More Than A Century
The first institution to enter PNG was Australia’s Bank of New South Wales, now Westpac Bank, in 1910. That was followed by the Commonwealth Bank, an Australian government-owned bank, which established itself in Rabaul in 1916. Until the 1950s, with the exception of a short period between 1910 and 1916, when Union Bank had a Port Moresby branch, these two institutions were the only banks in the territory. The Australia and New Zealand Banking Group (ANZ) entered the market in 1953 and the National Bank of Australasia entered in 1957. The latter became Bank South Pacific (BSP) in 1974. Several other banks came and went following liberalisation of the sector. Niugini-Lloyds was formed in 1983, Banque Indosuez entered the market that same year and its local unit, Indosuez Niugini, was acquired by Bank of Hawaii in 1997. Bank of Hawaii’s operations were eventually acquired by ANZ in 2001, and Malaysia’s Maybank opened a branch in 1994.
At present, the country has four commercial banks, 13 licensed financial institutions and 22 savings and loans entities – essentially mutually owned credit cooperatives. As of the end of 2014, PNG’s commercial banks had 93.6% of the total deposits, while licensed financial institutions had 3.5%, savings and loans had 2.1% and micro-banks had 0.8%. The largest bank in the country is BSP, with total assets at the end of September 2015 at PGK14.3bn ($4.9bn), or 53.5% of the total. This was followed by ANZ with 26.7% and Westpac with 16.2%. Maybank (now Kina Bank) had 3.6% of the market share. In terms of deposits, BSP had 56.5% of the total, and in terms of after-tax profits, BSP earned PGK459m ($156.7m) in 2015, ANZ PG209m ($67m) and Westpac PGK164m ($56m).
Growth & Expansion
Due to the economic difficulties in the country, as well as global uncertainties, the sector is now growing at a slower pace than it has in recent years. In late 2015 deposits were expanding at about 2% annually while loans were up 6.9%. That compares with a 15.5% growth rate on deposits and an 8.9% growth rate on loans back in late 2012. Assets were expanding as fast as 15% annually in 2013, but were growing at a rate of under 5% by late 2015.
The state of the market is evident in the 2015 results of BSP – the only bank reporting full local financials. While net profit was up, it was up less than 5%. That compares with 16% profit growth in 2014 and a five-year compounded annual growth rate of 8.4%. At the bank level, the group actually faced a decline of 1.3% in net profit. The fall was mainly the result of a drop in foreign exchange earnings, which went from PGK267m ($91.1m) in 2014 to PGK179m ($61.1m) in 2015, down from a high of PGK353m ($120.5m) in 2013.
BSP’s results, however, were seen as a “bright spot” in the PNG economy, according to the local press, given the challenging environment. The other banks active in the local market also suffered from the economic challenges and headwinds. ANZ’s PNG profit after tax fell from PGK338m ($115.4m) in 2014 to PG209m ($67m) in 2015, while Westpac’s declined from PGK210m ($71.7m) to PG164m ($52m). “We have seen a normalisation of growth back to the baseline level, and as a result we are seeing less turnover and profitability,” Robin Fleming, CEO of BSP, told OBG. “In certain instances business were over-leveraged, and there are not as many people in the workforce.”
The sector remains well underpinned and stable. The Tier-1 capital ratio set out by the central bank, the Bank of PNG, is 8%, while the overall ratio target is 12%. With a Tier-1 capital ratio of 27.2% at the end of 2014, up from 21% in 2013, the sector as a whole is in good shape in that respect. BSP’s Tier-1 capital ratio was 19% in 2015, down slightly from 19.4% in 2014.
Non-performing loans (NPLs) for all banks were a manageable 1.4% of loans outstanding as of the end of 2014, down from 2% in 2011. Meanwhile, the past-due loan ratio was 2.3%, down from 5.1% in 2011. NPLs grew at BSP from 0.5% in 2014 to 1.7% in 2015, though this was, to a great degree, the result of its acquisition of assets in Tonga, the Cook Islands, Samoa and Solomon Islands, and the imposition of more conservative accounting standards at those operations. “When you get fast growth for five to seven years, you are going to get an uptick in NPLs,” Fleming told OBG.
