St George sees 2008 growth, backing Westpac bid

By Mette Fraende

SYDNEY (Reuters) - St George Bank Ltd SGB.AX, target of Australia's biggest banking takeover bid, said funding conditions were difficult amid a global credit squeeze, but it was on track to meet forecasts for 8-10 percent earnings growth.

Shares in Australia's fifth-biggest lender, which is recommending an A$18.1 billion ($16 billion) offer from Westpac Banking Corp (WBC.AX), rose 3.5 percent to a near 10-week high on Tuesday, outperforming a wider market .AXJO up 0.4 percent.

The trading update contrasted with recent warnings by National Australia Bank Ltd (NAB.AX) and Australia and New Zealand Banking Group Ltd (ANZ.AX) of their growing exposure to bad loans and U.S. mortgages.

NAB warned last month it would have to set aside A$830 million against potential losses on its exposure to U.S. mortgages, and ANZ warned its profits would fall sharply and forecast more than A$1 billion in bad debt charges.

St George said turmoil in global credit markets was affecting funding, and the situation could worsen in the short term, but it completed its wholesale funding for this year and raised A$3.3 billion of its estimated A$11-$12 billion term wholesale funding requirements for 2009.

"What it's done is dispel any doubts that the bank's not in a very strong position," said John Sevior, head of Australian equities for Perpetual Investments.

St George said it would meet its 2008 earnings per share growth target through cost controls and strong growth in all its business areas. It said it had no exposure to U.S. or domestic sub-prime lending, CDOs or hedge funds.

October-July unaudited cash profit, or core profit from which dividends are paid, rose 12.5 percent to A$1.07 billion from the same 10-month period a year earlier.

"I think it's pretty self-evident that the uplift in the second half in terms of EPS is fundamentally different and stronger than the first half," CEO Paul Fegan told an investor briefing.

EYEING BETTER OFFER?

Fegan said St George was in a much stronger position now than it was in May when Westpac made its offer of 1.31 shares for each St George share, though he stressed the bank had not changed its language on recommending the bid.

Analysts queried whether this was an attempt to squeeze a better offer from Westpac.

"The bank is giving the information that the business is performing very strongly, and perhaps he is trying to encourage shareholders to be more aggressive," said one fund manager, who asked not to be named because of the sensitivity of the issue.

Fegan said it was possible to reconcile the bullish trading update with its backing for the Westpac offer.

"It's very clear these two can be reconciled. The proposal by Westpac is subject to it being in the interest of shareholders, and clearly ... we've put that into the market place," he said.

"Westpac would know from its due diligence process the underlying performance of the group, and so does the market."

Other analysts said the outlook could turn, however, as Australia's bank sector feels the pinch of the credit squeeze.

"It would be interesting to see where the St George share price would be were it not for the bid," said Brian Johnson, analyst at JP Morgan.

"I think what's being missed here is that it's not the profit the bank makes in 2008 that matters, but the profit it will make in 2009. As the credit crunch rolls on ... I think we could see tougher times in 2009. It's difficult to say, but maybe the (Westpac) offer price is not so bad."

Last week, Westpac assured investors it would avoid the big loan losses flagged by NAB and ANZ. Fourth-ranked Commonwealth Bank of Australia (CBA.AX) reports annual results on Wednesday.

St George shareholders vote on the Westpac offer in early November.

(Editing by Ian Geoghegan)