police force. More recently, First Commercial oversaw the "transformation" of PNG based Bank of South Pacific (BSP) following its merger with PNGBC. Within the first 90 days the firm had reduced BSP’s cost per income ratio to 65 percent from 85 percent.
East & Partners executive editor Paul Bartholomew spoke to First Commercial directors, Michael Rowan and John Vivian.
How did the work with Bank South Pacific come about?
Michael: While doing some credit scoring and consumer work for BSP, we observed some issues where the bank was going to get itself into some difficulties if it continued the way it did. We made these points to the then CEO and to the board and they recognised the problems. They got us to undertake a project called "Follow the money trail" where we looked at the flows and activities inside BSP and saw that if the bank continued the way it did it was going to get into difficulty. From that we pre-planned the transformation effort and did all the pre work and launched it in January and said we’d go over there and set up the processes and work closely with them for the first 90 days, then we’d back off and let their executive manage it. We would then go back in July and do a review.
So what did you find when you looked more deeply into the way BSP was doing business?
Michael: We found that the high cost of contact personnel was killing them; they were meeting obligations in Aussie dollars but all they had was kina income and the kina was depreciating so they faced a big expense burden that was unsustainable. They didn’t really have any focus beyond integration of the old BSP, which was the remnants of the old National Australia Bank network, with PNGBC, the old Commonwealth Bank network. They had focussed on the integration of those banks but hadn’t taken the time to look beyond that.
They also had a serious expense crisis particularly in IT; there was a lot of conflict in the bank between people from the two merging banks and there was a suggestion that the good systems were being thrown out and the bad systems were being kept, so we had all those major conflicts to deal with. The bank was enjoying extraordinary returns from Treasury bills (t-bills) in the order of 20 percent and half the book was in t-bills and it was obvious that those rates weren’t going to stay around 20 percent and when they did drop the mass of cross subsidy between the retail bank and t-bills was going to be exposed and the bank would be in difficulty. As it is the t-bills are now down to eight, nine percent.
What was the reason for the merger of the two banks?
PNGBC got itself into a lot of financial difficulty, had to write off a whole load of debt and be recapitalised, so the government took the opportunity to do that and privatise it. Before that it went the way of many government owned banks in developing countries, where the politicians direct some of the lending, appoint the CEOs and boards. Lending is not done for normal commercial reasons; it’s done because there is a political expedient in making a loan which often doesn’t get paid and this is how the bank got into so much trouble.
Why has First Commercial been so successful working on these types of projects?
Michael: Because we’re bankers before we’re consultants and we really understand what’s going on inside a bank. We manage the whole transformation effort from start to finish, such as the whole redesign of BSP. Boards of these small banks understand that they don’t get a lot of executive depth in their banks as they can’t afford them; they can probably afford one or two and after that it falls away, so they don’t have the MBAs and a whole team of bankers with a rich array of skills. So, that’s where a firm like this comes in, and boards get a lot of comfort out of us coming in and running a rule across their bank and saying ‘these are the things you are doing well’, or ‘these are the emerging opportunities’, or more particularly ‘this is the crisis you’re about to face’."
What was it about the Asian crisis in 1997 that led to the formation of First Commercial?
Michael: There was substantial demand for these types of services and expertise because the Asians hadn’t experienced anything like it before; the banks were quite bloated on top of years of profit making, then all of a sudden they were challenged to manage both their losses and the implementation of much more efficient ways of doing things. So they needed help and in the end we were actually supplying people to the likes of Boston Consulting and AT Kearney to help them with consultancies they had by getting experienced practitioners in there and making sure implementation wasn’t a problem.
Since then you’ve been involved in some interesting projects in interesting places, including helping banks in Asia Pacific with money laundering issues.
