St George on target for record 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 8 to 10 per cent higher than last year, even though the domestic economy has turned down sharply since it last reported its results in May.

That should see St George top its $1.16 billion profit result of a year ago when it closes its books on 2008 at the end of next month. 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 would not meet its previous guidance of 10 per cent growth because of a variety of economic factors including the impact of the global credit crisis and the stockmarket turmoil on its investment portfolio.

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

But St George is also likely to indicate that its arrears levels and charges for bad debts have not risen as dramatically as those of some of its rivals - particularly ANZ and National Australia Bank, whose recent disclosures have seen them provide as much as $2 billion between them to cover their sour loan problems.

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

That deal is due to be voted on by St George's shareholders in November and, if agreed, the merged entity will form the largest such institution in the country, outstripping the market leader, Commonwealth Bank.

This week's comments about St George's trading position by its chief executive, Paul Fegan, will be closely analysed by market watchers seeking to get a more accurate picture of how much the economy's slowdown is affecting the major banks.

ANZ and NAB have both warned of profit falls totalling $1.4 billion but Westpac's rather more optimistic trading statement - it expects a slight boost to last year's record earnings of $3.5 billion - has partly helped counter the prevailing gloom.

St George has already given a hint of its position in a little-noticed ASX announcement that went immediately after NAB's revelations about its latest $830 million write-downs of US subprime housing loan-linked investments.

"Credit quality in consumer banking remains excellent with arrears performance solid. Overall credit quality in banking business remains strong," the bank said in a statement two weeks ago, seeking to put distance between itself and NAB's problems.

Analysts sought 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 its third-quarter update.

The prevailing view is that St George is in a weaker position than the Big Four given its greater exposure to expensive global financing and the prospect its loan book is more stretched.

But Ms Kelly, Westpac's chief executive, reiterated that her bank's detailed examination of St George's finances during the merger due diligence process had turned up nothing to worry it and would not be drawn further on Mr Fegan's forthcoming presentation.

St George's shares rose $2.60 over the past week to close at $29.42 on Friday as investors regained some confidence about the hard-pressed banking sector. At that price, its stock is trading at a $1.43 discount to Westpac's 1-for-1.31 share swap offer, which puts a value of $30.85 on St George's equity based on its most recent close at $23.55.