Shareholders have approved Papua New Guinea’s largest bank, Bank South Pacific, listing on the Australian Securities Exchange in a bid to access more capital and improve its presence in international capital markets, according to CEO, Robin Fleming.
Analysts say the float may be worth at least $US 750 million, but Fleming has told Islands Business that the bank ‘does not intend raising new equity capital on listing date”.
A special AGM approved the listing late March, including changing the name of the company to BSP Financial Group Limited, although the bank will continue trading across the region as BSP. He says companies could not be registered in Australia with the word “bank” as part of its company name unless they were regulated by the Australian Prudential Regulatory Authority (APRA), which BSP would not be as it will not operate as a bank in Australia.
“BSP may well raise equity capital at some point in the future to fund growth initiatives but there is no intention to do so immediately,” Fleming says.
“What we’re offering potential shareholders is stable dividends.
“From 2015, BSP has delivered sustainable year-on-year profit growth, while maintaining a strong capital position well above regulatory requirements.
“Given the latter BSP has had the ability to deliver stable shareholder dividends and strong yields,” he said, pointing out the three-year average is greater than 12 per cent.
“Like most businesses, BSP has also been adversely affected by COVID-19. As per our recent 2020 financial results announcement, the Group’s profit decreased by K84m (or 9.5%) to K806m in 2020.
“The global pandemic triggered significant challenges in every Pacific market and the consequential year-on-year increase in loan impairment expenses by K102m to K201m in 2020. It went up by 102.9 per cent from 2019.
“Despite that, BSP’s 2020 financial performance was stronger than the large banks listed on the ASX.”
Listing is expected later this year.
“BSP does not anticipate any material change to operations as a result of being listed on the ASX,” he said. “BSP has already adopted governance arrangements, for example, that are consistent with the requirements of the ASX.
And he doesn’t expect the listing to diminish the bank’s role in the region.
“BSP will remain a leading Pacific bank while access to new sources of capital will allow to us to invest in growth opportunities in the region as and when they arise.”
The bank has been listed on the Port Moresby stock exchange since 2003 and operates in Solomon Islands, Fiji, Cook Islands, Samoa, Tonga, Vanuatu, Cambodia and Laos.
Its shareholders include major PNG Institutions - IPBC, Nasfund, Nambawan Super, Petroleum Resources Kutubu, Credit Corporation, MVIL, PNG Teachers Savings & Loan, Comrade Trustees, and the International Finance Corporate (IFC).
It has assets (2016) worth more than K20.8 billion (US$6.4 billion), total deposits of K16.9 billion (US$5.2 billion) and market capitalisation of US$1.3 billion. BSP also has three 100% owned subsidiaries; BSP Capital Ltd - stockbroking and funds management in PNG; BSP Finance - specialist Asset Finance company in Fiji and PNG and BSP Life - specialist Life Insurance company in Fiji.
The much-anticipated bid for Westpac Pacific (PNG and Fiji) operations by Kina Securities (the owner of Kina Bank) was finally confirmed last month. The offer did not come as a surprise as Westpac moved its Pacific assets into a specialist business division in May 2020, and Kina Securities undertook a capital raising in October. The proposed deal is still pending regulatory and shareholders’ approval.
Currently, only four commercial banks – Bank of South Pacific (BSP), Kina Bank, Westpac and ANZ – operate in PNG with ANZ focused solely on institutional banking. BSP owns more than 50% of the total assets of the commercial sector and has a market share of 63% of loans. If the acquisition goes through, Kina Securities will have nearly all the remaining market share.
Unlike its acquisition of ANZ retail, commercial and SME operations in 2019, Kina Securities says that it intends to maintain Westpac’s commercial banking licence and run the branch network separately. It claims therefore that there will be no lessening of competition. However, this is unconvincing. Despite being run separately, there will be ample opportunity for the two banks, which serve the same shareholders, to collude for strategic purposes. In addition, there is no guarantee that any separation will be permanent.
A further weakening of banking competition in PNG would be a bad thing for several reasons.
There is already a massive spread in PNG between the very high rates at which funds are lent out by the banks and the very low rates depositors receive on their savings – in fact, one of the highest interest rate spreads in East Asia and the Pacific.
