Is St George Bank Kidding Itself?

Array
(
    [0] => Array
        (
            [0] => ((CNP))
            [1] => ((AFG))
            [2] => ((MFS))
            [3] => ((ANZ))
            [4] => ((CBA))
        )

    [1] => Array
        (
            [0] => CNP
            [1] => AFG
            [2] => MFS
            [3] => ANZ
            [4] => CBA
        )

)

This story features AUSTRALIAN FINANCE GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: AFG
The company is included in ASX300 and ALL-ORDS

By Greg Peel

Ever since the credit crisis began it’s been case of fear and loathing in the global banking sector, not to mention wishful misrepresentation. In the US, the likes of the Citigroups and Merrill Lynchs et al have been writing down, and writing down, and writing down again, all the time leaving the market wondering whether there’s still more write-downs to come. There may be a case to be made that the credit crisis has accelerated over time, but realistically banks and brokerages across the world have been kidding themselves on the valuations of their toxic debt positions, either through deliberate misrepresentation within loose regulatory enforcement, or through wishful thinking about a possible return of value eventually.

Much the same has been going on in Europe, with uncertainty emphasised by the incompetence of SocGen, who blamed it on the rogue, and of Credit Suisse, who blamed its traders.

In Australia, it had been a case of supposed immunity, at least until the bombshells of Centro ((CNP)), Allco ((AFG)) and MFS ((MFS)) were dropped. Even then, it took a long time for the market to find out just what exposure the local big banks had to these disaster areas. ANZ Bank ((ANZ)) took a shellacking in the market when it revealed not only its provisions against the Centros etc but a much bigger provision against a US monoline insurer. The exposure was only revealed at a scheduled trading update. Why did we have to wait to find out?

ANZ took another shellacking in the market yesterday, when The Australian revealed that despite only a $90m provision taken against Centro, ANZ’s actual exposure amounts to $680m. Unsecured! Why did we not hear about this in the trading update? “Customer confidentiality”, said ANZ.

What else is out there we don’t know about?

It was thus hats off to St George Bank which yesterday provided an unscheduled trading update ahead of the start of its share purchase plan period. As UBS put it:

“We see this transparency and guidance as a positive especially given current market uncertainty and encourage other banks to follow suit”.

But there was only one small problem. St George reconfirmed its 10% earnings growth guidance for FY08, but within that guidance made absolutely no provision for a disclosed $580m of exposure to – you guessed it – Centro, Allco and MFS. Guidance was made assuming “no one-off material credit losses”.

Commonwealth Bank ((CBA)) made all sorts of provisions last week, and was hammered in the market. ANZ made its provisions this week and was similarly dealt with. But St George, on the other hand, is working on the belief all loans to the aforementioned culprits will be recovered, with the possible exception of $25m to MFS which is dependent on a few things. The bank expects to get all of its $458m of secured loans to Centro entities back, given they are first mortgages over Australasian shopping centres, and all of its unsecured $60m facility to Allco.

Well, good luck to them, one can only say.

Provisions aside, St George’s credit quality is otherwise apparently good. UBS is hanging on to its Buy rating due to valuation and potential takeover possibilities, but admits there’s downside to profit on the back of bad loans. An impending announcement from Allco might be ominous.

Credit Suisse is also sticking with Outperform, given it had already downgraded all its commercial bank estimates.

Macquarie (Neutral) sees this renewed guidance as a risk, as “the potential that a portion of the exposure is not fully recovered is increasing”.

ABN Amro (Hold) goes further to suggest there is “material risk” to St George’s guidance. Bad loans aside, ABN notes St George is most highly exposed to the NSW economy which will likely suffer most as interest rates rise. Furthermore, the bank needs to raise $10bn of funds this year and has only raised $2.3bn to date. Funds are not getting cheaper, and the securitisation market which St George once relied on has closed its doors.

And an indication of Macquarie’s and ABN’s concern? The former dropped its target price on the bank from $34.00 to $26.50 this morning while the latter shifted from $33.78 to $27.84.

Alas, there was no response from JP Morgan (Underweight) this morning. But JPM wrote off St George long ago given its lack of a large deposit base.

Click to view our Glossary of Financial Terms