Maleeha Hadi  

Welcome to the webinar. I'm your host, Maleeha Hadi. Today, I have the pleasure of hosting Kina Bank's executive team. We are joined by their CEO, Mr. Greg Pawson; CFO, Mr. Johnson Kalo; and General -- Executive General Manager for Wealth Management and Corporate Advisory, Mr. Deepak Gupta. Joining us as well is Smartkarma Insight Provider and Founder of the Tabbush Report, Mr. Daniel Tabbush. Great to have you all with us.

We will start the webinar with the Kina Bank team walking us through a company presentation, after which they will engage in a fireside chat with Daniel. We are taking live Q&A for this webinar, so I would request your attendees to post their questions in the Q&A tab at the bottom of their screens.

During the webinar, we will also share some links on how you can connect with Kina Bank and read more research by Daniel. So please do keep a lookout for messages in the chatbox.

So let's dive right in with introduction to Kina Bank. Greg, can you please share a bit with our audience about the team and the company?

Gregory Pawson   Former CEO, MD & Director

Yes, sure. Thank you, Maleeha, and thanks very much to the Smartkarma for this opportunity to talk to you. As Maleeha introduced, I've got Johnson Kalo, our Group CFO on the webinar today from Port Moresby; Deepak Gupta, our EGM for Wealth and Corporate Advisory Services and, obviously, myself.

The structure of the presentation is Deepak is going to start with a brief overview of Papua New Guinea, the economic -- some of the fiscal things that are happening in our economy at the moment and just an overview -- a broad overview of the financial services sector as well.

I'll then talk a little bit about our vision, our Bank to Market Maker Model strategy and some of the key milestones that we've achieved over recent times. And then Johnson will talk to the financials and key metrics in that regard.

So without further ado, I might hand over to Deepak. I think, Johnson, you're going to share our presentation pack.

Johnson Kalo   CFO & Company Secretary

I'll share my page now.

Deepak Gupta   Former Executive General Manager of Wealth Management & Corporate Advisory

Okay. Thanks, Greg and Johnson, and thanks to the Smartkarma team for hosting this call, and welcome to everybody.

As Greg said, I'll give you a quick overview of the PNG economy and the financial sector to give everybody on the call a bit of context in terms of Papua New Guinea.

Starting with the economy. Total GDP for the country is in kina terms about PGK 120 billion. In U.S. dollar terms, that's about USD 30 billion. So that's total GDP. In terms of the 2 key contributors or the 2 key splits of that, the resources sector comprises about 35% and the domestic sector, about 65%.

And in terms of the resources sector, people maybe familiar with the fact that PNG is a very resource-rich country in terms of mineral wealth, soft commodities, agriculture and the likes. So the main exports are gold, copper, nickel in terms of mining. Gas and oil, gas is by far the biggest -- the two in terms of export earnings. Agriculture, cocoa, coffee, vanilla and palm oil are the main contributors. In terms of fisheries, tuna is a big export driver. PNG has one of the biggest tuna fisheries in the world. I think it might be #2. And forestry is also a big export driver as well.

In terms of macro growth in terms of Papua New Guinea, it's relatively stable. As you see on the graph, it's been -- we had a poor year in 2021. That was a year of weak export prices in particular and COVID, obviously. But since then, there's been a relatively good bounce back.

So what we're doing is we're forecasting growth at around that 3% level, 2.7% in 2023. And a key driver of that is we've got a large gold mine here in Papua New Guinea called Porgera Mine, which has come online recently. It's been out of action for a couple of years, while the mining lease was renegotiated. And that lease for the various miners has been extended for -- I think it was 10 years just recently.

The retail/wholesale sector, that's a big driver of the economy in Papua New Guinea. It's a sector that we've got good exposure to. And it's a sector that's growing geographically. As population moves out of regional areas and country towards cities, and there's 3 or 4 main cities that people tend to go to, retail and household businesses are expanding within the cities, but also geographically. And as I said, we've got some good exposure to that in terms of our lending.

Inflation in the last 3 years has been around that 4%, 4.5% level. Obviously, with a weak kina, the kina has been a weak currency just over the last 12 months and that's projected to continue for a period. There's a bit of inflationary pressure. Papua New Guinea is mainly an import-based economy and, therefore, there's inflationary pressures with a weak kina.