Banks are already not incentivised to transmit interest rate adjustments by the central bank (the KFR policy rate) to their consumers as there is little need to compete for loans and deposit base. If banking competition reduces further, banks will possess even more market power to set their own lending and deposit rates, and monetary transmission will be further weakened.
The two remaining bank owners may engage in anti-competitive behaviour by manipulating interbank and other market interest rates to maximise returns. For instance, they may collude to set a common interest rate floor for their lending products and promise not to undercut each other to avoid direct competition. The same applies to deposit rates.
In other countries, banks with high market concentration have been found to fix prices and rig bids in the foreign exchange interbank market to boost profits. PNG is unlikely to be an exemption.
In addition, PNG banks are already some of the unfriendliest in the region. Consumers are often required to pay for basic banking services such as account opening, ATM balance enquiries and cash withdrawals but receive poor service delivery. As banking competition decreases there will be less economic incentive to improve service delivery, and rip-offs like these could get even worse.
Further reducing banking competition will also lead to heightened risk aversion, and less lending to the private sector. There are already signs that PNG banks prefer lending to governments rather than firms. Having private investment crowded out by public investment is detrimental to economic growth and development, and will make it harder for smaller firms especially to access credit.
Financial inclusion is also at risk. Lesser banking competition has been found to reduce the supply of financial products, increase the rates and fees paid, curtail financial innovation and decrease the quality and variety of products offered.
That said, Kina Bank made a commitment to expand its financial inclusion effort in PNG in 2019 via its investment in MiBank, a microfinance institution. The Asian Development Bank (ADB) is also currently the second largest shareholder of Kina Securities, following its $10 million investment in the company in 2019. They may use what shareholder power they have to encourage decisions that align with their own inclusion goals.
Though these are positive signs, greater profitability and expanded financial inclusion do not always go hand in hand, and economic theory would suggest that healthy competition is more likely to create sustainably lower prices and better access than does relying on the benevolence of banks.
PNG’s financial regulator should take its fair share of the blame for not making the PNG banking sector more entry friendly. A recent study by ADB shows that regulatory barriers and high costs have discouraged the growth of the banking sector. The study pointed out that the increasing compliance with regulations related to consumer registration has led to increasing documentary requirements and high compliance costs. While strong oversight is necessary to guarantee financial stability, financial regulators must tread carefully to avoid their actions leading to financial exclusion.
Of course, if Westpac wants to exit the Pacific, it needs to find a seller. But PNG needs new entrants into its banking sector. The central bank should consider encouraging new entrants from the existing non-bank financial institutions.
A competitive financial system is vital for high and sustained growth. The people of PNG will find themselves worse off if one day they wake up to just two companies serving their retail banking needs.
This article appeared first on Devpolicy Blog (devpolicy.org), from the Development Policy Centre at The Australian National University. Accompanying graphs can be viewed on that page.
Dek Sum is an Associate Lecturer at the Development Policy Centre, based at the University of Papua New Guinea, where he is a Visiting Lecturer and Project Coordinator for the ANU-UPNG partnership.
Westpac says it will not respond to speculation in Australian media this week that it is on the verge of selling its Pacific businesses.
A Westpac Fiji spokesperson says the Bank “is currently undertaking strategic review of its specialist businesses, as we shared with the market in May. This includes wealth platforms, superannuation products, investments, general and life insurance and auto finances well as Westpac Pacific.
“Given this, there is going to be ongoing speculation circulating – as there has been since Westpac sold some Pacific operations in 2015. Westpac does not respond to speculation and, as always, if there is news to share about our business, our people and customers will hear it from us.”
On Monday, The Australian newspaper [paywall] reported that it had information Westpac was close to selling its Pacific banking operations, and that while the buyer’s identity was unclear, “logical acquirers” would be either the Papua New Guinea-headquartered Bank South Pacific (BSP) or France’s BRED.
Westpac sold its Samoa, Cook Islands, Solomon Islands, Vanuatu and Tonga operations to BSP in 2015. It retains operations in Fiji and PNG.
