Kina Securities Limited (KSL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kina Securities Limited Full Year 2021 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Greg Pawson, Chief Executive Officer and Managing Director. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us this morning. I'm calling you from a very dreary, stony Port Moresby. I hope you all are well, particularly those of you that are in Queensland at the moment. With me here in Port Moresby, I have Chetan Chopra, who's our Chief Financial Officer. And on the line, we have Samantha Miller, who's our Executive General Manager, Corporate Affairs and Investor Relations. Sam is based in Brisbane. Look, what we thought we would do, I'm sure KSL is probably not familiar to most of you that are on the call. This is the first time actually that we've done something like this as opposed to speaking directly to brokers and our main shareholders. But what we thought we would do is just -- I'll start with a bit of an executive summary, a broad overview of where we've come from, our journey and where we've got to today. Chetan will talk about the -- largely about the financial numbers for 2021 as opposed to the prior financial year. I'll then talk about our plans for this year, for 2022. This is year 3 of our 5-year strategic plan. Sam will talk a little bit about her relatively new portfolio and touch on some of our objectives in relationship to ESG. And then we'll open up for questions at the end, if everybody is comfortable with that. So let's begin. We've made solid progress transforming and growing the company as we move into year 3 of our current strategic planning cycle. Several key highlights from a financial perspective. Our NPAT compound annual growth rate has been year-on-year greater than 25%. Our footings have grown now to just be over PGK 5 billion, quite a significant milestone for the company. And through that, again, our compound annual growth rate in terms of organic loan growth has been in excess of 20% per annum. We've grown our customer base from 25,000 3 years ago, to over 185,000, and much of that organic customer growth are obviously coming as a result of acquiring ANZ, the retail business here in PNG in 2019. Our foreign exchange revenue is up from PGK 20 million to over PGK 60 million in 2021, and we've been averaging an ROE of around 17%. In terms of nonfinancial, the ANZ acquisition was a very complex program of work. It took us 18 months to complete that, but we completed it on schedule and on budget. Through that process, we also acquired a 15% stake in nationwide Microfinance Bank, the largest financial inclusion organization in PNG. We did a non-renounceable rights issue with AUD 80 million back in 2020, and we're on track to return our earnings per share to pre-capital raising levels within 18 months. As we promised, we've made significant enhancements to stabilizing our core banking network and infrastructure, including digital assets and channels. We've maintained our leading position and a key point of differentiation for us here at PNG as PNG's leading fund administrator and fund manager, securing revenues in excess of PGK 30 million. And our bank-to-market makeup business model evolution is on target. Our digital revenues from a 0 start in 2020 to over PGK 26 million in 2021 and service agreements in place with MiBank and TISA and, more recently, NCSL for the use on a service model of our infrastructure partnership agreements in place with NiuPay using our Internet payment gateway, [ FSID ] , Xero and [ Neutro ], which is the new PNG digital ID. Xero, well underway and all to materialize in 2022. And finally, quite an ambitious culture transformation program is well progressing on plan as well. As we move into 2022, I mean it's fair to say there's a lot to do. We're on our pathway to realizing our vision of being the most dynamic, progressive and accessible financial services organization in the Pan Pacific region. But at a high level, our ICT program include the considerable number of BOU initiatives, remediation, stability and performance. We are on track and going well. And additionally, we're in the process of putting in an API middleware integration to our other systems across the organization, which will enable us to be considerably more innovative and a lot more flexible and nimble in terms of the launch of new technologies that we have lined up for this year. And it will move away from an overreliance on our core banking system. We're also working, very exciting, with Amazon, who are coming to PNG on a cloud offering and hosting and continuing to mobilize and implement our data management strategy with the assistance of the Asian Development Bank. Very proud of the fact that we are PNG's leading digital bank. And certainly, one of our programs or key program of work for us is to continue that innovation over the course of 2022. One of the things we're conscious of and that we have achieved, I think, in the past is that we must continue to leverage our strong organic growth opportunity and the positive market sentiment towards our brand in PNG to build our profits and capital base. But for those of you that don't know the financial or the banking sector, particularly well in PNG, it's dominated by one bank, Bank South Pacific, who have around 70% market share. We just made it to second place, at about 16%. And then you have the 2 Australian banks, Westpac and ANZ, who have made it very clear that given the opportunity, they would actually exit the market. So clearly, that's presenting a lot of opportunities for us. We're excited about a number of new offerings that will come to fruition this year, the Kina Private Bank Exchange, which is our independent e-KYC payments platform for remittances, and [ Pay Better ], which is a market-first new domestic market payments platform as well that we'll launch in the second half of 2022. Off the back of the opportunity that we had to acquire Westpac-specific businesses, despite the fact that we terminated the SPA due to the inability to get the PNG ICCC to approve the transaction, we have made quite a good and solid investment in PNG around incorporation and banking licenses. And it's a market that we're looking at in particular to build out our ICT support, some good talents and good infrastructure that remains quite a challenge for us here in PNG, to source quality ICT talent in PNG and that's a comparatively high cost. So we think that developing a compelling test-and-learn innovation hub to explore future growth opportunities with easier access to venture capital with our development partners and tax incentives available in PG would be a good plan to explore. It will also assist us, we think, to deliver more operational efficiency and a budgeted 5 basis point reduction in our cost of income until over 2022. However, at the same time, we're going to continue to strengthen our technology leadership and our people capability, and continue to broaden our investor profile and market coverage and explore other options potentially as a source of future capital. And all of this is underpinned by a bold aspiration to move into the ASX top 300 listed companies by market cap by 2025. But that's a little bit of our story of where we've come from, where we're at today. I might just hand to Chetan to talk about the 2021 results.

