Community Comes First for Hirst

Dealing with a diverse range of characters playing Aussie rules football helped CEO Mike Hirst guide the Bendigo and Adelaide Bank through the troubled waters of the GFC, writes Tom Skotnicki

It is rare that a chief executive reflecting on his management career nominates football as one of his critical influences. After many years as a country Australian rules footballer and coach, Bendigo and Adelaide Bank CEO Mike Hirst told Mt that football provided him with practical leadership experience that proved vital in steering the bank through the difficult post-GFC period.

Bendigo and Adelaide Bank could have been in trouble in the wake of the global financial crisis. The board had probably paid over the odds for the 2007 acquisition of the Adelaide Bank, which was completed only months before the effects of the GFC began to be felt internationally. Adelaide Bank was primarily a player in wholesale banking markets, the area worst affected by the sub-prime crisis that originated in the United States.

Hirst, who has worked in banking and finance since completing his commerce degree at Melbourne University in the late '70s, became CEO of Bendigo and Adelaide Bank in 2009. He admits this was a tough time, and explained the bank was eventually forced to write down much of the goodwill associated with the purchase of the South Australian bank, significantly depressing profitability in 2011-12.

However, the capacity of the bank to bounce back was a tribute to the fundamental strength of the operation and its commitment to local communities. Hirst freely admits that the bank owes an enormous debt of gratitude to his predecessor Rob Hunt, who in 21 years transformed a regional building society to a player in the national banking market with almost 500 branches.

The "community bank" approach, first trialled in the late 1990s as a response to regional branch closures by the major trading banks, has since progressed into what can only be described as a sophisticated franchise operation.

"Community banks aggregate the demand for local banking services so they can build a revenue stream to assist the community balance sheet," Hirst tells Mt at his Bendigo office.

The first step in establishing a community branch is a town meeting, followed by a feasibility study which, depending on the outcome, leads to the issuing of a prospectus. "A company is then formed by the local community. We require broad community ownership so it is not about making 10 people wealthy but adding to the wealth of the community," Hirst says. Once the capital is raised, there is a period during which the company is required to get firm commitments for business onto the books before the branch is opened.

"A lot of hard work is involved in that, but we want to be adding to the wealth of the community, not detracting from it, so we don't want them putting money into something that will not be successful."

The profits that flow are then split equally between the local company and the bank. However, the company shareholders receive only 20 per cent of profits, with the remaining 80 per cent invested for community benefit, Hirst says.

Interestingly, the financial institution, which traces its antecedents back to the early days of the Victorian gold rush, refers to a 100-year outlook for the business.

"Decisions that we make today have to be about sustainability of the business over time so we don't take decisions to cut costs lightly, no matter what."

At the same time, Hirst recognises that change is inevitable and has no doubt that the digital world will play an ever-increasing role in banking, despite Bendigo Bank's strong emphasis on bricks and mortar.

"We believe in a bricks and clicks strategy. We are currently working through a new mobile platform for our retail business. We certainly think there will be greater convergence between banking and digital business and so we have a significant share of a payments business and our own telco operation."

However, Hirst admits to being in the dark about the precise shape that convergence will eventually take.

"The technology is just moving so quickly. At a time when we were looking at enhancing our online capacity, we realised we needed to shift those resources to a mobile platform."

Hirst says despite the major trading banks having about 85 per cent of the retail market, historically that has been closer to 80 per cent.

"The evidence is that 20 per cent of Australians would rather bank with someone other than the major banks. However, you must be able to offer a differentiated proposition, you can't fight the majors on their strengths. Our differentiated proposition is our engagement with customers and their communities."

Hirst contributes much of his professional success to his involvement with Australian rules football. He played his last game of first-grade football in 1998 at the age of 39. However, he made a comeback in 2009 in the Masters Games in Geelong as a captain-coach and ended up winning the competition with a scratch team he assembled from teammates he had played with over the years.

"You have to give continual feedback to get a football team to improve and you have to do it instantly. You have so many different characters; you have to manage all their personalities and backgrounds. Particularly when I coached Sydney Uni, there was everything from concreters to a Queen's Counsel. It was a really diverse group that you have to mould into a team by your leadership. I have no doubt the lessons I learned from my successes, but particularly my losses, have played a significant role in shaping my career as a manager."

He says it is no coincidence that many corporates are turning to people with sporting backgrounds to help create cohesive teams.

"When you think about it, in the two hours in which a game is played, the management techniques can be very intense and can provide a platform for broader management experience."