In May this year, Westpac announced statutory net profit was down 62% (A$1,190 million) for the first half of 2020, compared to the first half of 2019. In a statement to the Australian Stock Exchange it said it was clear that Westpac needed to “simplify and focus on its Australian and New Zealand banking businesses,” and that a Specialist Businesses division under the leadership of Jason Yetton would review Westpac’s Pacific businesses, superannuation, wealth investments, insurance and auto finance.
“Over the coming months we will conduct a detailed strategic review on the best option for these businesses. This will include considering whether they would ultimately be more successful under different ownership” the Bank said in May.
Meanwhile in Fiji, “customers can be assured that we are here to help and continue our support to people and communities across Fiji, including through our COVID-19 customer assistance package,” the Westpac Fiji spokesperson says.
A major bank in the Pacific region has recommended that Fiji put the brakes on civil servants wage increases as a major step towards bringing the national budget back to balance in the medium to long term.
In its Pacific Economic Outlook for Fiji released today, the ANZ Bank offers an independent analysis on the Fijian economy, highlighting some weak areas that the Fijian government could look into.
Fiji’s total national debt and the need to bring the national budget back to balance were among the areas that needed attention.
“Since 1992, the government of the day has run a budget deficit in all but two years (1998 and 2008). As a result, the nominal outstanding debt level has climbed. Although this is not the time for austerity, we would advocate that the budget be brought back towards balance over the medium to long term, especially as the interest cost is likely to increase when the interest rates rise,” the report said.
“History suggests that expenditure close to 30 per cent of GDP generally yield the smallest budget deficit. With payments as a proportion of GDP estimated at 39 per cent for the 2017/18 financial year, our view is that expenditure needs to be cut by around 1.5 per cent a year, in order to wind it back to around 30 per cent of GDP over the next five years. This includes showing restraint on public sector wage increases. Public sector employees have received large double digit wage increases in recent years. We understand that budgets have to balance commitments, deficit implications for credit ratings along with political consequences. However, even allowing for some catch ups in wage increases, the hefty wage increases recently awarded appear excessive. The public sector wages bill now accounts for nearly a third of total expenditure from just over 23 per cent in 2011,” the report said.
In the last few years, civil servants have called for what they believed was a long overdue rise in salaries and in response, government undertook a pay review exercise last year followed by pay increases in various ministries.
Now with the civil service wage bill accounting for almost a third of government expenses, the ANZ is cautioning the policy makers to go slow with the pay rises.
“We’re not saying that the wages should be cut back. We’re saying that there should be some restraint in wages growth because wages growth has escalated over the last two, three years,” ANZ International’s Pacific Economist and author of the report Kishti Sen told Islands Business.
“I agree that there should be some catch up payment to the public servants because they actually haven’t had enough increases to compensate for cost of living. But going forward, we’re not saying this is something they need to do over the next two years; austerity is not something that the economy needs at the moment, the government has to continue to do some of the capex projects in order to keep people in employment. What we’re saying is over the medium to long term, it’s necessary for any government, or even a household, to not continue to spend more money than they bring in. You have to have a plan to bring your budget back towards balance. And we think that expenses at around 30 per cent of GDP gives you some sort of a balance of your budget so over the long term, that’s something that government could think about,” Sen said.
On Fiji’s debt level, the ANZ Bank noted that total public debt stood at F$4.85 billion (US$2.32billion) in 2017 - a new high but its serviceability was still manageable, considering that the debt to GDP ratio of the current debt cycle was still lower than Fiji’s debt peak in the mid-1990s.
SIX months after successfully expanding its business to Solomon Islands, the European bank-BRED Bank- will open a second branch in Honiara by the end of the year and a third branch in the provinces in the next 24 months. BRED Bank CEO in Solomon Islands, Owen Thomson, told Islands Business they would now focused on improving the quality of their services by implementing mobile banking through Mobile Application and USSD – banking through text messaging “This is very important for us to deliver banking service to everyone as most of the population live in remote rural areas with no banking access,” Owen said.
He said they would work with NGOs and government agencies to promote saving groups and financial knowledge for the people in Solomons. With the successful establishment of operations throughout the Pacific (Vanuatu, Fiji, New Caledonia and French Polynesia), the BRED Group began operation in Solomon Islands in August last year with one staff member. By opening day, it has installed eight ATMs and opened over 830 accounts.
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