TDT

The Dream Team

WESTPAC’S POTENTIAL ACQUISITION OF ST. GEORGE

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AGENDA

Our team

Background

Strategic rationale

Valuation

Offer price

The approach

Risk Considerations

Final recommendation

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OUR TEAM

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BACKGROUNDAustralian Banking Industry Conditions in April 2008

The onset of the global credit crisis in August 2007 has subsequently resulted to the following:• Increase in the cost of wholesale funding

especially for non AA-rated banks• Illiquidity in the securitisation market• Deposits becoming an increasingly important

source of funding

Impact on St. George Bank• Being only an A rated bank, St. George is now

experiencing significantly higher costs on 48% of their funding mix that is from wholesale capital markets

• St. George’s share price has also fallen significantly since the onset of the global credit crisis

Australian Banking Industry in April 2008

St. George’s current vulnerability opens an unprecedented opportunity for Westpac to acquire St. George.

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THE QUESTION

Why should Westpac acquire St. George?

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55,020

49,266

44,603 43,231

14,423

STRATEGIC RATIONALE: BE THE LARGEST IN MARKET CAPITALISATIONMarket Capitalisation (in A$ billions)

Currently 3rd Largest

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44,603

55,02049,266

43,231

14423

Largest after acquiring all of SGB59,026

STRATEGIC RATIONALE: BE THE LARGEST IN MARKET CAPITALISATIONMarket Capitalisation after Merging with SGB (in A$ billions)

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STRATEGIC RATIONALE: HAVE THE LARGEST RETAIL BRANCH NETWORK

13

192

504

113

160

229

22

1,233

Merged Westpac and St George retail branch network

= 1,010

Highlights:• Largest retail network

in Australia• Dominance in NSW• Instant extensive

network in SA

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Current Westpac Business Model

STRATEGIC RATIONALE: GROWTH OPPORTUNITIES

Current Opportunities for Growth:• Acquisitions• Expand in NZ with focus on Institutional Banking• Superannuation• Business Banking: Small/Medium Scale Enterprises

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STRATEGIC RATIONALE: GROWTH OPPORTUNITIES

Merged Westpac and St. George Business Model

Product & Operations

Technology

Core/Support

Opportunities for Growth after merging with SCG:• Cross-selling to within the wider distribution channel in retail banking segment• Extension of wealth management segment• Growth in small/medium scale business banking segment through St. George• Expansion in VIC, QLD, and WA using St. George’s brand

VALUATION AND OFFER PRICE

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DIVIDEND DISCOUNT MODEL

Total value for the bank: 0 1 2 3 4 5 6 7 8 9 10 11

(A$m) 2007A 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F

Net Income 1,190 1,144 1,191 1,243 1,301 1,345 1,382 1,434 1,501 1,565 1,605 1,666

Growth (%) -3.90 4.13 4.37 4.68 3.37 2.76 3.79 4.68 4.26 2.56 3.78

Risk Weighted Assets 63,226 60,760 63,272 66,036 69,126 71,455 73,430 76,209 79,776 83,174 85,299 88,525

Target Tier 1 6.70% 6.44% 6.70% 7.00% 7.33% 7.57% 7.78% 8.08% 8.45% 8.81% 9.04% 9.38%

Increased in required capital (159) 168 193 226 176 154 224 302 299 192 303

Free cash flow to equity 1,302 1,022 1,049 1,075 1,169 1,228 1,210 1,200 1,266 1,413 1,364

PV of terminal value 4,192 PV of cash flows 1,160 811 741 676 654 612 537 474 446 443 381Total PV of equity 11,127

Total number of shares on issue 552,231,572Value per share 20.15

Assumptions Cost of equity (%) 12.30%Growth rate (%) 3.13%Terminal growth rate (%) 2.95%Implied 2010 P/E (x) 9.59Tier 1 target (%) 7.87%Payout ratio (%) 100.00%