Hirst believes in having a flexible approach to staff and adjusting to different circumstances. He says there is no such thing as a one-size-fits-all approach with staff, as individuals have different triggers that need to be understood to maximise outcomes. At the same time, Hirst believes in a "one team" approach and although people should be encouraged to voice opinions, once a course of action is determined everyone should rally behind it.

"To be honest we probably do not do as much as we should in training for our staff. We do have a leadership course and some management courses within the bank," he says.

However, he is a strong believer in on-the-job experience, although he accepts the company may need to re-evaluate its support, particularly for junior managers.

One of the major sources of training is in the branch structure, where managers have clear targets and significant bottom-line responsibility. This includes the almost 300 community branches in 230 communities. New branches are opening at a rate of about 20 a year. The community model has proven so successful that since its inception the total returns to local communities from the profits generated exceed $100 million. Community banks are now generating profits of close to $15 million a year. Hirst says they have proved invaluable to many local communities. He says once people headed out of town for their banking, many stopped buying at other businesses, such as the grocers, butchers and hairdressers.

Hirst says about five years ago, the Bendigo model changed from predominately a replacement for closed local branches to a source of revenue for local communities, as more towns and suburbs recognised it as an opportunity to access a revenue stream to help build local assets. It has also grown in popularity in suburban areas, with about half of all community branches now located in suburbs (frequently abandoned by the major banks).

The Bendigo community bank concept has not been replicated by any other bank or financial institution.

The local community has to raise about $750,000 to cover cost of premises and fit-out, employment of staff and running costs until the branch becomes cash-flow positive, which Hirst says usually takes three years. Bendigo and Adelaide Bank provides all banking services, capital guarantees and systems. "At the end of the day (the community bank) is a franchise and you can't tell the difference between the service and product between a community and company site, because we like to think all the staff are equally committed to service."

He says company sites also tended to become involved in the community, with the bank putting an emphasis on local sponsorships and volunteering. Hirst says the establishment of community banks is handled by a special team of about 50 staff, but once a community branch is established it becomes part of the responsibility of the normal management stream. Community and company sites report through to regional managers.

He has not heard of the major banks specifically seeking to replicate the community banking model but says he likes to think it had an influence on the decision of the major trading banks to slow the rate of branch closures.

Hirst, who has worked for the bank since 2001 and was head of retail banking before succeeding to the top job, admits the past five years have been tough due to slow growth and writedowns in wholesale banking.

The last half of 2011 saw a writedown of the bank's wealth business of $90 million, mainly relating to the margin lending business operated by the Adelaide Bank. Margin lending has deteriorated from a peak of $8 billion to about $2.1 billion.

However, Hirst says cash earnings have been relatively steady, with an underlying growth in the last reporting period of 3 per cent. It is a performance with which he is pleased in a market where margins are being squeezed and the cost of deposits are increasing. He says the bank managed to contain its costs. "Given the difficulties of recent years, with rapid falls in margins, lack of growth and rising credit concerns, our bank and the system more generally have fared remarkably well.

"On a cost-to-asset basis, Bendigo is competitive with the other banks, which is generally regarded as a measure of efficiency, while on the other main measure of cost-to-income, we are higher than the major banks, but we would say this is because we offer a premium service and a premium service requires a higher-cost model. However, we think that is vindicated by the high levels of customer satisfaction with our service."

Despite the poor timing of the acquisition of the Adelaide Bank just weeks before the GFC, Hirst is proud his was the only Australian bank not to have used the government guarantee for wholesale funding and one of very few banks internationally to receive a credit upgrade after the GFC.

Hirst says some of the criticism of the acquisition ignores the long-term benefits. It has proven to be relatively efficient, with a 35 per cent reduction in combined administration costs as a result of synergies, while in the past few months the retail business of Adelaide (its 125,000 customers) have been fully integrated with the Bendigo operation.

However, by far the most important benefit is that almost half of the Bendigo mortgage book is derived from the wholesale activities acquired as a result of the merger with the Adelaide Bank.

Hirst admits while the margin lending business of Adelaide Bank has proven extremely volatile and problematic (although he insists the bank has maintained a loyal customer base), this has not been the case with the third-party mortgage business. He says the mortgage operation, where it works with mortgage brokers, is likely to prove to be a long-term strength of the bank.

"Forty per cent of Australians want to obtain their mortgage through a broker. If we don't have that third-party business then we are cutting ourselves off from 40 per cent of the market. That is why CBA bought Aussie Home Loans and Westpac bought RAMS and NAB owns part of Home Loans Limited."