Dragon Head Not Swayed By Theories On Merger

Sydney Morning Herald

Monday May 19, 2008

Danny John

THE chief executive of St George Bank, Paul Fegan, has denied that his group's supposed financial weaknesses brought on by the global credit crisis has made its $66 billion merger with Westpac both inevitable and necessary.

Mr Fegan, who succeeded Gail Kelly as CEO in November after his predecessor had been poached by Westpac, said market concerns about the pressure on both its margins and profits had been overdone in the wake of its most recent half-year financial results.

Lower than expected interim profit growth and a cut in its earnings guidance for the remainder of this financial year announced a fortnight ago brought to a halt a recent rally in the St George share price, which helped Westpac make its approach for an agreed merger that same week.

Banking analysts also highlighted the impact of the credit crunch on the Dragon's margins that had significantly pushed up the cost of borrowing for all banks. At the same time St George faces a bigger interest cost bill because its single-A rating restricts its ability to get a better lending deal from hard-pressed international markets compared with the AA level of the bigger banks such as Westpac.

Nonetheless, Mr Fegan, whose short reign at the top of St George has coincided with the worst global funding crisis in 30 years, told the Herald that the bank was still in "fine financial shape".

"It's been a very challenging four-to-six months, but we have come through it, and we have a very clear agenda [for growth]", Mr Fegan said.

In briefings to St George's largest institutional investors last week about the terms of the deal with Westpac, Mr Fegan emphasised he was confident about the bank's immediate prospects - with or without Westpac.

Addressing shareholder concerns about its latest financial performance in which the bank turned in half-year earnings of $603 million, he made clear that: The result was still a record in St George's 16-year history as a bank; It was just 3 per cent below the expected consensus figure of $619 million but still 6 per cent ahead of the corresponding period last year; The bank was still on target for its best-ever full-year result, which the market expected to come in at $1.25 billion; The slight cut in annual earnings guidance from 10 per cent to between 8 and 10 per cent was equivalent to just $13 million of profit for every percentage point; The 5 per cent fall in margins was purely the effect of holding more cash and liquid assets on its balance sheet - up nearly $8 billion to $17.7 billion - to counter the lasting effects of the credit crisis; The bank's costs had risen by less than 5 per cent compared with the corresponding period last year and had risen only 1.3 per cent compared with the previous six months, which covered the height of the recent financial turmoil.

As for the earnings guidance, Mr Fegan said it was an indication of how the bank was travelling but not an absolute forecast, and he did not believe it had proven to be a deciding factor in Westpac's move to seek the merger.

Having thrown his support behind the deal, Mr Fegan would not be drawn on his future if the 1.31-for-1 share swap offer to St George's shareholders goes ahead as planned. No discussions had taken place about the new management line-up, he said.

His comments came as St George's shares finished the first week of trading since Tuesday's announcement at a 2 per cent premium to Westpac's offer terms.

St George's stock was off 21c after Friday's sessions at $33.28, while Westpac closed 21c up at $24.86, putting a bid price on St George's shares of $32.56.