Despite a tight supply of foreign exchange and a slowdown in economic growth in 2018, Papua New Guinea’s banking sector remained well capitalised and registered a robust performance, aided by supportive policies from both the government and the Bank of PNG (BPNG), the country’s central bank. The successful issuance in September 2018 of the country’s first dollar-denominated sovereign bond raised $500m at a relatively attractive interest rate of 8.375%, helping to relieve some of the foreign exchange pressures, while ongoing economic stabilisation efforts supported business growth.
Although commercial banks responded well to challenging macroeconomic conditions, their overall performance remains hindered by the lowest loanto-deposit ratio of any country in the Pacific region, a consequence of PNG’s legacy of community-based mutual credit transactions. Domestic commercial banks remain well-capitalised, but they are nevertheless part of a system that is under some strain. “Macroeconomic conditions may impact the availability of new lending opportunities,” Robin Fleming, Group CEO at Bank South Pacific (BSP), told OBG.
PNG also remains one of the world’s least banked countries, despite considerable gains, with large pockets of rural communities excluded from formal financial services. Tapping this large, underserved consumer market remains a priority for both the government and commercial banks. To this end, mobile banking and financial technology (fintech) solutions continue to be employed to narrow the existing financial inclusion deficit, while progress in improving internet service provision is helping address limitations in banking, power and telecommunications infrastructure (see ICT chapter).
Structure & Oversight
Established in September 1973, BPNG serves as the central bank and autonomous monetary authority. Under the Central Banking Act of 2000, BPNG is responsible for providing means of payment in kina to the country’s four commercial banks, operating interbank clearing and settling arrangements, acting as the government’s banker and fiscal agent, as well as operating mandatory exchange settlement accounts for commercial banking. Elsewhere, the central bank is also in charge of the supervision of life insurance.
PNG’s commercial banking sector dates back to 1910, when the Bank of New South Wales, today Westpac, and the Australia and New Zealand Banking Group (ANZ) began operations, followed by the Commonwealth Bank (1915) and Kavieng (1916). A number of other banks have arrived and subsequently left over the years, including Niugini-Lloyds International, Banque Indosuez and Bank of Hawaii.
The country’s financial services sector is small in terms of the number of institutions, but it has a healthy mix of banks and related financial enterprises. Four commercial banks dominate the industry: the two Australian institutions, Westpac and ANZ; and two local banks, BSP and Kina Bank.
Local Giants
With a presence in six countries within the region, BSP is PNG’s largest bank by asset size. At end-2018 it was operating 46 branches, 43 sub-branches and 314 ATMs across the country. As a sign of the bank’s commitment to digitalisation, branches were responsible for 12% of BSP’s transactions in the third quarter of 2018, compared with mobile banking at 43%. Public entities control the majority of the bank’s shares: Kumul Consolidated holds an 18% share; the government’s civil service pension fund, Nambawan Super, holds 12.3%; followed by Petroleum Resources Kutubu and the National Superannuation Fund – commonly known as NASFUND – holding 9.9% and 9.7%, respectively.
In June 2018 Kina Bank’s founding and major shareholder, Fu Shan Investment, sold their entire stake. Managed by Australia’s Morgans Financial, the sell-off saw a 34.94% divestment, which equated to the transfer of 57.29m shares to a range of new and existing institutional and retail investors in PNG, Australia and New Zealand. The divestment was the fulfilment of the last remaining condition applied to the Kina Bank Banking Licence, namely the requirement for its largest shareholder, Fu Shan, to reduce its shareholding in line with the central bank’s principles and prudential guidelines. In addition to the bank’s shareholder restructuring, Kina Bank acquired ANZ’s retail and commercial wing, a deal first announced in June 2018. As part of the deal, which is set to be finalised by September 2019, 300 staff and 120,000 customers will transition to Kina Bank, making it the second-largest retail bank in PNG. The acquisition includes the transfer of all of ANZ PNG’s retail branches, ATMs and electronic funds transfer at point-of-sales terminals, expanding Kina Bank’s distribution network significantly. Meanwhile, ANZ will refocus its operations on institutional and large corporate banking in the region.
Global Participation
International participation is set to increase, with state-owned Bank of China planning to open a branch office in PNG. This follows the signing of a memorandum of understanding in April 2019 between Rimbink Pato, the then-Foreign Minister, and Liu Liange, the vice-chairman and president of the Bank of China, that focused on the implementation of projects linked to China’s flagship Belt and Road Initiative. Chinese interest in PNG and the wider Pacific region has grown over recent years, becoming an increasingly important source of infrastructure financing and concessional loans alongside traditional development partners. “Chinese companies and certain international projects usually rely on external financing,” Fleming told OBG. “In that sense, it has become more difficult for domestic banks to participate.”
Microfinance
Microfinance institutions also play an important role in the provision of financial services. The first microfinance service was introduced by the Asian Development Bank (ADB) in 2002 under the Microfinance and Employment Project, which was co-financed by the ADB, the Australian Agency for International Development and the PNG government. For the most part, microfinance penetration remains low due to low financial literacy and a legacy of community-based mutual credit. Microfinance services are primarily supplied by the state-owned National Development Bank, a financial institution mandated to provide credit for income-generating activities.