Thanks, Greg. Good morning, everyone. So this -- my comments will be, obviously, in addition to the preliminary final report that we have already launched on the ASX as well as the investor presentation last May. But what I'd like to do is actually take you through some of the key financial areas that we normally track as part of our key parameters. In 2021, we saw KSL delivered an underlying profit of PGK 96.2 million. This is the after-tax profit on an underlying basis, which was a 27% growth on pcp. And this has confirmed that really, that the base business is still very strong and is poised for future growth and especially into 2022. The financial results are, however, impacted, as you know, by the one-off separation as a consequence of the Westpac transaction. And this resulted in a final NPAT of -- statutory NPAT of PGK 70.8 million. The dividend -- the directors had announced a dividend PGK 18.5 toea per share for the second half, which converts to AUD 0.07, and making it a cumulative dividend for the full year at PGK 26.8 toea, which converts to AUD 0.10. This is a payout of 80% on our underlying profit, which is within our policy. And the directors are confident that the company has adequate capital to support this payout and maintain adequate capital growth. In terms of the business metrics that we look at, I'd like to just highlight a few areas, which are obviously the key ones that we track and which probably underpin the strength of our business. Revenue has continued to grow in this environment, which has been a tough environment affected by COVID as well as our business position with PNG. We still -- we grew the revenues of PGK 334 million. This was up on the basis of a 3% growth in net interest income from -- and an also 19% growth in FX and a 26% growth in fees and commission incomes, primarily from digital channels, which was a really strong growth, which is one of our key strategic areas, up 65% year-on-year. The sales timing of the loan drawdown as a budget was a major contributing factor to some matters that impacted our performance. We could -- because 40% of our loan drawdowns occurred in the final quarter. And we're obviously looking at that as a key area to see how business moves into 2022. And that impacts all our ratios, including the cost-to-income ratio that will appreciate. Net profit after tax on an underlying basis, as mentioned, was slightly above the adjusted plan. We are at 95.5 -- PGK 95.6 million. And it is our market expectation, and it reflects the revenue growth and controlled operating expenses and improved management of the loan portfolio. And as you know, that was offset partly by administration expenses because in 2019 and 2020 and '21, we continue to have the impact of the COVID-19 pandemic, particularly in areas of employee transport and hospitalization costs of staff were impacted by it. In terms of the loan book, the loan book grew by 21%. This was a milestone year for us because we've crossed PGK 2 billion in our loan book. And though as mentioned earlier, typically to reach a substantial part of this growth, that comes in the second half of the year. But as mentioned, this obviously positions us good for the next year in 2022. For the full year, we were up PGK 544 million, as you'll see in the 4E, with 29 new connections to the bank. And as part of our strategy in 2021 and 8-K, then we did the annual and we raised this additional capital, which allowed us to engage with large corporates and larger transactions, we had brought on several new signature commercial and corporate transactions, which include Oil Search, but there are a number of other large companies, large global operations who are now considering Kina Bank as definitely alternative to other banking arrangements in PNG. The home loan book also saw a very positive growth of 16% and we do expect that this is going to be a 15% continued year-on-year growth, and that will be maintained. On the flip side, obviously, the deposits, which you've got to maintain because we have an internal ratio that we maintain of 66% to 70% of a loan-to-deposit ratio. We grew our deposit base at the same time. And the milestone achieved in terms of deposits was at PGK 3 billion. So we are pleased to say that we have seen a total growth of over -- and up to PGK 5 billion now in our asset base. It was also pleasing to see that we had a 28% growth in our low noncurrent account balances, which means, obviously, the cost of funds has remained within manageable areas, which is -- and this has been a key focus area for us. We have 1,600 new business accounts, which have been onboarded, which have also had current accounts with us, and retail customer growth at savings accounts is nearly 20,000 customers with over 15% increase in the retail customer base. And all this has