Q4 2007 ST. GEORGE BANK LIMITED Earnings Presentation - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

PAUL FEGAN, ACTING CEO, ST. GEORGE BANK LIMITED: Good morning, everybody. We might get started and close the doors, Sean, I think. I think firstly, welcome to everyone, particularly those joining us here in Sydney, but also on the telephone and the webcast. Just a small administrative reminder to please, wherever you are, if you can turn off your mobile phones to make the broadcast much more clear.

I think suffice to say for those of you who by habit have bet on me wearing canary yellow, strawberry, purple, or pink, and have lost, my apologies. This is about as colorful as I could get relative to Gail.

I think speaking of that, I mean, this is the first time in six years that this hasn't been a Gail and Steve presentation. I think they have clearly been a big part of the team in these results, and I just wanted to acknowledge that. But also to say also how particularly pleased I am personally to be able to present these results on behalf of the Group. I think I said to turn the phones off.

I think, firstly, from the initial reaction, I think, from the media this morning, I think what you have seen is a very clean set of results. There's nothing opaque about them. Very transparent, very strong set of numbers. Record AUD60 million for the Group, up 13.1%.

It reflects generally the intrinsic strength of this great domestic franchise. We will spend some time going through that as well.

I think one of the things I also focus on is the extent to which the strategy, the currency of it, it is very strong execution by a very disciplined management team. When we talk about the management team, we don't just mean the Group executives; we mean the depth in the organization.

I think before we jump into the presentation, a couple of observations for me personally over the last 10 weeks. One is the intrinsic strength of the team, and the momentum, and the cohesiveness. Also particularly over the last couple of months where we have really had to deal with quite a lot of market volatility both in equities, subprime, and the impactors on that in funding.

We have also had the closure effectively of the securitization markets, which no doubt will be raised today; a rejuvenated political agenda given the federal election; and also the completion of our own internal management processes around the budgets, the very year itself, and the preparation for today.

Our new CFO Michael Cameron, as many of you know, can't be with us. He has been unwell for a number of weeks; but very pleasingly in fact, he is at home recuperating very well, and I'm really looking forward to having him back on board in the next couple of weeks. In fact I just spoke to him last night, ahead of the release.

So, very good progress. But specifically to welcome Elvio Bechelli, who have known to you for many years; he will copresent the results with me this morning. Elvio has been in the Group 14 years and has just a deep and profound understanding of not just the numbers for the year, but the business drivers particularly, and the history and the journey that we have been on. So, Elvio, welcome, and thanks very much for joining me today.

And so to the results. I mean, I think the great feature of this, as we have said in the press release this morning, is the fundamental composition, not just the absolute number. Up 13%. Strong revenue growth. A composition of these results, underpinned by strong performance of all our businesses. This is actually not just a record profit; this is our seventh year of double-digit earnings per share.

There are no significant items. It also underpins the fact that every single one of our businesses has performed to the strategy with a very strong execution, demonstrated by very strong growth in momentum, not just with our existing customers, but with our new customers.

With our revenue up almost 11%, costs under control, the geographic expansion of the franchise away from New South Wales, and the increasing momentum in our own state, it augers very well for the future.

Asset quality is something that has been called out by the industry itself over the last couple of years, and many calling the end or the top of the cycle. I think we have proved once again that improving asset quality, both in arrears and [the lib] write-offs relative to asset growth, risk-weighted asset growth, are not mutually exclusive.

The team here have done an outstanding job and will deliver on that and drive into it a little bit further later on in the presentation. Our actually gross nonaccruals as a percentage of total receivables are actually at a record low.

Cost management also a very significant focus. We often talk about discipline. The very management team very much has its hands on the cost levers. The formula that we have talked about of high single digit revenue growth, low single digit cost growth, you see the momentum in the second half. Very conscious decisions to invest for the future in the core business and expand revenue-generating activities.

I think going forward, it is really important to understand the organic strategic plan. It hasn't run out of currency. There is a lot of momentum that we will talk to, and the execution risk is very low.

So if we look at the results more broadly, I mean the cash profit, as we have mentioned, AUD1,160 million, up 13.1%. Net profit AUD1,163 million, 11%. Importantly, the earnings per share was right at the top of our guidance that we had been reinforcing to the market throughout the period and particularly over the last couple of months.

