St George says its still committed to the $17.5 billion merger (takeover, really) from Westpac after reporting what appears to be a solid profit for the 10 months to July 30 and forecasting a sound result for the year to September 30.
When the $17.5 billion all paper merger was originally suggested in May it was claimed that St George’s cost of funding, indeed its future was threatened by the clouded outlook for banks and the credit crunch.
It was claimed by Westpac and banking analysts that to remain viable, St George needed a higher-rated owner, which was Westpac: Westpac’s superior funding ability would help St George weather the storm.
But on what St George reported yesterday, it seems to have weathered the credit crunch very well so far: so well in fact that the market pushed its shares back over $31 for the first time in two months yesterday.
They closed at $31.30, up $1.07. Westpac shares rose 15c to $24.50.
St George’s share price had already risen off the back of Westpac’s solid trading update last Friday and expectations that the deal would be a winner.
St George Bank reaffirmed its annual September 30 earnings guidance after posting a 12.5% rise in cash profit for the first 10 months of the year. It said it was on track to meet its earnings per share (EPS) growth target of 8%-10% for the September 30 year.
St George said that its unaudited cash profit was $1.073 billion for the first 10 months of fiscal 2008, 12.5% ahead of July 2007 which was a much more benign credit environment and on the eve of the eruption of the crunch a year ago this month (although signs of problems were emerging in credit spreads and hedge fund problems in the US).
That compares very nicely with Westpac’s forecast of a 6%-8% rise in cash earnings for its September 30 year. So on the face of it, the lower-rated St George Bank, with higher exposure to the shutdown securitisation markets, has plucked a superior result out of the worst conditions for banks since the 1991 recession.
It’s partly a tribute to former CEO, Gail Kelly, now running Westpac, but is it also a tribute to Westpac’s interest in the bank?
A question to be asked is whether the bank’s performance has benefited from having Westpac waiting in the wings since May while it raised billions of dollars in new funds, and captured more deposits from retail customers?
St George says its board intends to recommend the merger proposal subject to it remaining in the best interests of St George shareholders compared to the position when the proposal was announced on May 13.
But all banks are now facing an economy that’s slowing with the normally lucrative home loan business under pressure as building approvals tumble and housing credit slows to recession like growth patterns. (Although St George says it has just 87 houses it has taken possession of because customers couldn’t pay.)
Retailing is also slowing, and that means less business on credit cards, and more possibility of bad loans (bad loans in credit cards was around 1.4% of total lending).
But there’s also the impending drop in official interest rates next month, and then over the next year which opens the way for a possible revival in housing, and lower funding costs for St George, and other banks.
And if Westpac walks, what happens to the St George share price, and the St George funding profile?
All important questions.
But St George management told analysts and the media in yesterday’s briefing that it can reconcile the bullish nature of yesterday operational update of its business with its recommendation of a takeover offer from Westpac Banking Corporation.
St George chief executive Paul Fegan acknowledged to investors that the bank’s performance had improved since Westpac launched its bid for the group in May.
AAP reported him as saying: "It’s pretty self evident that the uplift in the second half in terms of EPS [earnings per share] is fundamentally different and stronger than the first half."
St George on Tuesday reaffirmed its annual fiscal 2008 earnings guidance of 8% to 10% growth in EPS after its cash profit jumped 12.5% in the first 10 months of the year.
Mr Fegan said it was "very clear" that the St George board’s recommendation of Westpac’s offer was justified.
"They’re not mutually exclusive and I’ve said previously that our job is to run the bank for the interests of St George shareholders," Mr Fegan said.
Mr Fegan said Westpac’s offer was still in the best interests of St George shareholders.
There are questions from the update that will linger now for a couple of months until the independent experts’ report and the final profit figures are out in November.
