BSP Financial Group Limited (BFL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to BSP 2025 Full Year Results Announcement and Investor Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your host today, Mr. Methuselah Eka Wabiria. Thank you. Please go ahead.

Thank you, operator. Good morning from Port Moresby and thank you for joining Bank South Pacific's 2025 Full Year Results Presentation. We released BSP Financial Group's 2025 results, to the PNGX, the ASX and the SPX earlier this morning, and I would like to welcome you all to our investor briefing. My name is Methuselah Eka Wabiria. I'm Senior Manager here at BSP, overseas, ESG and Investor Relations. Our presenters this morning are Mr. Mark Robinson, our Group Chief Executive Officer; and Mr. Glen Skarott, our Group Chief Financial Officer. Gentlemen, welcome. After the presentation, which should last about 30 minutes, there will be an opportunity for investor questions.[Operator Instructions] Turning to Slide 2. I would like to draw your attention to the legal disclaimer associated with this presentation, which is on this slide. And I'll hand over to our group CEO, Mr. Mark Robinson.

Thank you, Met. Good morning, and welcome to our 2025 full year results briefing. I'm going to start with an overview of BSP and our full year performance. Glen will then walk you through the financial results in detail before I return to outline our strategy and the outlook. And we'll then move to your questions. Turning to Slide 5. I want to take a moment to remind you about the scale of our business, our track record and the opportunity ahead of us in Papua New Guinea and the rest of the South Pacific. First, BSP is the largest bank in the Pacific with market-leading positions in 7 countries serving over 3 million customers. We operate the most extensive distribution network in the region, spanning branches, ATMs, EFTPOS, mobile Internet banking, agent banking and of course, our relationship managers in the corporate bank and our business bank, extending access into rural remote communities with few other providers operate. Our banking roots are here in Papua New Guinea with our origins dating back to Commonwealth Bank opening its first branch in Rabaul in 1916 or 110 years ago. Over time, Commonwealth Bank's PNG business and the National Australia Bank's business in PNG became what is now BSP Financial Group. And in 2015, we acquired Westpac's businesses in 5 South Pacific countries. This has built a bank that is a well-governed and well-managed regional champion with a track record of delivering for our shareholders as well as our customers. We have done that through a diversified revenue base with strong contributions from lending, foreign exchange, transaction banking and life insurance. Importantly, we know there is more gas in the tank, and we are investing for growth and performance through our Modernizing for Growth program. The opportunity is very clear. Economic and market growth in the region has been driven by a young and growing population. Demand for agricultural commodities and fisheries, tourism and the world-class endowment the region has an energy and mineral resources, particularly here in Papua New Guinea. We are also growing by using digital channels to bring banking to the regions under banked and to help unlock more opportunities to champion prosperity in the South Pacific. Moving to Slide 6. you'll see that BSP delivered strong financial performance in 2025, underpinned by disciplined execution and a clear focus on long-term value creation. Some highlights include net profit after tax, which increased by just over 13% to PGK 1.17 billion or approximately AUD 440 million. This was driven by revenue growth across all key businesses, up over 14% to PGK 3.41 billion or approximately AUD 1.28 billion, reflecting growth in lending, foreign exchange and transaction banking. We are investing to modernize for growth, which saw an expected increase in operating expenses. However, we are continuing to manage costs tightly and our cost-to-income ratio of 42.9% remains well within our target range and below that, our Australian banks, for example. A particular highlight is BSP's return on equity at 23.8%, which increased by 50 basis points, continuing our 20-year track record of an ROE above 20%. This is well ahead of international peers ROEs and reflects our ability to effectively manage our operations and costs while reinforcing our scale in the South Pacific. Our capital position remains strong. with a capital adequacy ratio of 26.4% as of year-end, which is significantly higher than the Bank of Papua New Guinea's requirement of 12%. The bottom line is that BSP delivered strong operational results in 2025, and we continue investing in the future of the business while providing exceptional returns to our shareholders. Many of which are Papua New Guinea and South Pacific institutions focus on the retirement needs of hundreds of thousands of people in the region. Over this year's strong performance, the BSP Board has declared a final dividend of PGK 1.38 per share payable on the 27th of March 2026. That brings our full year dividend per share to PGK 1.88, up 13% from the previous year. Now turning to Slide 7. I'll talk a bit more about strategy at the end of this presentation, but I really want to make 3 points here. First, our history and scale mean that we have a deep understanding of the region. This includes the role BSP plays in supporting nation building, strengthening economic resilience and providing rural and remote communities with banking services that support financial inclusion. Our ability to prudently manage risk across our region and we understand the need to invest to continue to improve the customer experience and stay ahead of competition. Second, we have a clear strategy to be the South Pacific International Bank, based on the 6 strategic pillars outlined on Slide 7, including driving prosperity through convenient digital services for our retail and corporate customers, building a new business bank dedicated to supporting small and medium-sized enterprises that are the lifeblood of Papua New Guinea and the South Pacific economies, bringing greater focus to corporate and government clients by continuing to develop world class capabilities and services in our corporate bank. Thirdly, we are building a track record of execution through a focus on areas that will move the dial. Modernizing for growth is our PGK 1.2 billion full year investment plan to ensure BSP continues to deliver sustainable growth. It's a program of improvement in every area of the business, and I'm pleased to say that we are delivering the program on time and on budget. So in summary, 2025 has seen BSP deliver a strong financial performance supported by a revenue base that's diversified by product, customer segment and geography and continued investment on a clear strategy and focus on execution. I'll now hand over to Glen to talk about the financials in more detail.

