Kina Securities Limited (KSL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kina Securities Limited Half Year Results 30 June 2023 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speakers today, Mr. Johnson Kalo, CFO; and Mr. Greg Pawson, Managing Director and CEO. Greg, please go ahead.

Thanks, [indiscernible] and good morning, everyone. And then thank you for joining us. The ASX and the PNGX communications only went up at 9:30 this morning. So I doubt many of you have had time to retrieve a full pack on our half year results announcement. An investor presentation pack has also been made available, and I'd encourage you to read through that when you have an opportunity. So I'll take this opportunity to provide a high-level overview of our results for the first half of 2023 and give some additional context to the results and, of course, for the year ahead. So, look it continues to be a very good narrative for 2023 and a consistent story of steady organic growth on track with our key objectives that we have in accordance with our 2025 strategic plan, which is currently under review. We've had a strong start, particularly with customer loan growth and digital revenues. We've also made some really good headway on reducing our cost to income and aiming to be ahead of budget for the full year. The best outcome, I think, though, is the fact that we've been able to neutralize as best we could, but the impact of the increased tax rate for the commercial banking sector in PNG with our net profit before tax slightly up 2% half-on-half. We expect that trend to continue. We're managing it very carefully through the second half. And of course, it's the second half of the financial year, that's normally our strongest in terms of underlying revenue growth. So just walking through several of the key highlights. Revenue up 5%. That's close to PGK 190 million. This was largely attributed to strong lending growth of 10% and that was actually 17%, and the business sector with interest on loans up 21%, revenues continued to perform well, up 53% against the prior comparative period. With the 2 negative impacts on the revenue line, which were really beyond our control, although we've attempted to mitigate these impacts as best we could by booking stronger loan growth in the first half. Income on our investments is behind budget. The yields on government securities and treasury bills and PNG really fell off the cliff. So we're half that of what we were in 2022 around 4%. And this is mainly due to the government moving much more of its borrowing offshore. However, these yields are slowly starting to turn the other way in term signs of strengthening, which I think all bodes well for the second half. Foreign exchange earnings were also quite tough in the first half. We have been challenging for the whole financing sector in PNG with the market shrinking by about 15%. However, again, revenue into the second half July, August, that already looking much stronger. So we're quite confident of achieving our budget of our NCD marked PGK 75 million for the full year with those increasing flows coming through in the resources sector. Pleasingly, our wealth businesses are also continuing to post good growth rates, and they now contribute around 15% of the total revenue for the organization. Our funds administration and funds management contracts with the 3 major super P&G super funds have also been extended for another 3 -- by 3-year term. So that's securing revenues for us took around PGK 35 million. Customer growth was really pleasing and I'm delighted to advise you, we're now officially the second largest commercial bank in PNG. Spot bookings, in fact, our loan and deposit portfolios are now bigger than ANZ and Westpac combined. We continue to gain market share and into the second half, we're onboarding over 3,500 customers per month. So we expect to finish 2023 very, very strongly in terms of new customer growth. The market demand for our payment service has frankly been unprecedented, and we're expanding our sales teams to manage that demand. It's a nice problem to have. Our strategic partnership with Nationwide micro finance bank is continuing to move from -- strengthen through that. We're now reaching over 700,000 Papua New Guineans. On the flip side, operating expenses were down 6% on the prior comparative period, and that was a deliberate strategy and due to close monitoring and effective management of costs internally. With respect to new, you'll see a far more detailed graphic on net interest margin in the investment pack. And the reason for that I touched on earlier, we've seen quite a lot of decline on yields for our investment portfolio, which is largely PNG government securities and treasury bond and that impacted our NIM by close to 1%. However, the really good news is that the medium on our loan portfolio has actually strengthened to 7% and the demand for lending has remained very strong. In fact, our pipeline -- forward pipeline is in very good shape. So we're forecasting our NIM will still be between that sort of 6% to 8% range by the end of the year. And as I said, we expect it to improve from the half year position as the yield on our investment portfolio continue to improve. We're not seeing the same increasing interest rate size of Australia has albeit this seems to have stabilized. The PNG domestic market remains extremely liquid with deposits flooding and deposit to loan ratio is still very healthy at around 150%. PNG's inflation rate is also stabilized somewhat. That sort of sitting around 5% to 6%. The loan book has come in at PGK 2.4 billion. It's performing well with nonperforming loans to gross loans down from 12% to 8% and provisions on gross loans down to 2.2%. We're really happy with that result, and that's well within our internal benchmarks. The ASX documents, particularly the 4D, will provide you with a very comprehensive overview of the results and importantly, an update on our strategic deliverable. I won't summarize those on this call. But again, I invite you to read this part of the document, which gives, I think, a great overview of the several key initiatives that we have delivered in the first half against our 5 key strategic priorities: growth, resilience, service leadership, dynamic people and, of course, sustainable communities. With respect to the PNG economy, the prospects for a stronger 2023, I should say, are certainly baked into our forecast. The government's referenced to the 4Ps and W: Porgera, Penang, Papua, Pasca and Wafi-Golpu are the 5 major resource projects, some of which have been approved and are in scope. Some of which are pending approval, but we expect those approvals to be ratified by the end of this year. That's around USD 30 billion investment over the next 5, 6 years. The Papua LNG project has already commenced. And we're expecting construction on that project to start early in 2024. That's the joint venture between Exxon-Mobil, Total and Santos. And certainly, there's already a lot of activity in the market in relation to that project specifically. The PNG government budget announcement of plans to increase the corporate tax rate for the commercial banking sector is 45% for the 2023 fiscal year last November. It continues to be challenged mainly by the PNG Bank Association. And particularly, as we're moving into the 2024 budget round, which is about to commit it. So we entered into an extended consultancy period with the PNG Treasury and our listing, which is a good sign. And I think recognizing along with some sound advice [indiscernible] from the international military fund that the medium-term unintended consequences of this increased tax, the highest tax rate of any financial services sector in the world I might add we'll see potentially an investment of capital potential for increasing interest rates. We are considering that at the moment given the increased cost of capital because of the tax the market instability and a lack of effective competition and the sector PNG financial services sector need bigger banks and certainly a higher tax rate discourages that. So the support for more consultation, I can say is encouraging and it may lead to other options being explored and pursued, but we'll keep fighting that battle and provide you with updates over the course of the second half as further information comes to light. I think though, in the meantime, we continue to execute a robust plan to mitigate the earnings impact as best we can. And I think we've shown that to a certain degree in the first half. This includes, obviously, growth above our system or market, our legal structure, M&A opportunities and offshoring potential to these equivalents with our Pan Pacific aspiration. But of course, at the same time, recognizing and taking advantage of the strong organic growth opportunity, which continues to prevail for us in PNG. So look, I'll wrap it up there. Thank you for listening. I think what we'd like to do now is open it up for any questions. And Johnson Kalo, our CFO, who was in floor mostly at the moment will join me, while answering any of those questions. Thank you.