been underpinned by what Greg spoke about, the anchor initiatives in e-KYC and other assets that we are going after. Mainly the constant focus area for us, as you know, the target range for NIM that we have set after is between 6% to 8%, and which is reflective of the fact we're lending in market, and we do expect that we will lend. And in 2021, we were at the lower end of 6%, at slightly above 6%. And this reflects the mix of increased lending to the corporate sector, the strong deposit growth to maintain the loan-to-deposit ratio because naturally, we've got to make sure that the deposits come out in line to manage that ratio, and that impacted the cost of funds in the last quarter. And we looked at our strategy to grow FX revenues, which meant we obviously had to work with larger corporates and have them come onboard. And this obviously saw a significant impact on our business growth because foreign exchange revenues have grown by 19%. So really the cost to revenue benefit was significant. While increased earnings saw a 21% increase overall, 69% of the growth was recorded in the second half, and we expect that to really reflect in 2022 results. The other pleasing area and the impact that we track is our revenues from our digital channels, as we always have had the aspiration to be the leading digital bank in PNG. And in 2021, saw tremendous market sentiment reflecting that it has ultimately transformed into a very strong digital proposition. And our digital revenues saw a 65% increase to PGK 23.4 million in 2021, as when comparing the PNG market, this is the highest growth by any bank from 2019. A key area of monitoring by both all shareholders as well as ourselves is the asset quality. This has been a significant focus area, and particularly with the COVID environment impacts, the impacts of IFRS 9, this area was heavily concentrated on in terms of focus management. And we have got a lower impairment charge in the current year. The lower charge is a consequence of increasing our provision levels in 2020, which obviously we took up the IFRS 9 provision. So on a comparative basis, it looks lower, but it is reflective of the quality of our book. Our asset policy with spending is strong. Our greater focus on robust and disciplined relationship management has underpinned this, and we have maintained strong credit follow-up processes by the credit team, which had helped us deliver a manageable low impairment charge. This reflects the strong asset quality that we have. The other area that we've obviously focused on is the ROE and the NIM and the EPS. We are at a market expectation on an underlying basis. On an underlying basis, our return on equity is at 16.7%. And the statutory -- well, the statutory was obviously impacted because of the Westpac acquisition. However, we do -- we know and are confident that the business will recover in the next 6 to 12 months. We always mentioned to the market that post the [indiscernible], we will take 18 months to recover from -- on the ROE and the EPS, and I think we are on track to achieve both those matters in 2022. The other key area that we do focus on is capital management. Capital management is a key area for us, and we have always looked at keeping it within the 20% to 24%, and capital adequacy remains at that level. And this is to ensure that we are well-capitalized for future growth initiatives and in particular, the strategic objectives that we have for 2022. The total leverage ratio is also in line with the requirements of the Bank of Papua New Guinea. We are ahead of the minimum requirement of 6% in terms of the leverage ratio. A key parameter that Greg also spoke about was the cost-to-income ratio, and this has been maintained flat at 58% compared to the prior year. But there were necessary expenses incurred as part of our Q3 initiatives, where we also had a real objective of making sure that our systems and processes are completely in line, so that's in place before those bank acquisitions would go through. We would be able to manage that business and integrate it very effectively. And as a consequence, obviously, in Q3, we took significant effort in improving our digital platforms, AML and CTF processes, credit systems. We have developed our FX platform, and we have enhanced our channel network systems. And this has resulted in us maintaining our cost-to-income ratio, and the benefits obviously will flow on into 2022. I think those are the key highlights that I want to really stress on. If there are further questions, then we're happy to take any questions at the end. But all in all, the financial performance on an underlying basis has been extremely positive and I think the market has also -- and the local market and the domestic business operating environment has probably reflected that. Thanks, Greg.

