Dragon Rethinks Guidance Policy

Sydney Morning Herald

Thursday May 8, 2008

Danny John

ST GEORGE Bank is to review its long-standing policy of giving investors profit guidance after a dip in its expectations of reaching $1.3 billion in earnings this year resulted in its shares taking a battering for a second day.

The poor response to both the cut in its earnings target and its smaller than expected half-year profit of $603 million has prompted the chief executive, Paul Fegan, to rethink the financial target it puts out to the market.

St George is the only top-five ASX-listed bank to disclose as much as a year in advance what it expects to achieve over the coming 12 months.

That was less of a problem when the economy was doing well, but the sudden slide in both equity and financial markets in the past six months led the bank finally to admit on Tuesday that it would undershoot its expected 10 per cent target and come in with a rise as low as 8 per cent.

Having as late as last month built up market expectations that it was still on target, the disappointment of a half-year profit result that missed analysts' hopes by as much as $23 million was exacerbated by the cut in earnings guidance.

The immediate pain was felt by St George's shareholders who, despite a 6 cent rise in the interim dividend to 88c a share, saw their stock punished again yesterday, with an even steeper fall of 93c after the initial slide of 76c on Tuesday.

That took the combined drop to 6.2 per cent in value as St George finished the day's trading at $26.05, a slide that halted the recent recovery in its share price and those of its rivals after the heavy falls since November.

Mr Fegan told the Herald he would "weigh up the benefits" of producing future guidance, although he stressed that the bank's hoped-for target was an indication, not an absolute forecast, of what it would achieve.

He accepted that such targets were a high hurdle to set, especially when a well-performing economy started to slow down, but added that the most recent guidance had been given in "good faith".

Nonetheless, Mr Fegan faces the task of restoring investor confidence in St George's immediate prospects after market analysts continued to doubt if it would achieve its now lower target.

The half-year outcome even prompted analysts at Deutsche Bank to advise clients to sell down their holdings in St George, saying its recent stock price, compared to its rivals, "does not look justified".

The bank's performance also led to a tough day of trading for its rivals.

ANZ, Commonwealth Bank, Westpac and National Australia Bank were left rueing slides of between 2.6 per cent and 3.1 per cent as investor nervousness increased about future financial performances.