Therefore, interest rates have been trending up locally. The government has been tightening monetary policy, and they've been doing a few things just to try to keep a bit of a lid on inflation without putting too much pressure on the economy. So we've seen interest rates domestically going up, both the short end of the yield curve and the long end. So it's a bit of a structural shift upwards.

And there's been higher yields in government securities. So that's a bit of a backdrop that we're operating in terms of the investment part of our business and our balance sheet. So interest rates have been increasing, which is good in terms of the excess liquidity or the liquidity that we've got.

The FX situation, some of you may be aware that the foreign exchange situation in Papua New Guinea has been relatively tight over recent years for various reasons that we can get into. That has improved over the last 12 to 18 months. The government, in conjunction with the IMF, has been putting in place very -- various monetary tools, specifically, and tools around how the foreign exchange market works in the country. So that's leading to an improved situation in terms of FX flows into the country.

And we've really noticed the fact that the foreign exchange order books for trade-related foreign exchange have improved dramatically over the last probably 3 or 4 months. Prior to that, the wait to get foreign exchange was out to 4 or 5 months, and has dropped down to a few weeks now.

I might go to the next slide, if I could. Thank you. In terms of the economy, the big driver -- or a big driver is resources. There are many resource projects planned for the country over the next few years. On this slide, we've listed the major ones. Papua LNG, P'nyang LNG and Wafi-Golpu.

The first 2 are gas projects. We've got the main proponents listed there, so Total and ExxonMobil. These are sizable projects in terms of the country. Wafi-Golpu, that's a gold and copper mine, Newmont and Harmony, and that's sort of around PGK 5.4 billion.

The main purpose of this slide is to really show people that there is very large projects that are coming online over the next few years. And if you look at just these 3 relative to the size of the economy, these 3 are nearly the size of the country's entire GDP.

If you add into that, there's a lot of other projects in country that relate to infrastructure build. There's a project -- or a program called Connect PNG. That's all about connecting the country's roading development. That's a multibillion-dollar infrastructure project. There's rebuilds in terms of hospitals, airports. There's port redevelopments. Lae, which is a city in the Northeast of the country is where the largest ports in the -- commercial ports in the country.

There's a very large expansion planned for the port there. There's an offshore gas projects. And also there's another gas find. It's called Wildebeest. That's an exploration well at the moment, but early indications are that could be PNG's largest gas find to date.

So the main message that I'd like to leave is that the long-term growth profile for the country is very strong, and that is really the environment that we're operating in, that there's a very long-term runway of growth that underwrites economic growth.

The projection that we've got right at the beginning, that 3%, that excludes all of these projects. So as these projects come through, we'll see a lift in GDP growth. And obviously, there'll be a lot of spillover into the economy, into businesses, into personal consumption. And that's something that's -- that happened when the very first gas project got underway in the country about 10 to 12 years ago.

Very quickly in terms of financial sector overview. There are 4 commercial banks in the country. They've been around for -- all of them quite a long time. There have been 2 new commercial bank licenses issued. There were up to 6, but the 2 new ones are very, very recent. They're very small businesses. One is a former finance business, and one is a former savings and loans business.

So in terms of commercial banks, 4 historical ones that have been in country for a period of time, 2 newer ones. There's quite a few finance companies. They tend to operate in the personal lending space, and there's 12 of those. There's 4 superannuation funds in the country. The commercial banks and the superannuation funds are the 2 largest components of the financial services sector. In terms of assets, the banks are sitting at around PGK 16 billion with liabilities of about PGK 30 billion, and the superfunds are sitting at about PGK 19 billion.

There's also a range of savings and loan societies and microfinance companies that tend to operate in the financial inclusion space. There's about, yes, 18 in savings and loans, 4 are microfinance. And there's also 4 life insurance and general insurance companies in Papua New Guinea. So that provides a bit of an overview of the economy and also the financial sector in the country.

And happy to take questions as we're going or later on. Thanks, Johnson.