Okay. Thanks, Chetan. I thought now I'll just give you all a brief overview of our strategic initiatives that we have as part of our 2022 business plan for this year. There are several of those, and I'll just touch on them very briefly. There's a little bit of an outline in the investor pack, and there's also an update on the sort of economic situation here in PNG. Obviously, the big shining star at the moment is the approval by the government of the Papua LNG project. That's quite a significant USD 15 billion project, which is expected to start in the latter part of this year, which I think will be a nice and well-received boost for the economic growth here in PNG. But the several objectives that we've got planned for this year, the first around core banking is expanding our regional banking model. It's fair to say a considerable amount of our growth continues to come out of the 2 key markets: Port Moresby and Lae. Over the course of 2022, we'll be expanding commercial centers into Mount Hagen, Lae, the local Madang and Kokopo as well to leverage the growth that's happening in those larger provincial centers outside of Port Moresby. We're excited about that, the huge focus on business development. There's really only one bank in those locations dominating, which is BSP. So we're doing, I think, some well-received competition into those locations. There's also 3 other secondary provincial locations that we're planning to go into as part of our distribution strategy this year, and that will be done in conjunction with MiBank. I mentioned earlier, we have a 15% stake in the largest national inclusion bank here in PNG. They had over 450,000 customers across the country, quite an extensive nationwide branch network. They're in some locations that we are, and the intention is to co-brand and telesale our platform make sure that we see good presence. The other exciting thing this year is launching 3 new segment propositions: Prime for our home loan customers; Prime Plus, which is a targeted employee referral scheme; and we'll be launching Kina Private Bank before the end of this quarter, leveraging the significant capability we have as part of our fund administration and investment management business. Digital banking continues to be a major focus for us. Digital onboarding at scale, inclusive of what we call e-KYC, which is digital know-your-customer onboarding. That's something very common in Australia, but rather unique here in PNG. We'll be the first bank to launch that in the first half of this year. It's a game changer in terms of the ability to onboard literally hundreds, if not thousands of customers digitally through our partnership with the 2 largest provident fund -- superannuation provident fund here, Nambawan Super and NASFUND. We effectively had access through our fund administration to data on every Papua New Guinean that's working and employed in the country. So we're finding ways to leverage that. Over the course of this year, it's going to be critical for us. And continuing the strong growth that we've had in payments and continuing to expand our payments platform, [ Pay Better ], I talked about earlier, which is our marketplace -- marketplace payments platform. Our POS network, we'll be adding another 1,000 terminals to that. And we've just had agreement for the online revenue commission and PNG Power Limited as part of the tender process. They'll be using our payment gateway for online payments. Our partnership platform. So I touched on this earlier. We have allowed some smaller financial services institutions in PNG to utilize our infrastructure in our payments network. They include MiBank, TISA, Teachers Savings and Loan Society, and Nasfund Savings & Loans Society, and we're about to onboard Nambawan Super Savings from those societies as well. Rather small organizations, but it's a fee-for-service model. So another potentially lucrative income stream for us that we'll build over time as those organizations get bigger. Those are the key focus. And we've got an exciting partnership with Xero, the New Zealand-based software accounting organization, to allow our customers access to -- our commercial and corporate customers access to their platform, which, again, will be a key area of differentiation for us this year as well. Diversified investment bank is a key focus. We're enhancing our investment management platform. We're in the process of exploring and scoping there, scoping a number of alternative retail investment opportunities here in PNG. It's a very unsophisticated market. There's virtually no secondary corporate bond market. So we're looking at ways to potentially leverage that opportunity at the moment. Our deployment of our corporate banking and advisory unit, that's well on track at the moment. And we are putting in place to fund for the SMEs here in PNG in partnership with Business Link of New Zealand. A lot of work happening around continuing to build out our people capability and leadership development across the organization. Some challenges at times, getting the right talent, particularly in technology here in PNG, exploring a number of options to continue to build out that capability. And I talked earlier about our Pan Pacific strategy as well. The first phase of that will likely be the establishment with an ICT center of excellence in PG. But why PG? We went through the process of incorporating in PG. It's not a market that we have an absolute desire to go to. Obviously, because of its size and scale although a limited size and scale, but the advantages from an ICT perspective far outweighed that of PNG, and that they're on the southern capable of 5G network. The cost of technology actually overall is about 1/4 of what it is in PNG. So we think there's an opportunity to better leverage that. And they have some terrific talent, particularly in the RPT space there that will help address some of the gaps that we have. And a really good place, I think, to use as a test-and-learn digital innovation hub, the things that we might want to do in the future as well outside of our core market here at PNG. And the other key piece around that is formalizing our environmental and social governance strategy that will be completed by the end of this year. And on that note, I might just hand over to Samantha Miller to give you an outline of what that's going to be all about. Sam, I think you're online.