Michael: The money laundering projects that we’ve been doing in the region are very interesting. People are beginning to recognise now what the problems are in the Pacific in terms of anti money laundering and the potential for terrorists to bring funds through the islands, so we’ve had a lot of work there. In this area, Lyle Proctor, who was head of supervision at the Reserve Bank of Australia, has been a great consultant for us.
This area must have become more important than ever in light of events over the past three years?
John: There’s been a lot of pressure on this for a number of years through FATF (Financial Action Task Force), which is the regional task force of the IMF, World Bank and they’ve put out their 40 principles which were expanded recently. But certainly the Patriot Act after September 11 put a lot of pressure on countries to apply and the compliance is driven by the major international trading banks, which won’t trade with banks unless they comply with some of the basic forms of anti money laundering, such as knowing your customer and understanding where the money’s coming from. Then there’s the broader aspect of it which is drugs and trafficking of people and arms and those aspects come out very clearly in the Asia Pacific context.
So are a lot of financial organisations currently going through this process?
John: Yes, particularly financial institutions in the Pacific who understand that unless they put these measures in place they’re going to be precluded from dealing with major Australian banks and major US banks, because major Australian banks won’t be able to deal with major US banks if they are dealing with non-compliant banks in other parts of the world. So the whole mood of compliance in terms of anti money laundering is driving a lot of consulting work, a lot of good work that needs to be done.
What other projects or areas of interest is First Commercial currently involved in?
Michael: I think the really interesting development that’s about to take place is the origination of business lending outside the banking system and the securitisation of this lending outside the banking system in a form that’s going to give the bank capital relief as well as funding relief. The difficulty is that financial institutions can hand off the credit management of housing loans which are fairly simple and get balance sheet relief for doing that, but it’s much more difficult to hand off the credit management of business and commercial loans and get balance sheet relief. So we’ve been working with a number of financial institutions on techniques to achieve that and I think that’s been the heaviest area of work over the past six to nine months, particularly because of the implications of Basel 2. That seems to be the next frontier.
The firm has worked extensively with financial institutions across Asia Pacific. Last year, it worked on the economic governance paper for the multi-donor task force in the Solomon Islands, prior to the arrival of the Australian police force. More recently, First Commercial oversaw the "transformation" of PNG based Bank of South Pacific (BSP) following its merger with PNGBC. Within the first 90 days the firm had reduced BSP’s cost per income ratio to 65 percent from 85 percent.
East & Partners executive editor Paul Bartholomew spoke to First Commercial directors, Michael Rowan and John Vivian.
How did the work with Bank South Pacific come about?
Michael: While doing some credit scoring and consumer work for BSP, we observed some issues where the bank was going to get itself into some difficulties if it continued the way it did. We made these points to the then CEO and to the board and they recognised the problems. They got us to undertake a project called "Follow the money trail" where we looked at the flows and activities inside BSP and saw that if the bank continued the way it did it was going to get into difficulty. From that we pre-planned the transformation effort and did all the pre work and launched it in January and said we’d go over there and set up the processes and work closely with them for the first 90 days, then we’d back off and let their executive manage it. We would then go back in July and do a review.
So what did you find when you looked more deeply into the way BSP was doing business?
Michael: We found that the high cost of contact personnel was killing them; they were meeting obligations in Aussie dollars but all they had was kina income and the kina was depreciating so they faced a big expense burden that was unsustainable. They didn’t really have any focus beyond integration of the old BSP, which was the remnants of the old National Australia Bank network, with PNGBC, the old Commonwealth Bank network. They had focussed on the integration of those banks but hadn’t taken the time to look beyond that.
They also had a serious expense crisis particularly in IT; there was a lot of conflict in the bank between people from the two merging banks and there was a suggestion that the good systems were being thrown out and the bad systems were being kept, so we had all those major conflicts to deal with. The bank was enjoying extraordinary returns from Treasury bills (t-bills) in the order of 20 percent and half the book was in t-bills and it was obvious that those rates weren’t going to stay around 20 percent and when they did drop the mass of cross subsidy between the retail bank and t-bills was going to be exposed and the bank would be in difficulty. As it is the t-bills are now down to eight, nine percent.
