St George To Buck Bank Blues

The Age

Monday August 11, 2008

Danny John

ST GEORGE Bank will see out what is looking increasingly like its last few months as an independent institution on the back of predictions of a record final full-year profit.

Despite the turmoil caused by the global credit crisis, its impending merger with Westpac and the ignominy of an earnings downgrade in May, St George is expected to reveal tomorrow that it remains on track to hit its revised profit target for its 2008 financial year.

The country's fifth-largest bank is set to confirm in a trading update that its cash earnings per share will come in at between 8% and 10% higher than last year, even though the domestic economy has turned down sharply since it last reported its results in May.

On that result when St George closes its books on 2008 at the end of September, it would top its $1.16 billion profit result of a year ago. It is the only one of the top five banks to give an annual forecast of what it expects its earnings will be in the coming financial year.

The bank turned in a net $603 million at the interim stage - another record for a half-year - but warned it wouldn't meet its previous guidance of 10% growth because of economic factors including the impact of the global credit crisis and the sharemarket turmoil on its investment portfolio.

St George will also confirm significantly tougher trading conditions, a statement in line with Westpac's disclosures on Friday that lending and wider economic growth have dropped off at a much faster rate than previously expected.

But the Dragon is also likely to indicate that its arrears levels and charges for bad debts have not risen as dramatically as some of its rivals, particularly ANZ and National Australia Bank, which have made provisions of as much as $2 billion between them to cover loan problems.

In that regard, St George's experiences are more likely to match those of its fellow NSW-based competitor Westpac, which agreed on a friendly $17billion merger with the Dragon shortly after the half-year profit announcement.

St George's shareholders are due to vote on that deal in November, and if they agree, the merged banks will become the largest such institution in the country, outstripping the current market leader, Commonwealth Bank.

Market watchers seeking a more accurate picture of how much the economy's slowdown is affecting the big banks will be closely analysing chief executive Paul Fegan's comments about St George's trading position.

ANZ and NAB have both warned of profit falls totalling $1.4 billion but Westpac's more optimistic trading statement has helped counter the gloom.

Westpac expects a slight boost to its record earnings last year of $3.5 billion.

St George has already given a hint of its position in a little-noticed announcement to the Australian Securities Exchange immediately after NAB's revelations about its $830 million write-downs on investments linked to US subprime housing loans.

"Credit quality in consumer banking remains excellent, with arrears performance solid," St George said in its statement two weeks ago, as it sought to put distance between itself and problems such as NAB's.

"Overall credit quality in banking business remains strong."

Analysts searched for an early taste of St George's latest update by querying the bank's former chief executive, Gail Kelly, at her new employer, Westpac, on Friday during Westpac's third-quarter update.

Ms Kelly reiterated that Westpac's detailed examination of St George's finances during the due diligence process had turned up nothing to worry it.

St George's shares rose $2.60 last week to close at $29.42 on Friday, putting its stock at a $1.43 discount to Westpac's share swap offer of 1 for 1.31 shares. Westpac's most recent close of $23.55 values St George at $30.85.