Top billing comes with being adept

In the present downturn Westpac has so far managed to avoid big, bad credit exposures, and should it swallow St George, will be catapulted into the position of No. 1 bank by size. NAB managed to achieve this without acquisitions in the last cycle, more by conservative risk and lending practices.

Westpac is not immune to the credit cycle. But so far, in this anniversary week of the subprime implosion, Westpac has proved itself most adept among its peers at managing risk.

Mind you, yesterday's market update - a little ray of sunlight in a dark and gloomy sector - coincided with the collapse of the telco Commander Communications, which owes $360 million to Westpac, the Commonwealth Bank and NAB. And there is not a lot in the way of tangible assets to dispose of there.

Still, the Westpac update showed that even though expenses and stressed loans were rising, forecast net profit growth was 6 per cent to 8 per cent, when the market had been predicting 5.5 per cent to 6 per cent. This is unequivocally good news. Brokers will probably lift their estimates by 2 percentage points as a result.

It was the absence of bad news, however, that should lend strength to the stock price. That there were no new impaired assets in the third quarter was also good news. That total impaired loans stand at similar levels to the first half of 2008 is great news, especially in light of recent comments by NAB's boss, John Stewart, and Mike Smith at the ANZ.

Credit for Westpac's performance should go to former chief executive David Morgan, and naturally his team, for doing what bankers should do well - managing risk - even if the seeds had been sown long before. In the horrific aftermath of the bank's commercial property debacle in the early '90s and its abortive expansion into the US, the then chief executive, Bob Joss, and his chief financial officer, Pat Handley, re-engineered the business.

The Joss-Handley overhaul of treasury and risk management, plus the people and processes they put in place, have stood the bank in good stead. Their head of risk, Rob Whitfield, managed to avoid exposure to the very markets which are now causing the opposition grief.

Westpac's success - and this is mirrored in a stock price that trades at a premium to rival banks - delivers clear evidence that the job a chief executive does can hardly be measured in short-term incentives (which represent a large chunk of pay structures). Likewise, the poor decisions of a chief executive invariably hamper the market's perceptions of the performance of the successor.

Morgan's successor, the former St George boss Gail Kelly, has proven adept at making a second-tier bank a lot bigger, albeit in a bullish market environment. Whether St George will have displayed the same acumen in managing risk remains to be seen. Its lending has been aggressive. St George reports soon and even if there is evidence that the penalty for growth has been a blowout in problem loan exposures it should be able to hide most of the damage until the Westpac takeover is complete later this year.

While we're on the topic, St George's reliance on wholesale funding for its loan book has put pressure on margins, so the Westpac offer could not have come at a better time. In fact Westpac is probably paying too much.

Westpac's acquisition of the Rams franchises, which appeared a bargain at the time, is shaping up to be a failure. Many of the franchises are in dispute with the bank even though the dispute involves issues from the old Rams days.