[Operator Instructions] We do have a question from [ Darryl Jay ] a Private Investor.

My question is renewal of BSPs IT troubles, have you seen a lot of sort of new account openings and new retail deposits in the period post the financial year?

Thanks, Darryl. Yes, I deliberately actually left that out of the presentation this morning. But for those listening, the largest bank in PNG Bank of South Pacific just move to a completely new infrastructure platform or core banking system. And unfortunately, that's being fought with all sorts of issues around their ability to integrate. Certainly, Darryl, we are the benefactor of that. I mentioned that we're currently onboarding around 3,500 customers a month. We've had to open our branch network, particularly in the larger centers in the National Capital District, which encompasses Port Moresby -- lie in front of the larger provincial locations, we're now of 6 to 7 days in a week operating to keep up with the demand. The demand, not only for new accounts, it's actually been for our payment services as well. So we're expecting, as again, that trend will continue through the course of the year. And it really, I think, as highlighted to the PNG government and the regulator bank of Papua New Guinea, the risks associated with having one major bank because the impact is not only for BSP customers, but obviously, in relation to all of the other commercial bank customers who are trying to transact with BSP's customers. So a good opportunity. We've obviously been empathetic with BSP-wise, but we're certainly taking advantage of them.

And just to follow-up on that. And have you won any corporate customers as well?

Yes. We've currently got about 1,200 business customers that are presently being onboarded most of those fit within what we would call the commercial segment in PNG, which is around sort of PGK 5 million to PGK 50 million revenue turnover. Most of the corporate sector, the major clients, the multinationals, we already have transactional banking relationships with a big opportunity there for us is obviously in the FX side of the business to get a higher percentage of flow from those organizations.