Thanks, Greg. Appreciate it. Good morning, everyone. Thank you so much for joining us here at KSL this morning. I've taken on the role over the last 3 weeks of EGM, Investor Relations, Corporate Affairs and ESG. So mainly my role is to really broaden our reach across the assets and build some investor base. And I know many of you on the call here are strong supporters, and we thank you for that. And I'll start to build out that portfolio and engage more frequently with many of you over the coming months. Also included in the portfolio is the achievement that Greg just spoke to. Many of you here in Australia probably realize the importance of ESG, especially across the ASX-listed companies, and we will take an approach that will help us and our communities in PNG. And a good example of that is what Greg mentioned of microfinance banking. So many people in PNG are on bank. And having 450,000 people, giving them access to financial services is a really large impact that you generally wouldn't get in Australia. So that's something really exciting that we're going to launch over the next year as well. But I look forward to speaking to many of you soon. Thanks, Greg.

Okay. Thanks, Sam. Well, that sort of concludes, I think, most of what we wanted to talk to. If you haven't had the opportunity, I would encourage you to have a look at the full year investor presentation. It's probably the most -- I think is the most comprehensive and best way as we've put together a lot of information in there, a lot about our strategy and most of our objectives moving forward as well. But I'll leave it there and I'll open up for any questions.

[Operator Instructions] Your first question comes from [ Jim Graziadio ], private investor.

Thank you, Greg and the team for all the tremendous work you've done in PNG. Much appreciated. I've lived in PNG and understand the much higher challenges of doing business there. I'm just an individual investor that have invested since the IPO. My question to you, sir, and your team is you're humming along well, growing organically, lots and lots of initiatives. Could you help me understand the rationale of going after the Westpac acquisition versus just keep doing what you're doing, what you're doing so well, please?

Thanks, Jim. It's Greg, and thank you for your continued support. Very good question. And I think one that we've spent a fair bit of [ detail ] depending on -- since we terminated the 2 sales and purchase agreement. Look, I think the rationale behind it really was scale. There's an opportunity to get that scale much quicker. We were aware that Westpac were very keen to exit the Pacific. I don't know if you're aware, but in my previous role as the regional head for Westpac, I led the divestment of their 5 smaller Pacific Island Nation businesses to Bank of South Pacific. So we've always been aware that they had an intention to sell. And actually, we were talking to them at the same time we were talking to ANZ about potentially acquiring ANZ retail franchise here in PNG, which ended up being a much, much better proposition for us. I think one of the challenges for Westpac is that quite a large percentage of their business here is in dividends that they've been able -- or capital that they've been able to unlock and remit back to Australia, which artificially inflates the price. And for us, that just wasn't part of the negotiation. We didn't really want to acquire Westpac PG. It came with the transaction. Westpac wanted to sell both businesses in one line. The only piece really that we were interested in with respect to Westpac was its PNG business and its corporate portfolio. And to put that into context for you, we are slightly bigger than Westpac and ANZ now in PNG in terms of total footings, loans and deposits. However, Westpac are about PGK 50 million to PGK 60 million ahead of us on revenue, and all of that revenue relates to the corporate sector and predominantly foreign exchange. Now that's obviously very attractive to us. And look, we've demonstrated that we're chipping away at that. We've now got some very good relationships with the resources sector. Asian Development Bank coming in, I think, now is our third or fourth largest shareholder, has been extremely helpful in helping us tap into that sector. And I think our foreign exchange growth year-on-year, 19% up, and what we're forecasting this year is a reflection of that. However, it was really back to the case that Westpac really wanted to sell both businesses. I talked a little bit about the ICT capability in PG. And as we got closer to that transaction, we thought that, that would be really attractive. It will help reduce some of the costs we have in PNG and also improve our capability overall. We're disappointed that it didn't go ahead. I think, yes, in terms of the great cost that we've brought with it, and you would have seen that in terms of our statutory performance, very disappointed. But at the end of the day, as you've highlighted, the organic growth opportunity for us continues. We're leveraging it, and it's interesting. I didn't touch on this earlier, but in 2021, we had a record year in terms of new lending, around PGK 550 million. That was 56% up on the previous years. And of the 70 online, I think 80 new commercial and corporate connections we onboarded, 50% of those were from Westpac. So we come back to our original strategy, which was about really targeting -- and ANZ falls into this as well, targeting their best customers and moving them across to us. Hopefully, that answers your question.

Yes. And again, thank you for the tremendous work you and everyone does at Kina for us.

Thanks, Jim. Appreciate it.

There are no further questions at this time. I'll now hand back to Mr. Pawson for closing remarks.

All right. Well, again, just to reinforce Sam's comments. Thank you for your attendance this morning. This is the first time we've actually had a broader conference call to talk about our results and our strategies. So we appreciate you making the time and effort to join us this morning, and please don't hesitate to reach out to Sam as the first point of contact if we can provide you with any more information. Appreciate your time. Thank you.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.