At the end of 2018 there were five licensed microlenders, 21 savings and loans societies, and around 70 small community-based NGOs engaged in microfinance activities. According to data from US-based NGO Microfinance Information Exchange, the loanto-deposit ratio of PNG’s microfinance industry ranged 52-58% between 2013 and 2018, meaning that for every kina deposited around 55 toea was loaned to the public. However, a lack of demand for credit among low-income households has contributed to a cycle of low wealth generation in rural communities. This longstanding problem continues to hinder poverty reduction efforts, including government initiatives to promote growth in business ownership and the tax base.
Reforms Under Way
Guided by the Financial Services Sector Review (FSSR) team, the government is working to prepare the financial services sector for the next phase of development. Under the newly adopted Financial Sector Development Strategy (FSDS) 2018-30, BPNG is set to become PNG’s single prudential supervisor. The objective of BPNG and the FSSR team is to ensure that the financial services sector makes a greater contribution to local economic and social development. The next phase of development will be steered by the Financial Services Council, a new body comprising the secretary for Treasury, the governor of BPNG and the chairman of the Securities Commission of PNG. BPNG is also tasked with overseeing the development of the national payments system and the installation of a central payments switch to enable interoperability across all authorised e-retail platforms (see analysis).
Performance
The financial sector has expanded considerably over the last decade or so. According to BPNG, total industry assets reached PGK51bn ($15.5bn) in September 2018, up from PGK20.9bn ($6.3bn) in June 2009, marking an increase of 142%. Of that figure, banks and other deposit-taking institutions accounted for PGK37.8bn ($11.5bn), or 74.2% of the total, while superannuation funds and life insurance assets accounted for the remaining 25.8%. Financial sector assets accounted for 63.9% of nominal GDP as of September 2018. S&P Global, the business intelligence arm of the global ratings agency, forecast the non-performing loan ratio to fall to 3.8% in 2019 from an estimated 4.4% in 2018.
In its monetary policy statement for the first quarter of 2019, BPNG acknowledged it had maintained a neutral monetary policy stance by keeping the monthly policy signalling rate, the Kina facility rate, at 6.25% throughout 2018. This neutral stance was maintained as average annual headline inflation decreased from 5.4% in 2017 to 4.5% in 2018.
Major Players
Despite a challenging operating environment, the country’s largest lender, BSP, delivered successful financial results for 2018, marking the third consecutive year the group has delivered double-digit profit growth. That year the bank served 2.4m account holders and employed 4307 staff. According to BSP’s 2018 annual report, net profit after tax increased by 11.5% year-on-year in 2018 to reach PGK844.1m ($256m), up from PGK757m ($229.6m) the previous year, while total assets grew by 3% to PGK23.1bn ($7bn). Some PGK597.4m ($181.2m) was paid to shareholders in dividends, up from PGK521.9m ($158.3m) in 2017. BSP finished 2018 with a capital adequacy ratio of 22.9%, compared to 24.5% in 2017, and a leverage ratio of 10.3%. These figures easily exceed the respective 12% and 6% required by BPNG. On the back of strong performances from BSP’s local and overseas businesses, the group has delivered a compound annual growth rate of around 14.2% since 2013.
Kina Bank likewise enjoyed a positive performance in 2018, and has undertaken significant investments in technology, such as automating systems and processes to improve efficiency. According to the firm’s 2018 annual report, its customer base grew by 25% to almost 21,000, while deposits increased by 29% to reach PGK1.3bn ($394.3m). The bank’s loans and advances book grew by 20% to hit PGK851.7m ($258.3). Kina Bank’s foreign exchange income grew by 373% to hit PGK34.2m ($10.3m). Kina Securities, the holding company of Kina Bank, declared net profit after tax of PGK48.1m ($14.6m) for 2018, while net interest and non-interest income grew by 21% and 90%, respectively. Its subsidiary, Kina Funds Management, PNG’s largest funds manager, recorded annual revenue of PGK8.8m ($2.7m) with total funds under management standing at PGK7.5bn ($2.2bn), up from PGK6.9bn ($2.1bn) at end-2017.
According to market estimates, Kina Bank’s acquisition of ANZ’s retail and commercial wing is expected to see its share of the lending market increase from 5.8% to 8.8%. It anticipates this will double its share of the deposits market to 9.9%, making it the second-largest retail bank in PNG.
Assets & Lending
Assets in the commercial sector have recorded exponential growth since 2002, with BPNG reporting that total commercial banking assets rose from PGK3.9bn ($1.2bn) in that year to PGK20.3bn ($6.2bn) in 2011. Growth has been slower in recent years, however, with total assets rising from PGK22.7bn ($6.9bn) in 2012 to a high of PGK30bn ($9.1bn) in September 2017, before moderating to PGK29.3bn ($8.89bn) at end-2018. As of March 2019 commercial bank assets stood at PGK29.2bn ($8.86bn), of which other depository corporations accounted for PGK256.1m ($77.7m).
