Interest rate swaps sold to a North Island motel operator were unsuitable for it and "one-way traffic for the benefit" of Westpac, says a witness in a $3 million lawsuit.
Motelier Silveroaks Group has sued Westpac, claiming the bank made misrepresentations to get it to buy swaps that lost it $3 million.
Those swaps transactions, entered into in 2008, involved loans worth almost $15 million and allegedly locked two Silveroaks companies into comparatively high interest rates shortly before a substantial and protracted downturn in floating rates for commercial borrowers.
The motelier claims Westpac employees represented in October 2008 that interest rates for bank lending were likely to increase in the near future by significant amounts but made no adequate mention of the likelihood of rates decreasing.
It says Westpac's representations amounted to misleading and deceptive conduct. If not for this conduct, Silveroaks would have instead moved to floating rates and claims it has lost $3 million as a consequence.
Its lawsuit, seeking that amount in damages, began this week in the High Court at Auckland, which yesterday heard from banking consultant Morris Anderson, formerly of BNZ and giving evidence on behalf of the motel operator. He believed the swaps transactions were "completely unsuitable" for the financing needs of Silveroaks and the significant risks involved in the product were not presented in a fair and balanced manner.
Anderson said he agreed with Silveroaks that Westpac should have advised it to move to floating rates when its fixed rate loans expired and the promised interest rate savings from the swaps were "illusionary".
Anderson said ongoing monitoring of the swaps was essential but this was not adequately done by Westpac. On the other hand, Anderson believed the swaps products provided a clear benefit to Westpac, helping maintain liquidity and giving the bank the flexibility to increase margins.
"It was an attractive proposition for Westpac to push this product to customers to increase profitability ... the swap products were all one-way traffic for the benefit of the bank," Anderson told the court.
During cross-examination Westpac's lawyer, Michael Robinson, brought up examples of Anderson's evidence which he said were matters for the judge to decide. Referring to a product disclosure statement sent to Silveroaks' director before the swaps, which detailed the risks and costs of the transaction, Robinson asked if it was imprudent to ignore this document and Anderson accepted it was.
The case continues today.