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 30 June 2026. [Operator Instructions] I'd now like to hand the conference over to Mr. Ivan Vidovich, Managing Director and Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone, and thank you for dialing in to today's briefing on Kina Securities Limited half year results for the 6 months to June 30, 2026. My name is Ivan Vidovich, CEO and Managing Director of Kina Securities Limited. Before we begin, I'll draw your attention to the disclaimer on Slide 2, which notes that this presentation contains forward-looking statements and is not financial product advice. I'd encourage you to read it in full alongside today's ASX and PNGX announcement. I'm joined today by our Chief Financial Officer, Taiwo Fowowe, who will take you through our financial performance in more detail shortly. Taiwo joined Kina as CFO earlier this year, bringing deep experience in finance, capital management and governance from international banking markets. This is his first half year results briefing with us, and we'll both be available for questions at the end. Turning to Slide 4. Before turning to our results, I want to briefly set the economic scene because it's relevant to how we'd like you to read this half and the catalysts for PNG's economic growth. The standout development during the period was progress on Papua LNG. The state-led development forum opened in July and project capital costs have been cut from around $18 billion to roughly $14 billion, materially improving the project's commercial viability. Final investment decision, or FID, remains targeted for the fourth quarter of this year with 15 December set by the Minister for Petroleum as the current deadline. While there remains the potential for this to be extended to around April 2027, this would still be comfortably ahead of the 2027 national election. We continue to see FID as the single biggest trigger point for a step change in PNG's medium-term growth trajectory, and we're watching it very closely. On the domestic front, government has moved to cushion the economy from imported inflation with a PGK 1 billion fuel stabilization package holding pump prices at March levels. Around PGK 630 million has been disbursed by midyear. The Bank of Papua New Guinea has revised its 2026 CPI forecast up to 4.3%, and we're watching El Niño-related dry conditions as a downside risk to mining export volumes at Ok Tedi and Porgera heading into the fourth quarter. On currency, the crawl-like arrangement for the Kina remains the nominal anchor with further gradual managed depreciation expected against the U.S. dollar and the PGK/AUD cross continuing to track AUD/USD movements. On the currency, we're watching for signs of a turning point in the crawl. The Bank of PNG Monetary Policy Committee settings have held steady through 2026 with the next review due in September. And beyond the near term, we expect the combination of Papua LNG-related investment inflows and a balanced trade position to be the catalyst for a shift in the Kina's trajectory. With that backdrop, let's turn to our results for the first half on Slide 6. Firstly, I'd like to be upfront. These results show weaker growth than what we've delivered in recent halves. That said, they also show the resilience of our business. Statutory NPAT grew 4% to PGK 59.7 million. Revenue grew 2% to PGK 254.8 million and earnings per share grew 1% to 20.3 toea. Net interest margin eased 10 basis points to 5.8%. Return on equity was 16.6%, 50 basis points lower, and a lower cost of credit risk at 0.2%, down 10 basis points, which speaks to the quality of our book. Against that, our capital position has strengthened materially with capital adequacy up 870 basis points to 26% and the Board has increased the interim dividend 13% in Kina terms to 14.2 toea, holding flat in Australian dollar terms at $0.045. I'll come back to why growth was softer this half and also why we remain confident in the outlook. But I want to also note that this result is consistent with the guidance update we provided to the market in July and that the factors behind it are a combination of headwinds we previously advised to the market, factors external to Kina Bank or deliberate decisions we made in the interest of the quality of our balance sheet. On market share, we held our lending market share steady at 16.9% year-on-year. Our deposit market share declined to 10.9%, which reflects a deliberate decision to run off higher cost fixed deposits and cash management account balances as we optimize our funding mix, our funding costs and our margins. That's a choice we've made, not a competitive loss. Separately, industry-wide deposit growth over the period was largely driven by increased government deposits, which is unrelated to KSL's strategy or performance. On shareholder returns, our 1-year total shareholder return was 10% and over 3 and 5 years, 117% and 72%, respectively. The interim dividend is up 13% in Kina terms, the third consecutive half of PGK dividend growth. And though the AUD equivalent has held flat at $0.045, reflecting the impact of the Kina depreciation against the Australian dollar. I'll now hand over to Taiwo, who will take you through the detail behind these numbers across the next couple of slides. Thank you, Taiwo.