Meanwhile, the central bank reports that foreign assets in the commercial system have dropped off significantly since hitting a high of PGK2.7bn ($819m) in 2013, falling to PGK1.6bn ($485.3m) in 2014, before rising to PGK1.7bn ($515.6m) in 2015, then falling to PGK1.4bn ($424.6m) in 2017. The downward trend continued into 2018, with foreign assets totalling PGK1.2bn ($364m) in December. As of March 2019 figures stood at PGK1.1bn ($333.7m).
Commercial bank lending to the private sector has risen steadily. BPNG reports that total kina-denominated private sector lending rose from PGK1.3bn ($394.3m) in 2002 to PGK9.2bn ($2.8bn) in 2018, before reaching a high of PGK9.4bn ($2.9bn) as of March 2019. Foreign currency lending has also grown, albeit less rapidly in recent years, rising from PGK99.1m ($30.1m) in 2003 to PGK958.8m ($290.8m) in 2018. As of the first quarter of 2019 foreign currency lending stood at PGK922.3m ($279.8m).
Financial Inclusion & Fintech
Advancing financial inclusion through financial literacy programmes, the provision of fintech services and the expansion of mobile banking capabilities remains a top priority. While financial inclusion efforts have helped to accelerate customer growth over recent years, large segments of society remain unbanked. Only 15% of the population is formally employed, and many lack the necessary identification and steady income flows necessary to access formal banking facilities. Despite the challenges, the banked population has increased, with around 25% of the population making use of such services in 2018, up from 15% a decade prior. Commercial banks have played a leading role in expanding financial inclusion. BSP, for example, provided financial literacy and basic banking education to almost 130,000 people between October 2014 and mid-2019.
For years, prohibitively high internet costs and limited telecommunications infrastructure outside of the major urban centres has hindered tech-based solutions. However, the number of mobile broadband subscribers is growing on the back of major infrastructure developments and significant assistance from global partners. With the Coral Sea Cable System and the Kumul Submarine Cable expected to boost internet capacity and accessibility over the next 12 months (see ICT chapter), there is significant potential for fintech solutions to expand financial inclusion. “In terms of retail banking, the main challenge is simply reaching people,” Brett Hooker, CEO of Westpac PNG, told OBG. “Even if you reach them, there are problems in credit risk and identification, but the new cables should really help connectivity.”
Biometric authentication could also play a major role. A financial inclusion initiative launched by Women’s Micro Bank, for example, introduced new biometric access points in Port Moresby equipped with fingerprint scanners to authenticate transactions. The so-called Mama-Bank Access Points are part of a joint project with the Pacific Financial Inclusion Programme, which is administered by the UN Capital Development Fund and the UN Development Programme. Funding is provided by the governments of Australia, New Zealand and the EU. Biometric identity verification is expected to improve accessibility for women in semi-urban and rural areas by removing the cost of travelling to bank branches to access financial services. The project also aims to increase applications for micro-loans and reduce the occurrence of fraud, with a target of reaching 20,000 customers during the pilot phase in 2019.
Mobile Money
Significant investments towards improving coverage and mobile facilities will also increase the use of mobile banking in the coming years. Market liberalisation in 2007 led to several new players investing in mobile money, and the segment is already fairly well developed. Products include BSP Mobile Banking; BSP’s Wantok Moni; Digicel’s Cell-Moni; Nationwide Microbank’s MiCash; ANZ goMoney, which will migrate to Kina Bank as part of its acquisition of ANZ; and Westpac’s Everywhere Banking. Post PNG’s Mobile SMK, which launched in 2011, is no longer in service.
As of mid-2018 an estimated 9.2% of the population had access to some form of digital wallet, mainly mobile banking. According to estimates from BSP, around 90% of the 10m reported transactions in 2017 were conducted electronically, compared to 860,000 via brick-and-mortar bank branches. However, despite noteworthy expansion, mobile money transfers remain small in comparison to other emerging markets, indicating significant potential.
Outlook
As the government looks to advance the financial services sector into the next phase of development, the establishment of the Financial Services Council should help to facilitate better coordination between fiscal and monetary policies, in addition to ensuring liquidity in the banking system is sufficient. The council will also play a key role in restructuring regulatory and supervisory arrangements, which should support the growth of the banking sector going forwards (see analysis). However, the microfinance industry will continue to face disproportionately low demand for borrowings in comparison to savings deposits. Nevertheless, a number of initiatives, including the FSDS 2018-30, are set to see financial inclusion and literacy rise, though community-based mutual credit transactions will likely continue to dominate the market for the short term as they are not based on collateral.
That said, there are a number of product segments with significant expansion potential. The establishment of a national payments system, for example, would boost the volume of transactions and facilitate greater financial inclusion. Meanwhile, with a transaction settlement date scheduled to occur on or before September 30, 2019, Kina Bank’s acquisition of ANZ’s retail and commercial wing is expected to boost bank earnings and profitability, as well as increase liquidity and ensure higher returns for its shareholders to support future lending growth.
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