Okay. Thank you, Mark. It is my pleasure to present these results to you, particularly given the quality of our numbers and the growth we are seeing in the business. Starting on Slide 9. FY '25 was a strong year operationally with solid growth in revenue and earnings, while we deliberately leaned into investment for the future. Group revenue grew 14.4% in kina terms with broad-based momentum across net interest income, FX and fees. This was supported by lending growth, stronger investment income from the securities portfolio and continued customer activity across transactional banking. Operating expenses increased 18.8% to PGK 1.46 billion. This reflects deliberate investment of PGK 137 million into our Modernizing for Growth program as we moved into the execution phase of transformation. Statutory NPAT increased 12.9% year-on-year to PGK 1.17 billion. Underlying earnings momentum was stronger at 19.7% once you adjust for the one-off items last year. Credit expense in FY '25 reflects a normalization from an unusually low FY '24 outcome, which benefited from the release of COVID-related management overlays. The current year charge reflects portfolio growth and our continued prudent provisioning stance. Importantly, underlying asset quality remains sound with delinquencies improving and provisions to loans stable. Turning to Slide 10, this highlights both the quality of our revenue growth and the operating leverage in the business, even as we materially stepped up investment. Net interest income increased 9.1% supported by lending growth and higher income from the securities portfolio. Net interest margin expanded 19 basis points to 6.41%, reflecting disciplined pricing and a modest portfolio shift towards higher-yielding assets. FX income increased 28.7%, driven by higher exporter and importer activity and the continued uptake of our digital FX offering. Fee and commission income grew 14.5%, reflecting customers increasingly using BSP as their primary transactional bank and continued growth in our digital channels. Operating expenses increased 18.8% to PGK 1.46 billion, driven by a deliberate increase in headcount, leading to higher employment costs and a planned step-up in technology investment. Modernizing for Growth investment of PGK 137 million is now flowing through the P&L as we move into the execution phase of the transformation. Even with this step change in investment, operating profit still grew 11.3% to PGK 1.95 billion. That speaks to the underlying operating leverage of the franchise, ex transformation, the core cost base remains tightly controlled, and the business is funding its modernization program from organic earnings growth. On Slide 11, cost growth is deliberate and targeted, primarily people, technology, depreciation and program delivery as platforms progressively go live. The CTI increased 160 basis points to 42.9%, remaining within our 42% to 45% target range and below the major Australian banks. The increase in CTI was driven by investment in growth and capability around 35 basis points from adding 200 roles to support growth and improve customer outcomes, 32 basis points from long-term incentives, 30 basis points from our MFG investment, reflecting that controlled investment in the business and 9 basis points from CPI-linked salary increases. We expect CTI to trend higher in our target range over the next few years as the MFG program moves into its peak, expensing and depreciation phase with more platforms going live and further direct operating costs flowing through the P&L. As major platforms stabilize and automation increases, we expect operating leverage to reassert and CTI to normalize to the lower 40s over the medium term. Moving to Slide 12 on credit quality. We're pleased with how the portfolio is performing. Delinquencies improved modestly over the year and remained low at 2.7% of total loans reflecting continued stability across our markets. The FY '25 impairment charge represents a normalization from an unusually low FY '24 outcome, which benefited from the release of COVID-related management overlays. The current year charge reflects portfolio growth and our ongoing prudent provisioning approach, not any deterioration in underlying asset quality. Provision coverage remains stable year-on-year, and we continue to apply a conservative approach to risk management across retail, SME and corporate portfolios. Importantly, we are not seeing any emerging stress in any single sector or geography, and our asset quality metrics remain well within our risk appetite settings. On Slide 13, our balance sheet remains strong and conservatively positioned. Total assets grew nearly 16% and deposits grew over 17% last year, reflecting strong franchise momentum and customer confidence in BSP across all markets. Demand deposits remain an important part of our funding supporting a low cost of funds. Gross loans grew nearly 8%, and that growth was fully funded by deposits without stretching liquidity or our funding risk appetite. We are growing the balance sheet selectively and with discipline. Slide 14 shows a stable and balanced loan book composition. Retail mortgage growth reflects housing demand across Pacific markets, particularly CG. Business and corporate pipelines remain healthy and well diversified. Personal lending growth remains measured. We are not trading credit quality for yield. Overall, the portfolio mix remains stable with no material shift into high-risk segments. Turning to Slide 15, our key ratios highlight the quality of BSP's business. Return on equity of 23.8%, reflecting strong operational leverage and disciplined capital management. Capital adequacy of 26.4% underpins our ability to absorb unexpected volatility across our market support strategic flexibility and remains comfortably above regulatory requirements. Return on assets remain attractive, demonstrating balance sheet efficiency. This is a high return conservatively capitalized balance sheet, not one built to leverage on leverage. On Slide 16, we continue to deliver attractive and sustainable shareholder returns. As Mark mentioned, the Board has declared a final dividend of PGK 1.38 per share, bringing the full year dividend to PGK 1.88 per share, up 13% year-on-year. This represents a dividend payout ratio of 75%, consistent with the past few years, providing shareholders with an attractive income stream while maintaining balance sheet strengths. Our 10-year total shareholder return of 413% based on PNGX ownership reflects disciplined capital allocation and consistent earnings delivery over the cycle. We're committed to a sustainable payout ratio that balances reinvestment, balance sheet strength and shareholder returns. FY '25 demonstrated that BSP can grow earnings, invest in future capability, protect asset quality and continue to deliver attractive returns to shareholders. And with that, I'll hand back to Mark to talk through the outlook.