Gregory Pawson   Former CEO, MD & Director

Great. Thank you, Deepak. I'll kick in here. Thanks for that context, which I think is really important for those of you that don't know Papua New Guinea particularly well. But hello, again, everyone. I'm going to just talk a little bit about our vision, our strategy and some of the key milestones we've achieved as a company over the past decade.

So look, Kina Securities is the parent company for Kina Bank, Kina Funds Management, Kina Investment and Superannuation Services and Kina Wealth Management, which is essentially our stockbroking business. Our vision, as you can see on the screen, is to be the most dynamic, progressive and accessible financial services company in the Pan Pacific and in PNG -- PNG's leading digital bank.

The company was established -- just looking -- yes, thanks, Johnson. The company was established in 1985 as a privately owned finance company by cohort of predominantly Malaysian investors and from those humble beginnings has grown to become the leading fund administrator, the leading fund manager, the leading stockbroker in the country and also the second largest retail bank in PNG.

As a result, Kina offers a full range of financial products and services from transactional accounts, personal and business loans, financial markets, corporate advisory, wealth and investment management services.

The diversity of our business model, which has been a deliberate component of our strategy, has seen noninterest income grow to be 50% of our total revenue over the past sort of 4 to 5 years. Kina Securities, as you would know, is listed on the Australian and PNG Stock Exchanges as KSL.

In terms of key milestones, the growth of the organization really came to a headwind. KSL formed to acquire Maybank's commercial banking license and operations in PNG in 2015. Maybank's commercial banking license and operations were relatively small. It was the fourth largest bank, but only had a market share of about 5% and only really 2 points of representation in the country in Port Moresby, which is the National Capital District in Lae, as Deepak mentioned, which is the key commercial precinct in the Morobe Province.

The acquisition was funded by an IPO on the ASX and the PNG Stock Exchanges. And in 2019, the company rebranded as Kina Bank following the acquisition of ANZ Bank's retail SME and commercial businesses in PNG. Now that gave us a national footprint with branches in most of the major provincial locations across the country. And as a result of this acquisition, the Asian Development Bank actually became one of our largest shareholders and, I have to say, has been a key supporter of our growth journey.

In addition, Kina also acquired a minority stake in PNG's largest microfinance bank, MiBank, which was established actually by ADB about 15 years ago. And since then, as I mentioned, we've grown to become the country's second largest retail bank.

Just looking at our strategy. Our current strategic plan is described as what we call a Bank to Market Maker Model. Essentially, this transitions the organization in 3 phases from a traditional retail bank to a trusted financial services partner and then to a diversified investment bank and potentially beyond the shores of PNG over the next 5 to 10 years.

The basis of this model is mutually beneficial strategic partnerships that enable us to reach the whole of market beyond just the Kina Bank brand. And good examples of this include our Pei Beta payments platform, NiuPay, Xero and SNS Technologies. And by virtue of our banking infrastructure and associated services, we -- I'm pleased to say, we're humbly regarded as PNG's leading digital organization. And revenue growth from our digital channels has been significant from a 0 base 3 years ago.

Further, business-to-business and business-to-commerce opportunities that we're quite excited about include our strategic partnerships with the major provident funds. We are the funds administrative for the 3 largest superannuation funds in PNG and the leading investment manager for the largest of those, Nambawan Super. And we've also been recently selected as the leading bank participant in the Papua New Guinea government's e-commerce program, as I said, which we're really excited about moving forward.

So on that note, I'll hand over to Johnson, our Group CFO, just to take you through some of our key financial milestones and metrics. Over to you, Johnson.

Johnson Kalo   CFO & Company Secretary

Thank you, Greg. I'll talk mainly on the highlights of our recent half year announcement, the June 2024 half year announcement.

So we've enjoyed solid growth in revenue, underlying impact from the core balance sheet. Assets and liabilities growth is also building diverse revenue streams and roughly 50% split between net interest income and noninterest income. RoE is very healthy, and growth has been supporting a solid dividend payout ratio with a competitive yield, which is now at around 10%.

Cost to income reflects we are still -- or we are maturing as a bank with digitalization becoming more and more important. We are within sight of our internal metric 50% target, but we still need to invest in technology and infrastructure as well as specialist expertise. In this half, we are allocating time and effort to remediation and recovery in relation to the fraud incident, which we announced in the -- in our June results.

