The Company
Bank South Pacific (BSP) is the leading bank of the South Pacific, holding the largest branch network in Papua New Guinea with over 60 branches throughout the country including its operations in Fiji and Solomon Islands. BSP has total assets valued at PGK15.9bn ($6bn), equivalent to around one-third of PNG’s total 2013 GDP estimate.
The bank’s customer loan and receivables portfolio grew from PGK1.51bn ($571.4m) to PGK6.8bn ($2.6bn) over 2014. In PNG, BSP’s lending market share increased from 47% to 52% over the same period, while customer deposits grew to PGK12.7bn ($4.8bn), up PGK507.4m ($192m). At year-end 2014, BSP’s deposit market share in PNG stood at 55%. In Fiji, the bank branch has increased lending market share to 26% and in the Solomon Islands, BSP bank’s share of loans is 28%. BSP’s banking operations have a combined market share across PNG, Fiji and the Solomon Islands of about 40% in loans, and nearly 50% in deposits.
BSP has a robust balance sheet and its financial fundamentals remain strong. The group’s year-on-year profit after tax was up 16% to PGK507.3m ($192m) in 2014. This can be credited to stronger revenue streams and effective cost controlling. Total assets at the end of 2014 were PGK15.88bn ($6bn), increasing from PGK15.76bn ($5.96bn) at the end of the previous year.
Net interest income (NII) was up 14% in 2014, while non-interest income was down 7%. Total revenue was significantly higher in 2014, attributed to the stronger than expected NII. BSP’s cost-to-income ratio saw further cuts in 2014, with the ratio reduced from 54.8% to 50.4%. Operational expenses also declined 4.3%, as the management continues to remain cost-conscious. The total capital adequacy ratio at the end of 2014 was 24%, exceeding the Bank of PNG’s minimum prudential requirement of 12%. Consolidated earnings per share for the group was PGK1.08 ($0.41).
BSP paid PGK0.20 ($0.08) per share as an interim dividend in October 2014 and the final of PGK0.56 ($0.21) per share on May 22, 2015 bringing the total dividend for 2014 to PGK0.76 ($0.29) per share. This represents a dividend yield of 10.3%. Dividend per share increased 15% (+8% compared to our forecast) from 2014.
Banks across the Asia Pacific region are trading at 12x earnings. Using a benchmark of 10x earnings we reached a price of PGK12.96 ($4.90).
Recent Developments
During 2014 BSP established and launched its new subsidiary, BSP Finance, with operations in Fiji and PNG. The new entity will allow BSP to continue to expand its reach with new financial market solutions in the region. This new subsidiary now offers an alternative to customers that have asset financing needs. BSP Finance is set to draw upon BSP’s existing asset finance teams to help provide restructuring and refinancing, as well as offer new and innovative ways to attract customer’s asset financing and undertake more complex transactions.
Through its investment banking arm, BSP Capital, BSP also co-advised InterOil in the sale of its downstream assets to Puma Energy during 2014, a major corporate transaction in PNG’s energy sector.
In February 2015 BSP entered into an agreement with the Westpac Group to acquire Westpac’s Pacific operations for A$125m. The transaction is subject to regulatory approvals in the respective jurisdictions and is expected to be completed by second half of 2015. Westpac agreed to sell its operations in Samoa, the Cook Islands, the Solomon Islands, Vanuatu and Tonga, while retaining ownership of its PNG and Fiji branches. This transaction will increase BSP’s footprint in the South Pacific, with its first ever presence in Samoa, the Cook Islands, Vanuatu and Tonga. The deal will also increase BSP’s presence in the Solomon Islands, where BSP currently has five branches.
The BSP-Westpac deal will provide BSP with new customers, additional skilled employees and specialised processes and systems. Meanwhile, the evolving financial markets in PNG present opportunities for BSP to introduce new products and diversify from a traditional bank to a fully diversified financial institution.
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