Thank you, Glen. I wanted to briefly recap that we have a clear focus. We are the South Pacific's International Bank. It's a focus driven by our commitment to champion prosperity for the South Pacific, its people and communities. It's also reflected in our strategic pillars, which I talked about earlier, each of which, which is a critical element in uplifting people, communities and businesses across the region. Our Modernizing for Growth program is improving customer experience, driving efficiencies in the business and creating new opportunities for sustainable growth. We are making good progress and there is still a lot of upside for our customers, for our staff and of course, for our shareholders. The progress is already apparent. Our monthly average digital transactions grew by 22.5% last year as customers adopted modern banking channels with transactions at our branches and agents relatively flat. As you can see, digital adoption continues to grow with more customers shifting to mobile banking, which grew at almost 22% compounded annually over the past 5 years. Internet banking and EFTPOS grew at 33%, 18% respectively compounded annually over the last 5 years. Over that period ATM usage was flat, the trend changed last year with our new ATMs that have more uptime and deposit taking capabilities. Turning to Slide 19. I want to share a few examples of the Modernizing for Growth investments that have really shifted digital to live. In retail, we're bringing next-generation infrastructure to BSP customers, which is also saving time for our staff and our customers. We're upgrading our branches to bring our customers their experience. This includes [indiscernible] supporting our customers use digital channels. We are also using database to understanding customers and [indiscernible] launch of BSP first gold and BSP green. This year we will take a major step forward with the launch of our new digital experience platform, including new Internet banking and mobile app experiences, we are also in business and corporate banking. Our digital bank was launched in April to provide dedicated service specifically tailored to small and medium-sized businesses. While there is a lot of focus on projects, particularly in Papua New Guinea, the fact is small to medium-sized businesses are the lifeline of the South Pacific economies and those businesses also serve dedicated attention and support. This market is also a significant growth opportunity for BSP, in our corporate bank, we've introduced new risk and portfolio management capabilities and online foreign exchange services, and we've invested in more targeted customer propositions such as serving our financial institutions clients better. This year, we will introduce new digital experience platforms for our business and corporate customers. Turning to Slide 20. All this comes with the program of ESG work, which is aligning BSP with international standards. Right back to our banking routes of 110 years ago, we are focused on supporting the community and focus on strong governance. This now includes supporting customers in the community as we witness the increasing frequency and intensity of climate events across the South Pacific. Our ESG program of work looks to formalize all that we are doing across environment, social and governance to help investors to better understand our work and align with international standards. As part of the 2025 annual report, we published our second sustainability report. This report is based on a materiality led approach that focuses on the issues that are important to the South Pacific. I encourage you to take a look at our annual report, which was released today for more information about our ESG strategy and initiatives. Finally, turning to Slide 21, let me close by saying that BSP is delivering consistent growth and performance for our shareholders based on disciplined execution with an ROE above 20% for over 2 decades, we are not only the leading financial institution in the South Pacific. We are also delivering attractive returns for our shareholders. We are modernizing to create a better experience for our customers and staff and we're investing to build stronger, more resilient communities. We entered 2026 with confidence. We serve a region that spans almost 6,000 kilometers from our Eastern most branch in Avarua Rarotonga and the Cook Islands to Vanimo in the West Sepik Province of Papua New Guinea. This is a region that is more connected than ever with incredible diversity. Our customer segments are diverse from agriculture and fisheries, with established domestic and international markets to some of the world's best destinations for tourism to world-class commodities and resources including gold, copper, silver and major reserves of oil, particularly -- major reserves of oil and LNG. With the investment we are making, the modernization of our infrastructure, our scale and deep local relationships, I leave the best is yet to come for BSP. Finally, I would like to express my sincere thanks to our nearly 5,000 staff across the region without whom this result wouldn't have been possible. Thank you for your hard work, professionalism and passion for BSP and our customers. Let me now pass you back to Met, who will open the briefing for questions.

