Kina Securities Limited (KSL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kina Securities Limited KSL Half Year Results ending June 30, 2025. [Operator Instructions] I would now like to hand the conference over to Mr. Ivan Vidovich, Managing Director and CEO. Please go ahead.

Good morning, everyone. Thank you for joining us today as we present Kina Securities Limited's half yearly results. It's my pleasure to share our strong performance and the key drivers of growth in the first half of 2025. I'm joined today by our CFO, Johnson Kalo; and by our recently appointed Chief Investment and Strategy Officer, John Polinelli. Johnson and John will present further details on our key performance metrics and strategic outlook, respectively, and will be available for questions at the conclusion of the presentation. As many of you will know, Johnson has been with Kina since 2019 and was formerly CFO and Deputy CEO for the Bank of South Pacific. John Polinelli may also be a familiar name to some of you. In his role of Head of Corporate Advisory for Morgans, he supported several of Kina's strategic initiatives drawing back to 2015, starting with KSL's acquisition of Maybank PNG, KSL's ASX listing and thereafter, KSL's acquisition of ANZ, which completed in 2019. As we remarked on Slide 4 of the investor deck, 2025 is a very important year, not just for Kina, but also for PNG. This October, Kina celebrates its 40 years of operations in PNG, having grown from a finance company to the second largest bank today, where we take an active role in the nation building of PNG, whilst adding more competition to the banking sector. In September, PNG celebrates 50 years of independence, an important milestone for the country. Turning now to Slide 7 and half 1 2025 results. We are pleased to report a statutory net profit after tax of PGK 57.7 million, reflecting a 37% increase compared to the same period last year. This strong growth was underpinned by a 10% rise in total revenue alongside a favorable reduction in our income tax rate from 45% to 40% this year and with a further reduction to 35% to come in 2026. Our loan book showed robust growth, increasing 16% year-on-year. This growth is a testament to our commitment to lending responsibly and effectively and to Kina's established position as the Challenger Bank and the bank for business in PNG, with business lending up 22% in the half. As shown later in the presentation, the loan book growth is also reflected in our market share, which grew 110 basis points or 7.7% in the period to 16.9% market share. Additionally, we delivered a net interest margin increase of 30 basis points or 5%, now standing at 5.9%. This reflects our ability to actively manage our funding mix in line with market dynamics. Noninterest income grew 19%, now representing 55% of total revenues. This is a clear proof point in our strategy to grow noninterest income, delivering an efficient use of capital. This growth was buoyed by significant increases in foreign exchange income, which rose by 37% year-on-year, driven by higher commodity prices and increased foreign currency inflows. Our digital channels revenues also grew by 15%, reflecting increased transactional activity across our payments, Internet banking and bill payment platforms and products. Furthermore, our funds management services performed exceptionally well with a 24% increase in revenue driven by retail and wholesale wealth management, showcasing our ability to develop products that meet the evolving needs of the market and clients. Turning to Slide 9. The first half also saw a strong return on equity growth of 390 basis points or 30% to 17.1%, up from 13.2% from the first half 2024. Additionally, our earnings per share was up 36% to PGK 20 toea per share. In recognition of our strong performance, the Board is pleased to declare an interim dividend of AUD 0.045 and PGK 12.6 toea, representing a 13% and 19% increase, respectively. This dividend reflects our commitment to delivering value to our shareholders with a payout ratio of 63%. We believe that returning profits to our shareholders is essential as we continue to build a sustainable and profitable business. I'll now pass over to our CFO, Johnson Kalo, who will take you through some of our key performance metrics in further detail. Thank you, Johnson.

