St George a burden on Westpac

Some new rhetoric has turned up in the latest investor discussion pack published by Westpac Banking Corp that could be interpreted as an admission that the bank paid took much to take over St George in 2008.

Under the heading "factors influencing return on equity" the bank suggests that investors look at "return on tangible ordinary equity" rather than the usual measure of return on equity.

More than half of the decline in Westpac's ROE (by 8.5 percentage points to 13.8 per cent) is due to the $6.1 billion in goodwill added to the bank's balance sheet from the takeover of St George at the end of 2008. Westpac issued new shares worth $12.2 billion to pay for the takeover.

Only a minority of the decline in ROE is due to lower cash profits or the impact of selling new capital to reassure stakeholders of the capital strength of the bank and to meet regulatory requirements.

The presentation notes that the bank's ROE is "expected to trend higher over coming years", citing the likely decline in bad debt charges, wider margins and increased earnings from wealth management.

Using the measure of ROTE Westpac's return was 19.6 per cent in the September 2009 half year and still down from a pre-takeover (and pre GFC) high of 25.6 per cent.