Thank you. next question comes from John Polinelli from Morgans.

Just quick. Trying to get a little bit more information behind that 10% improvement in the cost to income -- what's driving that is, were you going to expect to see that continue to trend downward in line with what you've previously stated?

Thanks, John. Look, I'll get Johnson to provide a little bit more color around that. It's largely looking at sort of our operating expenses, some of the largest supply contracts that we have that we've been able to successfully renegotiate. We've also got a new Head of Technology, actually, an executive for what we're branding Kina Tech joining us mid-September. And he's been really useful, particularly in the ICT space and helping us understand where we can make some really effective savings around some of the investments that we have been doing, but also need to be doing moving forward. But Johnson, I might hand over to you to just add a little bit more color around that. Where do you think we're going to land for the full year?

Yes. Sure. Thank you. Great. Good morning, John and all others on the call. To add just a little bit more to add to that on our cost controls. We've been quite vigilant under current conditions that we're operating. Yes, so we have been very cautious in our price to cost in general. There's a little bit of sort of good Fortune involve the amortization of intangibles related to the 2019 acquisition of ANZ branch assets. By the way, at the end of last year. So that, that gave us a little bit of a boost. But nonetheless, we remain confident that with continued cost control in our staff area and in those IT-related areas, we will continue to achieve our cost-to-income targets. We came in around about 56% for the half year, and we think we will get along that trajectory towards the year-end.

If I can just ask a quick follow-up, just on FX and Johnson or Greg, whoever wants to take it. Just conscious that you made a comment that you saw the market sort of pull away the two liquidity. Just -- and I know it's not a like-for-like, but in BSP's results, they called out sort of a 14%, 15% improvement or increase in the FX revenue. Totally appreciate they're much more diversified across more markets. But what are you seeing in PNG? Is it that trading band, a 50 basis points above and below that's really constricting it? Or are you just not seeing the FX come in?

It's just supply, John, largely the recent success has been fairly slow in the first half of the year. BSP is a major recipient of the Central Bank intervention. They get around 50% of those market interventions and they're made clearly because they're the largest bank. So that's helped in their result. And also they're the principal bank at [indiscernible]. So they get [ on the ] variety of flow from that mine as well. But it's largely, I think, again, it's more seasonal. It tends to clean up more in the second half of the year, and we've certainly seen that in [indiscernible] results.

Great. I'm happy to take another question or is there someone else who wants some? No? I'll go again. Just quickly, last one, and then I'll hand you back. Just what response, obviously, your market share is increasing and is that a result of clearly the previous question about BSP's tech issues. Is it a result of that. Westpac going to, which is not servicing the region, they're showing results at the region? Or are you actually taking customers because that there would be an better proposition, better pricing, how are you seeing BSP react with that?

I would say, John, [indiscernible]. I think we had a better -- a better customer proposition across the board. But we used to actually those boast about the fact that we didn't have queues outside our branches, but unfortunately, at the moment, our queues are actually bigger than BSP. Look, I think our overall proposition for our customers in retail. The work that we've done around segmentation of our customer base to getting better understand what their needs are and the products that they're after. I can confidently say even with BSP's new core banking system, there's been a lot of negative I think, impact around customer experience in relation to that, but also the actual service itself. So we clearly have a leading digital proposition through our platforms. clearly connect corporate banking, and our mobile online, we're going to be in a position to launch any KYC, where customers can onboard themselves before the end of the year, well ahead of the other commercial banks. We'll be the first bank to issue virtual cards on Kina Wallet, which is sort of similar to Apple Pay in the market as well. So I think that's probably the starting point. There's no sort of -- so we've had really good loan growth in the first half of this year. In fact, the best that we've had, certainly in the 5, 6 years I've been with the organization. And I think it's just a function of -- we've invested well in terms of getting good commercial bankers. We bought 10 in from offshore. We put them into provincial locations and then we recently acquired ANZ's retail branch network was to really have coverage across the entire country. We've got that now -- and I think we're starting to see results coming through from that because in many of those potential locations is really only being one bank in town, and that's BSP. It has been relatively inactive. They're not really doing enough. I think there's a lot of naval guiding going on in that organization. We're still hearing that we've got intentions at some point in time of exiting the Pacific that still seems to be an objective over there. And ANZ, of course, really aren't a competitor for us in terms of retail commercial banking in the corporate space because they both the bank [indiscernible] Australian multinationals. But as I say, that's not really a direct sort of competition for us. So we get some business at the smaller end, the commercial portfolio. But I would argue some of those customers probably should come over with the acquisition and didn't. And then, of course, with BSPs problems, we're benefiting from that. But I think it is largely due to the fact, we're starting to sort of get some runs on the board in terms of how we operate it as an organization. And the results of that have a much better service offering than both Westpac and BSP.