The capital adequacy ratio is within our operating range of 16% to 20%, and we have plans to sustain this ratio for continuing balance sheet growth by raising Tier 2 capital in the form of subordinated debt in the near future.

Our NPAT of PGK 42 million was below the prior comparative period because of the exceptional non-lending loss provisioning related to the fraud incident, which I just mentioned. Without this impact, the underlying NPAT growth was 7% over the first half of 2023.

We -- in relation to the fraud incident loss in the first half, this resulted in an exceptional PGK 7.4 million reduction to after-tax profit. And the loss was incurred through the exploitation of payment release messages from our payment processing system, causing third parties to release cash without corresponding funding from our system. And internal controls have been addressed very swiftly, and recovery action is well progressed.

Shareholder metrics are being managed well with sound capital adequacy for the type of market we operate in and largely stable dividends and earnings. We are achieving good revenue growth backed by good loan growth. And putting aside the impact of the exceptional loss in June, underlying RoE is also stable.

Loan growth is pleasing at 14% in the largest category in the portfolio. We also continue to build a solid core of home loans for well-secured, long-term loan earnings. With cost of funds at just above 1%, NIM is relatively strong and is being maintained at 5.6%, mainly on the strength of lending assets as returns on bank bills where surplus cash is invested have receded over the last 18 months.

These have only recently risen back to their 2022 levels, causing some volatility in bank liquidity as wholesale funds have shifted into bills. But as investment patterns settle, we expect to see improved yields later this year and into next year flowing through our revenue streams.

Asset quality is good, slightly better than our major competitor, the BSP Financial Group. And provisions to loans is at 2.2%, and NPLs are below 8%. Both are better than expectation.

Our loan book is good and been growing and keeping pace with market growth. We expect to improve share over the coming 12 to 24 months, especially as we expand our capital adequacy. We are also matching our asset growth with corresponding funding growth.

In terms of our nonbanking operations, our funds management and funds administration activities provide about 18% of noninterest income or 8% of the total income as the dominant service provider to the super funds in the country. This is an area which we will look to grow over time, and which offers a range of cross-selling and adjacent revenue opportunities.

Funds growth is expected to continue organically. Superannuation contributions are mandatory by law in Papua New Guinea. And continuing economic growth is expected to also translate to membership growth.

Now that brings me to the end of the financials brief.

Maleeha Hadi  

Thank you very much, Johnson, for that insightful presentation. Let's transition on to the next part of our webinar, the fireside chat. Daniel has some interesting questions lined up for the Kina Bank team. Daniel, over to you.

Daniel Tabbush  

Thank you. Thank you for the presentation, everybody. I think that the first question from the audience is probably the most salient one because of the intro that you showed with a lot of the projects coming.

The question comes from one of the participants on will Kina Bank be participating in the funding of any of these large projects in PNG. How can we think about that?

Gregory Pawson   Former CEO, MD & Director

I can probably answer that, and Deepak, maybe -- if you could follow on with your comments.

So we do actively bank the corporate sector, but more on a transactional basis. And we don't -- we won't be participating any of the debt funding associated with the projects themselves. Those tend to be funded offshore in U.S. dollars given the participants are very large -- or the sponsors are very large multinational groups like Total, ExxonMobil, Santos, et cetera.

We do have a transactional relationship with them, and we do rely on them for FX supply or flow, which helps us on the import side manage the customers that we have that are require FX on that side of the equation. We do also actively participate as we have since the development of the Exxon LNG plant, Papua LNG -- sorry, PNG LNG, about 12 to 15 years ago in the supply chain. So many of the service businesses that are supplying those major plants, we're an active participant in.

And our sort of sweet spot in terms of customer segments is very much in the retail space. Home lending, which is very, very buoyant in PNG, particularly in the main provincial centers, Port Moresby, Lae and Mount Hagen.

And the SME, the small to medium enterprise, there's around close to 100,000 small businesses in PNG. That's a sweet spot for us as well. And the commercial enterprises, which tend to be large private organizations in the retail/wholesale sector and, as I mentioned, in the supply chains to the mineral extraction and LNG and the oil as well.

