Question 2

The following is an extract from the article entitled “St George tops $500m”, reported on May

3,

2006 in the Herald Sun (p. 33).

“ST GEORGE Bank’s national expansion plans continue to bear fruit, yesterday helping it crack

the half billion dollar interim profit mark.

A sluggish Sydney economy was overcome by stronger growth from its expansion regions of

Victoria, Queensland and Western Australia.

The Dragon produced a profit of $502 million, up nearly 12%. The number slightly

disappointed analysts, which had tipped a marginally higher figure.

In a day when the overall market was off 0.6%, St George finished down 59 cents, or 1.9%, at

$30.37. The board declared a dividend of 74 cents a share, up from the previous interim dividend

of 67 cents a share. It will be paid on July 4 after going ex-dividend on June 14.

St George chief executive Gail Kelly told reporters she’s done a dance with Happy – the St

George dragon mascot – before coming in to face them in the afternoon. “It is a quality result

. .

.

(and) it is an exceptionally clean result,” she said.

Mrs Kelly backed comments by her counterpart at ANZ, chief executive John McFarlane, who last

week said his bank had experienced a particularly strong finish to the reporting period to March

30. February, March and even April had shown particularly strong growth in volumes and

profitability,

but Mrs Kelly stopped short of delivering a profit upgrade.

Sydney, rather than NSW, stayed sluggish, with flatter housing prices weighing on growth. But

chief financial officer Steve McKerihan said he believed there were early signs of a recovery in

Sydney’s economic fortunes, which should accelerate in 2007.

The bank’s key indicators showed strong to glowing performances. Earnings per share are “on

track to

deliver” 10% growth for 2006 and 2007 under the new Australian International Financial

Reporting Standards system. Return on equity was 23.8%, while the

expense-to-income

ratio fell

to 44.1%, putting St George ahead of all larger rivals. Mrs Kelly said home loan growth was at

13% and deposits were up

13.5%, putting both above peer system

growth."

St George’s share price decreased, although it reported a record profit and increase in

dividend. This seems inconsistent with an efficient securities market.

Required:

Give three reasons that might have

contributed

to this share market reaction. Provide three

headings in your answer: “Reason 1”, “Reason 2” and “Reason 3” and carefully highlight

whether each

reason is consistent with stock market efficiency.