Although commercial banking assets and business lending dropped in 2017 as a result of macroeconomic headwinds, the sector has performed well in recent years. Notably, Bank of South Pacific (BSP), which is PNG’s biggest lender, recorded robust asset, lending, and profit growth, with returns on equity rising to a new highs in 2017. At the same time, its dominance in the sector has led to commentary that the bank is overly reliant on government lending, with a domestically concentrated lending portfolio and low levels of share liquidity hindering investment and expansion. Nevertheless, BSP’s diversification strategy has already seen it acquire overseas assets in the Asia-Pacific region, with the bank recently launching a joint venture in Cambodia.
PUBLIC TIES: BSP’s market dominance is attributed many factors, close ties with the government being one. As of April 2018, state-owned entities controlled the majority of the bank’s shares: Kumul Consolidated held an 18% share; the government’s civil service pension fund, Nambawan Super, held 12%; and both the Mineral Resources Development Company and National Superannuation Fund held 10%, according to a report from UK-based business information company Euromoney.
PERFORMANCE: BSP reports its market share of lending was 59% at the end of 2017, with a loan portfolio of PGK11.2bn ($3.5bn). Net interest income has risen steadily in recent years, from PGK682m ($213m) in 2012 to PGK1.28bn ($400m) in 2017.
Furthermore, profits after tax nearly doubled over the same period, rising from PGK408m ($127m) in 2012 to PGK757m ($236m) in 2017, while, the bank’s prudential indicators show stability, with its capital adequacy ratio rising from 18% in 2013 to hit a five-year high of 24.5% in 2017. Meanwhile “bad and doubtful” debt expenses fell from PGK98.6m ($30.8m) in 2016 to PGK77.7m ($24.3m) in 2017, the lowest level since 2014.
INVESTMENT CHALLENGES: In January 2018 Robin Fleming, group CEO of BSP, told local media that the bank was considering making a secondary listing on the Australian Securities Exchange. This may prove an attractive option, given limitations with the country’s own Port Moresby Stock Exchange (POMSoX). While the latter is reasonably robust, supported by sound regulations and good infrastructure, it nonetheless faces challenges. “POMSOX remains unattractive because its lacks trading volumes and liquidity.” Ian Tarutia CEO of NASFUND, PNG’s largest private sector superannuation fund, told OBG. Nevertheless, the potential listing does present issues. The move has been under consideration for several years and Fleming reported that BSP’s market dominance has led it to be associated with the country’s entire economy, rather than an individual stock, presenting challenges to stakeholders. Return on equity has been high, rising from 29% in 2012 30.6% in 2017. According to Euromoney, the bank paid PGK521.8m ($166m) of dividends in 2017, as well as PGK293m ($91.5m) of taxes, equivalent to 14% of the state budget, making it the largest non-mining taxpayer.
EXPANDING INFLUENCE: The bank’s long-term growth strategy will likely see it move to capitalise on regional opportunities to grow its lending portfolio, as well as gaining deposit customers from underbanked regions through acquisition of financial business assets. Indeed, BSP has undertaken several acquisitions since acquiring the state-owned PNG Banking Corporation in 2002 to create the country’s largest bank, moving to acquire Fiji’s Habib Bank in 2006, the National Bank of Solomon Islands in 2007, and Colonial Bank and Colonial Fiji Life Insurance in 2009. Additionally, the bank also acquired Westpac’s operations in Cook Islands, Samoa, Solomon Islands, Tonga, and Vanuatu in 2015 and 2016, most recently expanding its reach beyond the Pacific region to launch a joint venture with RMA Finance Cambodia, which was finalised in May 2017. The new entity will be rebranded BSP Finance Cambodia. The bank reports that BSP Finance Cambodia’s loan growth was slow during third quarter 2017, but accelerated later in the year to reach $15m of new lending by 2018.
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