Your next question comes from Glen Wellham from MST Financial.

To the question, while though you sort of highlighted you may look to grow corporate banking outside of PNG. Just wondering how that's tracking and where you're heading with that?

Thanks, Glen. Well look, it's largely not in relation to corporate banking per se, but other markets. So looking at other jurisdictions, if you're aware we've been thinking about [ PG ] for some time. We're still doing some work around that. We think as a market, there's a really active talent pool, they particularly in relation to IT, which we would like to take advantage of. And if there was an opportunity to buy business is a going concern there, even if it was not just a commercial bank, but in the payment space, that would certainly be something that we'll be looking at. As well as those discussions are ongoing. The corporate market in PNG is largely in relation to the resource sector. We have good relationships with them, and that's important. I think coming from sort of the fourth biggest bank to the second biggest bank all bodes well for our credibility with the multinationals. And as a result, they are starting to give us more business, which is good. And of course, having the Asian Development Bank, AAA investment-grade financial services organization is one of our biggest shareholders helps with that as well in terms of building credibility.

Great. And I haven't had a chance to go through all the details of your loan growth, but it looks as very strong. Can you give us a bit of color about where that strength is? Or what the catalyst has been for this year for that?

As I said before to John, I think it's just a compelling value proposition. We've got some good talent on the ground. We've been running quite an aggressive refinance campaign over the past 2 months, which, again, some really good momentum in terms of pipeline building as a result of that. And it's the fact that we now have presence in the provincial locations. And then we've got 10 commercial bankers now in locations like Lae, Kokopo, Goroka, Madang , Mt Hagen. We didn't have any presence in those locations this time last year. And as a result, we've seen some really good activity come through from that. But I think -- I'm humble about this, but I think we've got by far and away the best business banking team even compared to BSP. In that sort of mid-market segment, which I described before as sort of organizations turning over PGK 5 million to PGK 50 million that is our sweet spot. The domestic economy in PNG is actually quite active at the moment. And 1 of the reasons that we put those additional bankers into the provincial locations is preparing ourselves to ride the wave when construction of these big resource projects commences, which will be sort of early into 2024.

Yes. Okay. So most of the loan growth is sort of more the mid-market, but will be driven by some of those larger resource projects. I mean is there any particular industry that you'd like to call out that you seem to be doing better in or?

I think it's actually quite diversified and deliver, again, by sort of expanding outside of just NCD and Lae, where we were primarily centered before and we would attempt to service customers out of those locations from elsewhere across PNG just wasn't the right value proposition. We needed to have virtual bankers, the local hired in the bank, [ et cetera ] that know what they're doing and can make decisions for customers on the spot. We're not big in the corporate sector. We'll participate in syndicated facilities. And a good example of that is Vodafone, the second largest telco in PNG, I mean this is public information, but -- for those larger corporates, really, all of the banks need to participate because of the regulations around single borrower limits. You can't lend more than 25% of your capital base to one single entity. And we wouldn't -- we're sort of risk-averse around that. We wouldn't do that. But we tend to be more stronger in competing in that sort of PGK 5 million to PGK 50 million space, which, as I say, is a big market in PNG. And the only sort of other active competitor there is BSP. And we've got -- is the really pleasing thing, too, is that we're not competing on price. It's actually the customer value proposition is bringing customers across.

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

All right. And we'll thank you, everyone, for joining. As I mentioned, at the beginning of my presentation, please look through the documentation that's been uploaded to the ASX this morning. It's probably our most comprehensive investment pack. So there's a lot of information there. And please do not hesitate to reach out to myself or Johnson, if you would like any more color or further information on the result, full statement here for the second half, and thanks for joining us this morning.

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