Thank you, Ivan. I'll take us through from Slide 13 to about 20. Turning to Slide 13. The loan book growth of 16% was driven by business lending, which was up 22% as we cement our position as the bank for business in Papua New Guinea. We actively managed our personal lending book in the half, reflecting our risk-aware responsible lending practices. On Slide 14, the 30 basis points growth in net margin is accompanied by 1% year-on-year growth in net interest income, which has been achieved in the context of the following: actively pursuing investment income as yield of client and maintaining stable returns on our growing loan book. Pricing competitively to deliver growth in the deposit book through the half to support asset volumes. Initiating a more proactive and targeted write-off approach directed at a small number of long outstanding loan accounts necessitating some loan interest write-off. In terms of asset quality, the key ratios for loan provision to gross loans and nonperforming loans indicate continuing sound improvement in the loan quality and stability in the core growth areas of the portfolio. On Slide 15, as mentioned by Ivan, FX revenues were a standout in the half, up 37%, driven by higher inflows and commodity prices. In the same period, FX market volumes as a whole were up 20% versus PCP, highlighting the strength of our FX offering. However, we are conscious that growth rates may moderate in the second half as the Bank of PNG's FX intervention policy evolves in favor of interbank market development to support liquidity. Turning to Slide 16. Digital revenues were up 15%, driven by continued growth in our FPOS terminals fleet, Visa card issuance and usage by customers. In the second half, we see positive movement for our payments and digital transaction volumes. Slide 17. The Wealth business saw revenue growth, up 24% in the half, driven by retail wealth management, whilst underpinned by the continued performance of the funds management business, which saw funds under management increase 13.9% and funds administration -- with funds under administration and member numbers increasing 12.9% and 4%, respectively. Now a word on operational efficiency. Slide 18 shows operating costs were stable with a 0.8% increase compared to the previous year. Our headline or statutory cost-to-income ratio improved, decreasing from 64.8% to 59.2%. However, on an underlying basis, when removing the fraud events from full year '24, the cost-to-income ratio increased marginally. This was due to an 11% year-on-year increase in our cost base, mainly attributable to administration costs, including merchant card expenses and Visa card expenses, which grew in line with digital revenues. This cost profile is influenced by the following factors. Firstly, foreign exchange impact on costs. The 7% depreciation of the PGK against the USD over the year increased local currency cost of U.S.-denominated expenses, particularly in technology and consulting services. Secondly, domestic inflationary pressures. The weakening PGK also contributed to general price increases in locally sourced supplies and services, adding pressure to baseline operating costs. Thirdly, strategic investment in expertise. Kina is making targeted investments in external advisory and technical expertise to support strategy, capability as well as planned enhancements in technology infrastructure and operational risk frameworks, which are critical enablers of long-term efficiency, resilience and growth. And lastly, leadership transition costs. Temporary overlaps in senior executive roles, including the CEO transition impacted the first half '25 costs. Sensible and appropriate cost controls aligned to our growth strategy will continue to be deployed moving forward. And as reported to the market in February of this year, over the medium to longer term, we will deliver improvements in cost to income through operational efficiencies and digitization. As the PNG market evolves and in preparation for the next 5-year growth strategy out to 2030, investment in talent and strategic capabilities will continue in the second half of 2025 as stated during our AGM in June. Despite these investments, our workforce size will remain largely flat across 2025 as we commence a program of uplifting operational efficiency that also delivers improvements in customer and employee experience. Shown on Slide 19, our asset quality continues to demonstrate sound quality in the half with 90-day arrears down 26.7% to 1.1%, demonstrating the ongoing prudent lending and robust risk management practices at Kina. We maintained a strong capital base with a capital adequacy ratio of 17.3%, well above regulatory requirements and maintaining KSL's well-capitalized status as defined by BPNG regulations. This solid foundation not only positions us favorably for continued growth, but also supports our commitment to responsible lending practices. Our total assets have grown by 4% to PGK 5.4 billion, driven primarily by our lending assets, which now constitute 57% of our overall asset base. This growth in lending reflects our strategic focus on expanding our market presence while maintaining the quality of our loan portfolio. Importantly, sufficient capacity exists to maintain this growth profile. I'll now pass to our Chief Investment Strategy Officer, John Polinelli, who will present our strategic outlook.

Thanks, Johnson. Turning to Slide 23. As we look ahead, we're currently working to finalize our strategic plan for 2026 to 2030. Key to this are the recent appointments to drive our execution capabilities, particularly in the areas of strategy and innovation. Looking forward, our strategy over the next 5 years will focus on 4 core pillars: fostering organic growth within our existing business by prioritizing customer experience, targeted customer and product segmentation and optimizing product and portfolio profitability. Secondly, expanding our wealth management offering to complement our core banking operations, green shoots of which are already starting to show, particularly in our Retail Wealth Management business. Next, pursuing inorganic growth initiatives, emphasizing income diversification, scalability and enhanced capabilities, maximizing shareholder value; and lastly, optimizing our capital planning to ensure our financial resources are aligned to bolster stability, deliver returns and create enduring stakeholder value. We are confident that these core pillars will position us for sustained growth and profitability in coming years. As we navigate the evolving dynamics of Papua New Guinea's banking market, we remain focused on refining our operations and advancing digitization initiatives. These efforts are critical for adapting to customer needs and ensuring that we maintain our competitive position as PNG's challenger bank. Connecting with our communities and continuing to invest in our team members and workplace culture will continue to be hallmarks of our strategy moving forward. As seen on Slides 24 and 25, we've included some recent highlights from the first half of this year. Looking forward, we anticipate that growth in pretax earnings will continue in the second half of 2025, driven by increased revenues from both lending and non-lending operations. However, as Johnson mentioned, we are observing changing dynamics in the foreign exchange market in Papua New Guinea, particularly as the BPNG adjust its intervention policies, reducing total volumes of its market interventions in favor of encouraging interbank market practices. As a result, we may see some moderation in FX market volumes and therefore, revenue growth in the short term. Our treasury and financial markets team led by Nathan Wingti remain well prepared to adapt accordingly. In the medium to long term, the commencement of major PNG, LNG projects, particularly the Total-led Papua LNG project is expected to bolster business sentiment and economic activity in the region. We are optimistic about the opportunities this presents for KSL and all our stakeholders. I'll now hand back to Ivan.