The construction sector is seen as a main driver of growth, but also as a potential area of risk for the banks. However, in general the banks have been able to keep their exposure to this sector at a reasonable level. In September 2015 total advances for construction were PGK602m ($205.5m) – a four-year low in absolute terms and only 6% of the total loans outstanding, down from 10% in 2012. Real estate lending, however, remains quite high at PGK1.6bn ($546.2m). “Given all the building, you have to be cautious,” Fleming told OBG.
While the sector has sufficient liquidity, its financial institutions are seeking to lower their exposure to government obligations. The banks and superannuation funds have reached their limits on the purchasing of these securities. At the same time, the extension of credit to the household sector has historically been and continues to be restrained, due to the lack of income, limited competition in the banking sector, significant informal employment, weak contract enforcement and customary ownership of land, which makes mortgaging difficult.
Money supply growth slowed in 2014, almost stalling, with broad money up only 1.2%. However, the rate rebounded in 2015 to 6.7% from an increase in net domestic assets. The central bank projected broad money growing 5.2% in 2016, 5.1% in 2017 and 5.3% in 2018. Credit to the private sector is expected to grow 4.4% in 2016, enough to sustain expansion in the non-mineral sector.
In late 2015 ratings agency Standard & Poor’s (S&P) changed the outlook for BSP’s B+/B rating from stable to negative. But S&P also noted that this was mostly because of the broader economic environment, in particular the fall in energy prices and the impact this is having on the PNG government and the country’s businesses. It added that its opinion of the bank itself was largely unchanged and that a downgrade would be very unlikely as the move to CCC+ would indicate a one-in-three chance of default within a year.
In the Pacific islands, the two foreign banks active in PNG have historically been larger than BSP. In September 2015 ANZ had $30.2m in after-tax profit in Fiji, up from $22m in 2014, Westpac had $22.2m, up from $18.7m, and BSP had $12.9m, up from $8.2m. In Solomon Islands BSP had $5.9m of profits, up from $3.4m in 2014, Westpac had $2.4m, up from $2.3m, and ANZ had $2.4m, down from $2.7m. In the rest of the Pacific region, ANZ led with $9.1m, Westpac had $5.4m and BSP had $3.3m. However, BSP has been expanding in the Pacific region for some time and in 2004 it acquired the Niue assets and liabilities of Westpac. The bank started operating in Fiji in 2006 and expanded there over the next few years. It first acquired Habib Bank, and then in 2009 purchased National Bank of Fiji from the Commonwealth Bank. In 2007 BSP then acquired the National Bank of Solomon Islands, also from the Commonwealth Bank.
More recently, in 2015 the bank purchased operations in five countries from Westpac for AUD125m ($92.1m). The assets are in Samoa, the Cook Islands, Solomon Islands, Vanuatu and Tonga; however, the completion of the Vanuatu transaction was delayed until July 2016 due to the destruction caused by tropical Cyclone Pam in March 2015. BSP has quickly gone from a secondary player in the Pacific to a leader. It has 18 branches in Fiji, eight in Solomon Islands, four in Samoa, two in Tonga, two in the Cook Islands and one in Niue. ANZ has 16 branches in Fiji, five in Solomon Islands, five in Samoa, two in Tonga and two in the Cook Islands, as well as branches in American Samoa, Guam, Kiribati, New Caledonia, Timor Leste and Vanuatu. Westpac has largely withdrawn from the Pacific region, its only presence outside PNG being in Fiji.
Despite its recent acquisitions in the Pacific, BSP says it has no grand strategy for the region. It is looking to enter countries or businesses when it makes sense to do so, and while PNG is in the Pacific, the push will not necessarily go eastward. “We are going to be opportunistic if something presents itself,” Fleming told OBG.
On A Different Level
Increasingly, executives are starting to reassess PNG’s positioning, and it is unclear how the various financial institutions will proceed. In terms of population, the country is a poor fit for the Pacific, into which it has traditionally been lumped. PNG has nearly 10m people, while the next-largest Pacific country, Fiji, has just above 1m, and Niue only has a population slightly over 1000 people. In recent years PNG has broken from the pack and is now operating at an altogether different level from its smaller Pacific neighbours. It is now very much a large, resource-driven economy and has little in common with the smaller, isolated island nations in the region.