Thank you, Ivan. Good morning, everyone. Turning to Slide 9. Our key revenue drivers first half were interest income on loans, which was up 12% and wealth income up 11%. Digital income and underlying foreign exchange income were broadly stable year-on-year. I'll walk you through each of these over the next few slides. On Slide 10, our loan book grew by 2% against prior corresponding period. That modest growth reflects a deliberate choice. We optimized the balance sheets during the half, including a targeted [ 10% ] on lending exposures where we assess the risk return threshold. Excluding those strategic actions, underlying growth in the loan book would have been 7% against prior corresponding period. We remain confident in the strength of our lending pipeline heading into the second half. On Slide 11, net interest margin eased nominally by 10 basis points to 5.8% compared to June 2025. Our investment spread compressed to 4.4%, reflecting declining yields on government securities in line with what we forecast at the 2025 full year results announcement. Our loan spread improved slightly to 6.5%. The net interest income gain was partly offset by a planned increase in our cost of funds associated with the new corporate bond, which I'll come back to when we discuss capital. On Slide 12, foreign exchange revenue was PGK 48.3 million, down 5% on the first half of 2025. That includes a one-off PGK 2.4 million FX loss on the 2025 final dividend payment made in April of this year. Adjusting for this one-off loss, FX revenue would have been flat year-on-year. While FX revenue was flat, the underlying FX actually improved with an increased interbank market activity driving higher volumes that largely offset margin compression. We have previously advised the market to [indiscernible]. We see improved FX for revenue growth in the second half of the year. Digital revenue growth was constrained due to an issue entirely outside our control, but we have been very active in managing this interoperability problem, which affected the major PNG bank's newly issued debit cards and disrupted our payment business across EFTPOS, e-commerce and ATMs. This was an industry-wide issue rather than one specific to Kina Bank. We are working closely with stakeholders in the market on system upgrades and expect the issue to be resolved before the end of the second half. In relation to this matter, Kina has taken a strong leadership position in engaging with relevant regulatory authorities while actively advocating for developments that promote greater competition, customer choice as the market expands and as more Papua New Guineans enter the formal banking system. On Slide 13, our wealth business remains a bright spot. Funds under administration grew 15% to PGK 25.1 billion, driven by continued growth in superannuation membership. We also saw strong growth in funds under management, which rose 16% to PGK 14.4 billion. Turning to costs on Slide 14. Operating costs rose 7% to PGK 159.6 million. For more context, around 30% of our cost base is exposed to depreciation against the U.S. and the Australian dollar. The effect of that, combined with inflation and continued investment in organizational capabilities, including our digitization program, drove the modest increase. Headcount remained stable. The rise in staff costs reflect a 4% local CPI adjustment and the FX translation impact on AUD-denominated salaries. This half, cost-to-income ratio rose to 62.6%. Improving this ratio through efficiency, digitization, and organic growth remains a clear medium-term objective for the group. We have made good early progress in initiative execution during the first half of our 2030 strategy, which Ivan will provide an update on shortly. On asset quality, which is on Slide 15, provision coverage strengthened to 2.6% of gross loans, up from 2.1% a year ago. This is a prudent position. I want to spend some time on this to explain a technical point because the headline ratio has moved, and I don't want it to be misread. Following our application of IFRS 9 methodology of suspended interest on credit impaired loans from December 2025, our NPL reporting now includes suspended interest balances. On a comparable basis, this leads to the December 2025 NPL ratio rising from 7.7% earlier reported to 8.7%. And on the same basis, the June 2026 ratio is 8.9%. The 0.2% marginal increase between June 2026 and December 2025 is not due to a deterioration in the underlying credit quality, but is explained by the 3% reduction in the loan book, which I mentioned a moment ago. In other words, this is a denominator effect. Actually, the NPL balances in dollar terms reduced slightly over the half. Finally, on Slide 16, capital adequacy ratio increased to 26%, up from 17.4% at December 2025. Following the successful issuance of our PGK 235 million Kina Tier 2 bond, which is Papua New Guinea's first listed corporate bond. This is a material strengthening of our capital position and gives us real capacity to support future lending as growth opportunities emerge. I'll now pass back to Ivan to take you through our strategy and outlook.