Return on equity at 23.2%, a record high for the Group. In fact our tenth year of successive Group increases in our return on equity. The dividend at AUD1.68 represents another consistent philosophy of managing the growth in the dividend in line with our earnings per share growth and represents a very strong return to our shareholders.

As I mentioned, the cost-to-income ratio at 42.5%, many said last year -- was it possible were we not investing enough? Further investment, strong revenue growth, and again down we go another 1.5 percentage points.

Also, our dividend also reflects very strongly the ability of management and the confidence of management to generating these income and also franking credits.

Looking into the actual what drives this revenue, you start to look at the -- and drives the leverage at the earnings level -- is a very strong revenue growth. When you see in Elvio's presentation this is driven not only by strong net interest income but also fee income, other operating income. Particularly, the revenue growth in the Bank is the strongest it has been for five years.

Our cost growth at 7% reflects a very deliberate focus on the key cost drivers, but also deliberate releasing for investment to drive revenue.

The gap between the revenue and expenses continues to widen. In fact this is the widest it has been in the Group's history. So the operating leverage on the franchise is actually fundamentally strong.

We go underneath what actually drives the volume in terms of our revenue drivers here. Clearly, very strong lending growth at a little under 14%, underpinned very strongly by the Middle Market income and revenue growth in that business. Greg will talk -- I will talk about Greg's business. Very strong. The commitment that we have been doing over the last few years to double -- to grow more than double the system once again has been delivered.

Very pleasing on the other side of the balance sheet. Our retail deposit has seen very strong growth, up almost 14%, and 15% in our transaction accounts. As you can see the difference here between the first half and the second half, compositionally the deposit base very strong.

I know that many periods fund managers, analysts, have questioned us about -- is there a vulnerability here in this deposit base? Can this continue to grow? I think we have proved with both product, with the sales management disciplines, that this can grow; and the composition in the very high-margin transaction accounts can grow as well.

Very pleasingly, our managed fund business not just benefiting from superannuation and tax changes in this industry and this great country. 27% -- and in fact post balance date we have gone through AUD50 billion. This is the first time that our managed funds have exceeded our retail liabilities. It indicates the very strong momentum in this business.

The cash component within this AUD50 billion is also very important. Geoff and I over many periods have called this out as a part of the growth trajectory and part of the side benefits of the managed funds, from the asset allocation of the investors. This now is over AUD3.7 billion, and it has an increasingly important role as a funding source for the Bank.

In fact, talking today (inaudible) to Peter Clare before I came up here on a number of issues in terms of business volumes, he was mentioning to me today that not only are our [part] lines very strong, as the business guys have been saying, but one of our systems class that actually generates a lot of the line price [SE] in transaction had its busiest day ever, Peter, in terms of peak loads. That reinforces that the part line is very good.

A little bit on cost management. The discipline on this has been a big journey. Every year steeply downward curve. It is a strong feature of the management experience of the Bank at all levels. Hands on the levers, while simultaneously investing. It also reflects the discipline in management of having to find our own levels of productivity to fund other things through the P&L.

The ratio obviously has diven through the cycle investment. The focus, as you will see from Elvio's deep dive into these expenses, has been very much on revenue generation both distribution and physically and compares very well to our peers.

With such strong growth in assets over many periods, asset quality is something that we expend enormous of time managing. Clearly, the strong risk disciplines and the culture of this Bank reflect very strongly in these results.

Our overall credit quality remains excellent. Our low risk of business supports a very differentiated position and the discipline of staying in the industries where we have expertise.

Our conservative approach lending generally and our approach to track record and underwriting, both in a centralized way as well as diffused, is a very magic formula. In reality, we have a very conservative balance sheet. We have no exposure to hedge funds; no exposure to the US subprime; no exposure to collateralized debt obligations, credit default swaps, or hedge funds.

In fact, even in our consumer lending portfolio, which is actually a very small part of the Group's overall balance sheet at just over AUD3 billion, you will see in the detail that our arrears management process has been further improved off our already-strong first half.

This is attributable to work not just done here in our own team, but also as part of our management of the IBM partnership in India under Peter Clare's leadership. These truly are outstanding numbers across the portfolio and give us a lot of confidence to stay externally focused and manage through the cycle.

Our business credit quality despite all of this growth remains very strong. Elvio will touch on this very significantly. I think interestingly on this as well is that it is a tale of …