For ANZ this has meant a shift in priorities. The bank is pursuing a back-to-basics strategy internationally. After expanding rapidly into Asia for about a decade, it is now taking stock and finding that the heavy investment to become a regional powerhouse was expensive and did not yield the hoped-for returns. The institution is maintaining its footprint, but is cutting back on operations in some places. During this process, and largely as a result of the overall reassessment of PNG’s place in the region, ANZ’s subsidiary in the country is now reporting directly to Australia rather than as a part of the Pacific operations as a whole. The two countries largely share the same basic economic drivers, so the shift is seen as an alignment of talents and interests. “We have taken PNG and moved it out of the Pacific. What that gives us is closer support. The challenges around the Pacific are very different,” Mark Baker, managing director PNG at ANZ Banking Group, told OBG. “With the links to Australia, and the role of the extractive industries and agriculture in both, the fit makes much more sense. There is no big change in strategy, and the PNG operations have been reaffirmed as a core part of the group. But in these market conditions, to be reaffirmed is important.”
BSP is being particularly innovative in the asset lending space. In 2013 the bank tried to acquire Credit Corp, a local finance company, but its shareholders refused to sell. The following year, the bank formed its own finance subsidiary in PNG, BSP Finance. It also opened a finance subsidiary in Fiji the same year. In PNG the new unit focuses on asset financing for the purchase of equipment that will help a business increase its income, although it does not offer personal loans in PNG, but does in Fiji. The company helps lenders qualify by assisting them with the development of proper accounts.
The bank is also currently working on the development of an asset financing company in Cambodia. It will be formed as a joint venture with a local firm. BSP says that the new enterprise will pursue opportunities and develop to meet demand, and that a banking licence in the future is not out of the question if it makes sense as a business. BSP noted that it is making the leap to South-east Asia as it believes that it can take its experience, capital and core system and utilise them in countries with large populations and an underdeveloped banking sector. “Asset finance is our starting point,” Fleming told OBG. “In four to five years, the potential exists to move into banking.”
MoniPlus, a non-bank finance company, is currently working on an initial public offering and hopes to have its stock listed in Singapore in 2016, though it continues to rule out becoming a fully-fledged bank. Market participants say that BSP may be looking at a Singapore listing, though the bank has declined to comment on that possibility.
Movable Asset Registry
In other ways, the market is developing fast, and becoming more stable, efficient and transparent. While none of the improvements are in and of themselves transformative, they are helping to improve the banking environment and bring it closer to international best practices. In 2016 the country opened a movable asset registry and implemented a law to underpin its use: the Personal Property Security Act (PPSA). The project was supported by the Asian Development Bank (ADB) and has been helping the financing of small and medium-sized enterprises (SMEs). By allowing banks to see if a item of movable property has been used previously for collateral purposes, it could enable small business owners to get easier access to credit. The lack of credit for SMEs in the country has long been a bottleneck in their development. Other businesses, such as suppliers, may also be aided in the extension of credit because of the existence of the registry. Under the PPSA, a wide range of assets can be registered. These include aircraft, vehicles, inventory and equipment, accounts receivable, intellectual property, licences and court judgments.
Additionally, the Kina Automated Transfer System is fully up and running. Cheque clearing is now down to four days (for compliant documents), from as much as 10 days previously. The central bank noted that the system will help reduce waste and fraud. The government is now committed to digitising all of its payments, and PNG has joined the Better Than Cash Alliance – a partnership of governments, companies and international organisations promoting the transition from cash to digital payments. It is the first Pacific nation to do so.