Thank you, Taiwo. Turning to Slide 18. I want to reconnect this half's results with our strategy. Our purpose remains creating brighter futures, and our vision is to be the most trusted financial services partner for the people, communities and markets that we serve. That's underpinned by our 6 strategic priorities: customer first, empowered team, operational excellence, growth through innovation, serving communities and governance for growth, and by our CHANGE values, which continue to shape how our team members work together to serve our customers. On to Slide 19. Execution remains on track. This half, we successfully issued and oversubscribed our PGK 235 million bond. We launched Pei Beta, our digital wallet, which expands financial inclusion and payments capability, and we introduced a new corporate online banking platform to strengthen our business banking proposition. We've continued to invest in risk, leadership and digitization capability and our culture transformation program, including the rollout of our CHANGE values across the organization. We continue to pursue organic growth alongside the evaluation of selective value-accretive inorganic opportunities. Despite the challenges we're facing into 2026, we continue to make strong progress against our strategic agenda and remain firmly focused on delivering our key milestones as demonstrated by our first half achievements. Slide 20 speaks to our community commitment through our Strongim Komuniti Grant Program, which is fully governed and delivered by our own team members, we've supported small infrastructure, solar power and water tank installations across provinces, including the Western Highlands, Jiwaka, East Sepik, Southern Highlands, Milne Bay, Simbu, Central and Eastern Highlands. We've also renewed our partnership with the Kokoda Track Foundation and support the delivery of their Archer Leaders mentoring program and their distance education program. We also partner with RISE PNG, which supports young women to build skills and confidence and prepare for their future. Turning to our outlook on Slide 21. Let me be clear about how I'd like you to take this half. Our earnings growth was softer than we'd like, but every material driver behind that softness was linked to 1 of 3 things. Firstly, the headwinds we told the market to expect back in our 2025 results. Secondly, an external issue with a major PNG bank's debit card interoperability, which has affected our payments acquiring growth. And thirdly, a deliberate risk-based decision was made to optimize our loan book and funding mix. None of these matters changes our confidence in our strategy. We entered the second half with positive momentum. We expect the card interoperability issue to be resolved by year-end, supporting a recovery in transaction-related revenue. The competitive changes in the payments acquiring market resulting from these issues may mean that a full revenue recovery extends into 2027. In the second half, we expect stronger FX activity and loan growth, underpinned by improving market conditions and a solid pipeline. And with a materially strengthened balance sheet and capital position following the bond issuance, we have real capacity to support growth. Longer term, the PNG growth story remains intact and the Papua LNG final investment decision remains a key trigger point when watching for a further step-up in the medium-term outlook. Finally, we remain confident in our ability to deliver long-term value for our shareholders and customers and the communities that we serve. We've also included a set of appendices covering our Board of Directors, deposit tenure, loan portfolio by industry and deposits by product for reference. Before we move to questions, I want to thank our team across Kina Bank for their continued hard work, our Board for its guidance and our shareholders for your ongoing support and patience through what has been a more challenging half. Taiwo and I are now happy to take questions, and I'll pass back to Darcy, our moderator. Thank you.

[Operator Instructions] There are no questions at this time. Pardon me, we have a question here from Mr. David Fraser.

Can you hear me okay?

We can.

Okay. Could you give us a little bit of an update on the card interoperability issue? I guess, how it's going to be fixed? And if you have any recourse to the perpetuate this problem?

Yes. Thanks for your question, Dave. So we did mention this in the market announcement in July as one of the factors that will impact our earnings for the half and the year. The brief summary of the matter is that the major PNG bank with a dominant market share moved away from old-fashioned cards. As you see, all banks in PNG have and issued debit cards that were proprietary EMV chip cards as opposed to cards like Visa, Mastercard or UPI, which other banks issue in the market, including Kina. This means that the cardholders of that bank cannot transact on any other bank's payment acquiring network, only their own bank's, and that's obviously created an impact on our payment acquiring revenues. Our actions, Dave, on this matter have been across a variety of focused actions, which has really been regulatory, both from the competition perspective through also the financial services regulator as well. We have also pursued independent advice around our options regarding this matter, which we currently hold. I suppose, Dave, the main focus for the bank at the moment has been to work with the regulator and the banking industry to encourage and support a technology solution, which allows those same cards to become interoperable across the local payments system. We believe that will -- that tech change will be achieved by the end of the year. And certainly, that's where our focus is at the moment. That does also mean that participating banks, including Kina, also have to make some changes to our tech systems so we can interact with that payments card data. So at this stage, we believe that will be solved by the end of the year. In terms of the other part of your question, which was about recourse, yes, we have sought independent advice on this matter, but we're holding on to that position for now. Thank you.

Okay. Second one, business loans looked like they dropped off a little bit first time in a while. And just delving into the accounts, it looks like there's quite a big drop off in building and construction. Was there anything specific that happened there or -- why do you think that happened?

Yes, Dave. So across the book, as mentioned, we have selectively reduced less than a handful of exposures, some of large, which has really -- which was a risk-based decision, which has resulted in the reduction of the loan book as mentioned. I wouldn't read too much into the construction and building one because that can be a factor of projects coming to completion, for example. So nothing has changed in terms of our strategy and our appetite.

Managing your risk across your loan book, but also your -- I think you mentioned in the announcement that you dropped off on your effective funding position, and that was basically a removal of reflecting a decision to reduce higher-cost funding sources. Is that correct?