Thank you, Mark. [Operator Instructions] And I'll now hand over to the operator.

[Operator Instructions]

Thank you. We do have limited time. So if you don't get to all questions, we'll get back to you in the coming days, and we will, of course, post answers to any material questions on the website. While waiting for participants that have dialed in to join the queue on the conference call. We have received quite a few inquiries about the recent action by the Financial Action Task Force last week about the gray listing of PNG. And I'd like to invite Mark and Glen, if they could answer a few comments on the topic, please.

Thank you very much, Met. The announcement was made on February 14 that Papua New Guinea has gone on to the gray list. The gray list is maintained by the Financial Action Task Force. By way of background, countries are placed on gray list after detailed examination of law systems and controls in the country technical prosecution a range of legal activities, including, obviously [indiscernible]. At this Financial Action Task Force has previously placed the PNG on the gray list in 2014. PNG exited the gray list 2 years later in 2016. After enactment of both laws and regulations and amendments to the criminal code and the proceed crime act of 2005. The 2026 gray listing has followed an examination on examination here in 2024 of the effect the money laundering laws and detection and prosecution system. Our primary concern of that is there has not been prosecution cases of the various anti-money laundering laws. First thing to say with respect to BSP and for our customer [indiscernible] will continue to operate [indiscernible], the impact of listing likely increased reporting requirements in Papua New Guinea. Our customers may be impacted by longer processing times to do some transactions and potentially higher costs. Obviously, the gray list highlights the importance of strong controls for all banks, including BSP, to ensure [indiscernible] remain the reporting obligation to the Bank of Papua New Guinea. BSP continues to take obligations very seriously. It will take some time to address the matter [indiscernible]. I hope that's helpful.

We received several clear interest through the chat around the MFG program that we spoke about, particularly point around the end of that investment and where -- what the [indiscernible].

The MFG program, we announced last year that we were committed to spend PGK 1.2 billion over the next 4 years. [indiscernible] in the next 3 years, and we do believe it will be in our target range between 42% and 45%. Post the MFG program, we anticipate the CTI to come back down to a more usual low 40s number.

Thank you, Glen. I'll now hand over to the operator to check if there's any participants on the conference call waiting to ask questions. Operator?

We do not have any questions from the line. Please continue.

Yes. With that, we are at time. I will thank the CEO, Mark Robinson and our CFO, Glen Skarott as well. That concludes our investor briefing. On behalf of the staff and management of BSP, we thank you for your continued support. All questions that weren't answered, we will reach out to you directly as well. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.