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SENSITIVITY ANALYSIS

DDM Value (in A$)

Interest Exp

ense (-/

+ 5%)

Interest Inco

me (-/+ 5%)

Other In

come (-/

+ 5%)

Growth

Rate (-/

+ 5%)

Terminal

Growth

Rate (-/

+ 5%)

Bad Debts

Expense

(-/+ 5%)

Operating E

xpense

s (-/+

5%)

Income Tax

(-/+ 5%)

Target T

ier 1 (-/

+ 1%)14

16

18

20

22

24

26

20.15

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BENEFITS AND LIMITATIONS

Dividend Discount Model (DDM)Advantages:•Represent real cash flows to shareholders.•Considers time value of money.

Difficulties:•Difficult to forecast key variables and assumptions.•Terminal value forms a substantial part of the present value of the firm and the present value of the firm is sensitive to a change in growth rate.

Comparable Company and Precedent Transaction Based Valuations (Relative Valuation Approach)

Advantages:•Simple and easy to apply. At the same time, it also bears low cost (the absence of forecasting).•‘Market Value’ approach – based on recent M&A transaction.

Difficulties:•Finding the right benchmark (company).•Benchmark may not be available (precedent transaction).•Finding the right multiple.

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SYNERGIES

Merger costs and synergy benefits Amount ($ millions)

Assumptions

1 Cost synergies 348 25% of operating expenses. (Empirical evidence of 20-30%).

2 Restructuring costs (562) 161.5% of cost synergies .(Average of precedent transactions).

3 SGB's Funding benefits 51 48% of Deposits and other borrowings at 15 bp (May 2007).

4 Revenue synergies 232 25% of SGB revenue $2.3 billion realised over 10 years.

Total benefit 69

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VALUATION SUMMARY

WBC offers Starting price Maximum price

Price per SGB share $30.85 $33.69

Total consideration $17.04billion $18.60billion

Exchange ratio (WBC : SGB) 1.3 : 1 1.42 : 1

EPS Impact (Current : 1.85) 1.81 1.77

Value of SGB $/Share

Dividend Discount Model 20.15

Comparable company 25.77

Precedent transaction based 27.70

Value after considering synergies 33.69

SGB's current trading value 25.71

APPROACH AND RISK CONSIDERATIONS

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THE APPROACH

•Reduces resistance from SGB ‘s directors and shareholders•Gail Kelly’s relationships with SGB and WBC•Less aggressive approach ensures a higher chance to see the merger deal through•Hostile takeover is more expensive – offer a higher premium to make the deal happen

Friendly approach

A friendly approach maximises the prospect of SGB’s and its shareholders’ support as SGB is able to negotiate terms of the merger:

a) Retaining SGB’s strong brand name • Cope with less resistance from SGB’s loyal customers (60% of SGB shareholders are SGB’s customers)• Reduces integration risks – compliments the risk minimisation of operational disruptions• Reduces levels of customer leakage

b) SGB’s value-added strategies are retained • SGB continues to be customer-focused (maintains close-knit culture and competitive edge over rivals)

c) SGB’s shareholders value not disadvantaged• Court approval offers some form of comfort to achieve a fair transaction• Bank value would not be destroyed

Scheme of Arrangement

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KEY RISKS CONSIDERATIONS AND RATINGS

•Potential for unfavourable or noticeable negative impact on merger transaction

•Management attention is required to manage risk of unfavourable outcomes

RED

•Potential for less-than-optimal impact on merger transaction

•Management needs to establish monitoring controls/actions to manage potential risks

AMBER

•Potential minor impact on the merger transaction

•Management only needs to act if new unfavourable events occur

GREEN

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KEY RISKS CONSIDERATIONSKey Risks Description

Possible interlopers in the merger bid

Other Big Four banks in Australia – CBA, NAB and ANZ – may counter-bid WBC’s offer to acquire SGB. This could result in WBC having to offer a much higher price to ensure the success of the bid. However:

Risk level:

CBA facing domestic competition issues

NAB planning to expand into overseas markets as well as investment banking sector

ANZ focusing on expansion into Asia

GREEN

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KEY RISKS CONSIDERATIONSKey Risks DescriptionGovernment approval on the merger

Issues:Possibility of monopoly subsequent to the mergera) ACCC (the Government) may view each Australian state as a

separate banking market – NSW is the main issueb) WBC and SGB, combined, will be the largest amongst all the

Big Four Banks in Australiac) The merger would lessen competition in the wealth

management sector – possibility of reduced product diversity for consumers

The state of Australian banking industry “Four Pillars” policy maintained Solution:Obtain government approval for the merger proposition at the soonest time possible and manage potential legal issues earlyRisk level:

RED

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KEY RISKS CONSIDERATIONSKey Risks DescriptionSGB reliance on wholesale funding and exposure to interest rate risk

Issues:a) Wholesale credit markets attract higher funding costs

(coupled with SGB’s credit rating of A+) b) Shortage and volatility of wholesale funding markets

Solutions:c) Review other alternative sources of fundingd) Take advantage of WBC’s credit rating of AA to obtain cheaper

source of funding for SGBe) Utilise WBC’s expertise on interest rate management

Risk level:

AMBER

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KEY RISKS CONSIDERATIONSKey Risks DescriptionIntegration risks (post merger)

Common risks include:a) Resistance to changeb) Job securityc) Lack of skills and

experience in transformation processes

d) IT integration

Specific risks to WBC:a) Concerns over disruption to operationsb) SGB’s “small bank” culture (culture integration risks)

Solutions:c) Appoint Transformation team d) Appoint Transformation advocates from SGBe) Retain SGB brand name and branches whilst integrating the

head office and back office

Risk level:

AMBER

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FINAL RECOMMENDATION

Buy 100% of SGB• Achieve the largest market capitalisation in Australia• SGB share prices are low now• To maintain competitive advantage, retain SGB branches and brand name

Offer price and approach• Friendly scheme of arrangement• All-scrip transaction

WBC offers Starting price Maximum price

Price per SGB share $30.85 $33.69

Total consideration $17.04billion $18.60billion

Exchange ratio (WBC : SGB) 1.3 : 1 1.42 : 1

TDT

The Dream Team

©2010

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GDP FORECAST

Year - Actual 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1990 to

2007Australia GDP (%) 0.6 -0.6 2.5 3.7 4.6 3.3 2.7 3.7 4.6 4.2 2.5 3.7 3.2 3.5 1.9 2.7 2.4 3.9 2.95

% change -200% 517% 48% 24% -28% -18% 37% 24% -9% -40% 48% -14% 9% -46% 42% -11% 63% 26%

I/D D I I I D D I I D D I D I D I D I

European Exchange Rate Crisis. Asian Financial Crisis.

Year - Forecast 2007A 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F

2008 to 2018

Australia GDP (%) 3.9 -3.9 4.1 4.4 4.7 3.4 2.8 3.8 4.7 4.3 2.6 3.8 3.13

I/D D I I I D D I I D D I

Global Financial Crisis.Assumption: Lowest

GDP could happen is -200% of 2007.

Assumption: The movement from one year to another year is on a gradual basis to the maximum (120% of 2007) as the economy recovers.

Assumption:It follows 1995 and 1996 when the economy falls from the maximum.

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RELATIVE VALUATION APPROACH

Average CompanyP/E

CompanyP/NTA

CompanyP/B

$/Share $/Share $/Share

Low 25.24 14.44 14.44

Midpoint 36.06 20.62 20.62

High 46.88 26.81 26.81

Average 25.77

Average TransactionP/E

TransactionP/NTA

TransactionP/B

$/Share $/Share $/Share

Low 24.88 15.12 18.18

Midpoint 35.54 21.60 25.98

High 46.20 28.07 33.77

Average 27.70