Previously, PNG was on the Financial Action Task Force (FATF) list of countries that have deficiencies. However, in 2015 the government passed a wide range of legislation relevant to anti-money laundering. These included the Anti-Money Laundering and Counter Terrorist Financing Act 2015; the Criminal Code for Money Laundering and Terrorist Financing (Amendment) 2015; the Mutual Assistance in Criminal Matters (Amendment) Act 2015; the Proceeds of Crime (Amendment) Act 2015; and the UN Financial Sanctions Act 2015. These laws, which became effective in early 2016, enabled the country to meet the FATF standards and saw PNG removed from the FATF’s “grey list” of countries found to be non-compliant. According to the central bank, PNG is now one of the fastest-reforming countries in the Asia-Pacific region when it comes to anti-money-laundering issues.
PNG has long been underbanked, with about 1.8 bank branches per 100,000 people in 2013, according to the latest data from the IMF, a slightly lower level than was reported in 2004. That compares with an average of 11.1 found in developing Asia for 2013. Domestic credit to the private sector provided by the banks was at 24.6% of GDP in 2014, compared with 39.2% in the Philippines, 32.9% in Indonesia, 120.5% in Malaysia and 129.6% in Australia for the same year.
The country has a number of microfinance institutions. These include Nationwide Microbank, PNG Microfinance and People’s Micro Bank. The Women’s Microbank was formed in 2014 as the first bank for women in PNG and the Pacific region. A number of alternative channels have also been developed. In 2011, Post PNG introduced Salim Moni Kwik (SMK), a bank-like system that allows people to keep a balance of up to PGK5000 ($1710). They can also add cash for free, transfer cash starting at PGK0.40 ($0.14) for amounts of up to PGK20 ($6.83), and receive cash starting at PGK3.60 ($1.23). Cash-in and cash-out can be initiated at the post office or at SMK agents.
The major banks are also working to develop microfinance. Since 2015 BSP has been offering training in savings, budgeting and mobile money, and the bank has made 120 staff available for the project. Additionally, in 2015 more than 20,000 people received training, of which almost half were women. The programme is being undertaken with the cooperation of the Microfinance Expansion Project, which started in 2014, is funded by the ADB and will last for a total of seven years.
BSP has formed an SME Retail division to serve business customers with a turnover of under PGK3m ($1m). This includes sole traders, partnerships, family-owned firms and smaller companies. The bank makes loans ranging from PGK5000 ($1710) to PGK250,000 ($85,300) and is willing to use different criteria for analysing various clients. Rather than reviewing a full financial statement, they will evaluate a business’s borrowing capacity based on its cash flow.
The 2014 efforts by the central bank to narrow the foreign exchange spread were followed by other measures to gain greater control over the currency market. In March 2015 a foreign exchange control directive was issued by the Bank of PNG, requiring all earnings from exports, other than those derived under a project development agreement, to be brought onshore within three months. It also forbid the opening of new foreign currency accounts without approval. Documentation requirements are now stricter, and applications for foreign currency must be justified by a legitimate underlying export transaction involving goods or services. The bank has also started to search for offshore foreign currency accounts that were opened without good reason.
The currency-related moves have resulted in an overvaluing of kina, a shortage of dollars and a backlog of orders for dollars. By the end of 2015 an estimated PGK1.5bn ($512.1m) of sell orders were awaiting processing, with others estimating that as much as PGK3bn ($1bn) might be queued up. The banks found themselves in a difficult position as PNG sought $300m from the International Finance Corporation (IFC) so that liquidity could be restored. For the plan to work, the commercial banks would have to take on some risk, and they are going slow to make sure the structure works and does not overly expose them. “For the two foreign banks, it has always been more challenging. But we are working with the IFC to come up with a structure that works,” Baker told OBG. “The structure was quite complex. There are challenges on both sides, for both the IFC and the foreign banks. But we continue to work with Bank of PNG to find solutions. We are not saying there is nothing we can do. It is in everyone’s interest to bring stability to the foreign markets, but we have to do that within the bounds of the expectations of our shareholders and prudent risk management.”
Given its high profitability, high capital levels and conservative lending practices, the PNG banking sector is well positioned to weather the recent slowing in economic growth. It is also possible that the sector’s pivot to Asia and expansion into other lines of business will allow it to become more diverse in terms of exposures and income streams. Inclusiveness, however, will always remain a challenge in a country like PNG, while the financial institutions will continue to face challenges common to those in resources-based economies.