What was the reason for the merger of the two banks?
PNGBC got itself into a lot of financial difficulty, had to write off a whole load of debt and be recapitalised, so the government took the opportunity to do that and privatise it. Before that it went the way of many government owned banks in developing countries, where the politicians direct some of the lending, appoint the CEOs and boards. Lending is not done for normal commercial reasons; it’s done because there is a political expedient in making a loan which often doesn’t get paid and this is how the bank got into so much trouble.
Why has First Commercial been so successful working on these types of projects?
Michael: Because we’re bankers before we’re consultants and we really understand what’s going on inside a bank. We manage the whole transformation effort from start to finish, such as the whole redesign of BSP. Boards of these small banks understand that they don’t get a lot of executive depth in their banks as they can’t afford them; they can probably afford one or two and after that it falls away, so they don’t have the MBAs and a whole team of bankers with a rich array of skills. So, that’s where a firm like this comes in, and boards get a lot of comfort out of us coming in and running a rule across their bank and saying ‘these are the things you are doing well’, or ‘these are the emerging opportunities’, or more particularly ‘this is the crisis you’re about to face’."
What was it about the Asian crisis in 1997 that led to the formation of First Commercial?
Michael: There was substantial demand for these types of services and expertise because the Asians hadn’t experienced anything like it before; the banks were quite bloated on top of years of profit making, then all of a sudden they were challenged to manage both their losses and the implementation of much more efficient ways of doing things. So they needed help and in the end we were actually supplying people to the likes of Boston Consulting and AT Kearney to help them with consultancies they had by getting experienced practitioners in there and making sure implementation wasn’t a problem.
Since then you’ve been involved in some interesting projects in interesting places, including helping banks in Asia Pacific with money laundering issues.
Michael: The money laundering projects that we’ve been doing in the region are very interesting. People are beginning to recognise now what the problems are in the Pacific in terms of anti money laundering and the potential for terrorists to bring funds through the islands, so we’ve had a lot of work there. In this area, Lyle Proctor, who was head of supervision at the Reserve Bank of Australia, has been a great consultant for us.
This area must have become more important than ever in light of events over the past three years?
John: There’s been a lot of pressure on this for a number of years through FATF (Financial Action Task Force), which is the regional task force of the IMF, World Bank and they’ve put out their 40 principles which were expanded recently. But certainly the Patriot Act after September 11 put a lot of pressure on countries to apply and the compliance is driven by the major international trading banks, which won’t trade with banks unless they comply with some of the basic forms of anti money laundering, such as knowing your customer and understanding where the money’s coming from. Then there’s the broader aspect of it which is drugs and trafficking of people and arms and those aspects come out very clearly in the Asia Pacific context.
So are a lot of financial organisations currently going through this process?
John: Yes, particularly financial institutions in the Pacific who understand that unless they put these measures in place they’re going to be precluded from dealing with major Australian banks and major US banks, because major Australian banks won’t be able to deal with major US banks if they are dealing with non-compliant banks in other parts of the world. So the whole mood of compliance in terms of anti money laundering is driving a lot of consulting work, a lot of good work that needs to be done.
What other projects or areas of interest is First Commercial currently involved in?
Michael: I think the really interesting development that’s about to take place is the origination of business lending outside the banking system and the securitisation of this lending outside the banking system in a form that’s going to give the bank capital relief as well as funding relief. The difficulty is that financial institutions can hand off the credit management of housing loans which are fairly simple and get balance sheet relief for doing that, but it’s much more difficult to hand off the credit management of business and commercial loans and get balance sheet relief. So we’ve been working with a number of financial institutions on techniques to achieve that and I think that’s been the heaviest area of work over the past six to nine months, particularly because of the implications of Basel 2. That seems to be the next frontier.
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