St George Bank Ltd has a far worse outlook than any of its peers, but is likely to talk up its prospects to attract a higher takeover bid, according to JPMorgan.
St George is the subject of a takeover proposal from Westpac Banking Corporation Ltd. It will hold an operational briefing for investors on Tuesday after Westpac holds its own briefing on Friday.
In a note to clients, JPMorgan banking analyst Brian Johnson said St George, with its lower credit rating, was being hit hardest by the credit crunch compared to the big four banks.
"This analyst suspects that the reality is that the outlook for St George is not as good as the St George commentary suggests, given that St George's business model is far more adversely impacted by the credit crunch than its peers," Mr Johnson said in a note to clients.
Mr Johnson said St George had a high long-term debt issuance requirement in fiscal 2009 after it significantly shortened the duration of its debt funding profile last year.
Spreads on long-term debt, which is more expensive than short-term debt, are still far wider than they were a year ago.
Credit quality is deteriorating as the economy slows and St George's middle-market commercial loan book could be more vulnerable than most.
Mr Johnson also noted St George's apparent enthusiasm for Westpac's scrip bid, which had an implied value of $29.15 a share on Tuesday, down significantly from $34.00 when it was launched.
"If St George is going so well ... then why is selling to Westpac still in shareholder's best interest?" he said.
St George can withdraw its support for Westpac's 1.31-for-one scrip offer any time before a November 6 scheme meeting.
"In the meantime, the messaging from the St George team will likely be that everything is great in an effort to generate an alternative higher bid."
Mr Johnson said the likelihood of a counterbid was declining, given the deteriorating outlook for the sector's profitability and the opportunity a merger would present to other banks to pick up "easy" market share.
Commonwealth Bank of Australia Ltd has ruled out making a counterbid for Australia's fifth biggest bank. National Australia Bank Ltd and ANZ Banking Group Ltd are dealing with big losses from write-downs related to US property exposures, or bad loans to local businesses.
While the outlook for St George is rocky, Mr Johnson doesn't expect it to announce any big write-downs next Tuesday.
"Nonetheless, we reiterate our view that St George will be hard pressed to meet its eight to ten per cent EPS growth guidance issued at the interim result in May," he said.