Thank you, Johnson and John. Turning to Slide 26. In summary, the first half saw continued market share gains across both lending and deposits as Kina delivers on its strategy, delivering market-leading solutions in line with customer needs. We saw continued growth in noninterest income as Kina aligns growth and capital optimization initiatives. We've invested into technology, leadership and technical expertise, which are critical enablers of long-term efficiency, resilience and growth. We saw a record first half revenue, NPAT and interim dividend, demonstrating the underlying momentum in the business, the quality of the lending book and robust risk assessment. We have a strong capital base with headroom to maintain our current growth profile. In closing, I'd like to express my gratitude to our dedicated team members, the leadership of our executive team and the unwavering support of the Board. Their commitment and hard work are instrumental in achieving our goals and driving our success. To our customers and shareholders, thank you for your continued trust in KSL. Together, we're poised for a promising future, and we look forward to continuing to share our progress with you. I'll now pass back to the moderator for questions. Thank you.

[Operator Instructions] Your first question today comes from David Fraser with MST.

Can you hear me okay?

Hi Dave, we can. Thank you.

First one, I've just got a couple of questions, and I'll jump back in the queue. First question, just talking on FX and the revenue growth in the second half. Could you just elaborate on that a bit more?

Thanks for the question, Dave. Look, as stated by Johnson and John, we're seeing a change in FX intervention practices by the Central Bank, the Bank of PNG. We're associated with the IMF program over the last 18 to 24 months, regular market interventions support liquidity, that is now evolving in favor of interbank market dynamics. And as such, what we see the potential of in the second half is a little bit of variability about FX liquidity volumes and potentially some aspects of margin management, particularly for those aspects of FX order books, which were traditionally supported by BPNG interventions.

Okay. I might have to take this offline. Second question, just I guess looking at your balance sheet, and obviously still in a very strong position, but Tier 1 plus Tier 2 has come off a wee bit at 17.3. Could you just give us an update on where you are on your Tier 2 bond issuance? I think it was around about PGK 200 million. And I guess the follow-on question from that. On our numbers, and I suspect most people's numbers in the market, your earnings growth reflecting market share growth, growth in the system growth in PNG and the potential for additional FX income coming through, particularly once the resource projects come online. If you maintain your current payout ratio, the dividends would obviously grow materially. Just is there any thought on what you're going to do with your payout ratio? So I guess first question, where you are on the Tier 2 debt issuance? And the second one, could you explain what's happening with the payout ratio?

Thanks, David. It's John Polinelli speaking. I'll take the first one with regards to the bond and Tier 2, and then I'll hand over to Johnson to take your second question there. So on the bond, that's a project that I've taken responsibility for at the moment. As you can appreciate, this is the first time that any instrument of this form has been issued in Papua New Guinea. We are well advanced in the design phase and operate -- understanding the operating environment and requirements. And we are due to start our engagement -- we have formal engagement with the relevant regulators as we go through this process. So we will keep the market informed. It is well advanced, and we just need to -- it is the first time, however, this has ever been -- any instrument like this has ever been issued in this market. So we're going through the process of engagement and drafting new rules, I suppose, as things develop. So things are well advanced, and we will update the market as things progress in that aspect. And I'll hand over to Johnson.

Thanks, John, and thanks for your question, David. Look, the payout ratio is -- I mean, that's really a question for the Board in the first instance. You'll notice that we've maintained our ratio between 60% to 80% over the last several reporting cycles. We feel that at the moment, that's a comfortable range to have adopted. You'll also notice, I suppose, that we're sort of traveling towards the lower end. But I suppose as our growth starts to take hold and the need for capital also becomes probably a little bit more prominent than it has in the past. We are addressing that also by the -- by working towards the bond issuance. But yes, the dividends will be constantly considered. We don't expect to move too far away from our current payout ratios, but the market will definitely be informed if there is a material change.

The next question comes from Richard [ Joseco ] with Morgans Financial.

Richard Coles from Morgans Financial. Just a question on -- a couple of questions. You've obviously seen an improving NIM trajectory. I'm just wondering how much of the sort of improved rates you're seeing in treasury bills has washed through. I mean is the direction of NIM still up from here? How do we sort of think about that?