Has the glow gone from the halo of the sainted Gail Kelly of Westpac, who according to some claims, is one of the most powerful women in the world?

To maintain that power, the organisation or the company you run has to get the runs on the board and  keep the scoreboard ticking over.

This morning Westpac revealed a stumble with a weak first quarter trading update that also put paid to the view among some ill-informed punters that the Big Four banks were also the big-four profit machines and that the St George takeover made Westpac more powerful.

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When Westpac Bank officially committed itself to the St George Bank bid in May, 2008, the shares traded as high as $25.97 that month.

Yesterday, the day before the first quarter update from the bank this morning the shares closed at $24.42, not the best of returns for the outlay of more than $16 billion in cash and shares, notwithstanding the impact of the GFC.

This morning we had a good reason for that continuing under-performance.

“The Westpac Group today advised that cash earnings, on an unaudited basis for the three months to  December 31, 2010, was approximately $1.55 billion,” the release from Westpac started.

The release continued: “Chief executive Gail Kelly said the group’s first quarter performance was a solid start to -the year with cash earnings up 5% over the last two quarters of 2010, which averaged $1.47 billion.

“The higher 1Q11 result was due to improved operating income, slightly lower expenses and a continuing improvement in impairment charges.”

It took four paragraphs before we came to the headline, buried as they always are when there’s a spot of bad news.

“The 1Q11 result was lower than the $1.6 billion cash earnings reported in 1Q10 as that quarter was boosted by high Treasury and Markets income,” it read.

So by way of real comparison, the first quarter cash profit of 2011 was down about $50 million from the first quarter of the 2010 financial year, which is the proper basis for comparison, not the PR-light spin of the second paragraph, quoting Kelly, who compared the latest quarter to the final quarters of the 2010 financial year (i.e. the third and fourth quarters of last year).

And a bit deeper in the report was the news that “Asset quality has been stable to improving, and this contributed to the impairment charge for the quarter falling to around $280 million, despite the higher economic overlay.”

In other words, the Westpac result was worse than just a $50 million drop in cash earnings, the bank could not take advantage, as the National and the Commonwealth did in their updates or interim report last week, of a sharp fall in bad debt provisions as the economy and credit quality continues to improve.

The Westpac result will produce a quiet “told you so” at other banks today, especially at the NAB, which Westpac attacked yesterday in a memo to senior staff.

At least the NAB lifted its first quarter earnings, to about $1.3 billion, compared with the same quarter of 2010.

Oh, and there’s more bad news: that St George buy is turning into a headache. There was the poor controls on lending in the boom (much of which happened when Kelly was CEO) which cost Westpac big write-downs a 18 months ago.

Now there’s more problems in St George, as the release explains:

“Lending growth in St George was lower, due principally to the repositioning of the business over 2010 to reduce its reliance on brokers and to reduce its exposure to commercial property. Despite this, growth in St George lending has been below expectations and is being addressed.”

Perhaps that weak lending has a lot to do with the way Westpac has come in and taken control of St George lending and ruined relationships with many small and medium business clients who found their loans were being cut or more collateral demanded, even on deals already well secured. Westpac is buggering up St George business lending, and Gail Kelly has no one else to blame.

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Peter Fray
Peter Fray
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