St George Annual Cash Rises Before Merger

The Age

Thursday October 30, 2008

ERIC JOHNSTON, FINANCIAL SERVICES EDITOR

ST GEORGE Bank has defied financial market turmoil to deliver a 13.9% jump in annual cash profit, with the fifth-biggest lender attempting to go out on a high before being folded into Westpac.

The earnings lift, helped by a slowing costs and fast-paced lending growth, places St George at the head of the pack in terms of profit among the major banks.

While smaller banks have been having a tough time in the face of the credit crunch, analysts claim St George has been insulated from the worst of the crisis since it agreed to merge with the bigger Westpac in May in a $17.5 billion deal.

Still, chief executive Paul Fegan yesterday insisted the latest result would have been no different had the merger not been going ahead.

"We've managed the bank very well. The environment has been very tough on funding and liquidity ... but we've run the bank for St George shareholders," Mr Fegan said.

St George's cash profit of $1.32 billion for the year to September 30 was up from $1.16 billion a year ago.

Earnings were bolstered by an almost 30% growth in lending to small and mid-sized business, while a 12% increase in housing loans was in line with the broader market.

Several one-off items clouded the profit, including a $54 million windfall from the sale of its share in credit card provider Visa, but this was more than offset by costs including those related to the merger and other restructuring charges.

Like most banks, St George experienced a sharp run-up in provisions to cover souring loans.

Total impairment expenses ran up 63% to $291 million, with specific provisions making up the bulk of this charge as it wrote off a number of impaired consumer loans and was hit with a large margin loan loss.

St George also has exposure to a number of companies under pressure, including Allco Finance Group and Centro, although it said these loans were secured and continued to be paid.

Stripping out some one-off items in the second half, St George's profit growth was closer to 4%, which was "still a creditable performance given the economic climate the bank endured", brokerage EL & C Baillieu told clients.

Rather than marking the end of St George, a former building society, Mr Fegan said the Westpac acquisition represented a "new chapter" for the business.

Westpac, which is expected to deliver at least a 6% lift in cash earnings this morning, has already received regulatory approval for its planned merger, with a shareholder vote next month expected to endorse the deal.

Westpac has promised to keep St George's brand and branches.

Key to St George's latest profit is its tier-one ratio - that is a measure of the bank's capital strength - coming in at 6.57%, just above its minimum of 6.25% and well below its rivals.

Analysts believe that, without the implicit backing of Westpac, such thin coverage would be unsustainable in the current environment.

For St George, a lower ratio frees up capital to redeploy into areas of the business that generate income, such as writing new loans, as other banks have been cutting back on lending.

Still, Mr Fegan said if the bid failed the bank would seek to raise funds by underwriting its next two dividend reinvestment programs.

Providing a boost to earnings was St George's 0.3% drop in expenses in the year.

The bank's costs fell away at a faster rate during the second half as the company put a number of investment projects on hold given the looming merger.

Group-wide revenue grew 9.4% while net interest margin, a measure of St George's profitability, fell 10 basis points to 1.91%, mostly as a result of the higher cost of attracting long-term funding.

Fast-paced revenue growth translated to a cost-to-income ratio of 38.7%, making St George the most efficient bank in the country.

St George declared an 8-a-share increase in final dividend to 94 a share, while the bank also declared a special dividend of 31 a share as part of its a revised merger agreement with Westpac.

ST GEORGE BANK

FULL-YEAR RESULT

Cash profit: $1.321bn + 13.9%

Revenue: $3.579bn + 9.4%

Final Dividend: $1.25 (total $2.13)

DIVIDEND PAYMENT DATE: DECEMBER 18