But Deepak, I don't know if you want to add anything to that at all.

Deepak Gupta   Former Executive General Manager of Wealth Management & Corporate Advisory

No, I think it's covered. Probably just 2 or 3 points. First one is that in terms of the corporate sector, we -- it's a sector that we kicked off about a couple of years ago as we've diversified and gotten focused in terms of segments.

It's very pleasing because we've onboarded over 60 corporate relationships. And as Greg noted, it's not really about the lending direct to the large corporate. But as these projects are going, they've got requirements to make use of local businesses as subcontractors to the various projects as they get going.

So that provides an opportunity to provide funding for those sorts of businesses, which is a good growth opportunity for us. But also in terms of other services, working with the large proponents in other areas. They've got a lot of community work they've got to do. So with our MiBank relationship, we bring a lot to the table.

We get involved with the corporates -- the larger corporates, not in lending, but in other service. So for example, we do payroll services and the like. So it's helping on that other revenue aspect as well.

Daniel Tabbush  

That's great. Yes. I mean I would view the slide that you showed as hugely positive for the potential for lending growth, even if it's not directly to those companies for all the reasons that you said.

One question I would like to ask before we get to this list of questions is your business in AUM and your FX business. And the reason I'm focused on those 2 because they look very strong. And in a lot of countries in Southeast Asia, it's been hard for banks to get to a 50-50 split of noninterest income and interest income, and you've already achieved it. So I'd like to understand that a little better.

Gregory Pawson   Former CEO, MD & Director

Yes. I think I'll start, and again, perhaps, Johnson, you can add. A deliberate part of our strategy was to expand our digital platforms after we acquired the ANZ business. And we made a conscious decision as part of that strategy to be a leader in the market as opposed to a fast follower, if you like.

And by virtue of that, we've been able to invest in leading sort of digital technologies that are commonplace offshore, but not necessarily in PNG. And as a result of that, the revenue from our digital channels has gone from, I think in -- I mentioned in my speech, a 0 base around 4 -- 3, 4 years ago when we acquired the ANZ business to, we're getting close to, I think, PGK 100 million this financial year, which is really pleasing and, I'm pleased to say, at the expense of our competitors as well.

Foreign exchange has been, I think, a lot of work put in by the team that Deepak spoke about in the corporate space. We were getting a very low percentage of overall flow for FX. And the structural issues that Deepak highlighted in his presentation have, over the years, caused us some degree of volatility.

But the fact that we have successfully onboarded almost all of the multinationals that we would want to transact with in the country has really addressed that issue that we had in terms of capturing a reasonable share of FX flow.

And I think being recognized as a credible commercial bank in PNG, bearing in mind, we're up against Bank of South Pacific, which is the biggest bank and has a market share of around 65%, in part, that's held up by the fact that they bank the sovereign. And then you've got the Australian banks that tended to transactionally bank most of the Australian multinationals that are operating in PNG. So there, we're getting the majority of flow.

But by virtue of the fact that we have really come from nowhere, I think, to be the second largest retail bank, the Central Bank is very supportive. We ranked second for market interventions, which are a lot more frequent than they have been as part of the IMF program. And as I mentioned, we're now getting our fair share relative to our market share of flow from the multinationals.

But also the state-owned enterprises such as the Porgera Mine that Deepak spoke about, which is being partly nationalized and also the likes of Kumul Petroleum and Ok Tedi, which is a nationalized gold mine as well. So I think that's showing through on our results this year compared to last year, definitely.

Daniel Tabbush  

Good. A couple of questions from the audience. I'm going to combine a couple. One is fairly simple in terms of total shareholder returns if you have some kind of target?

Gregory Pawson   Former CEO, MD & Director

So I'll answer the digital channels one. And then perhaps Johnson, you can talk about the shareholder returns.

Look, not really. The only sort of competitors that we're watching very closely and, in fact, we're talking to about potential strategic partnerships are the telcos. So there's 2 predominant telcos in PNG, Digicel and Vodafone, which is actually owned by Vodafone Fiji and the Fijian government.

They do have some payment services, but nothing sort of in comparison to us that we're concerned about, but it would be certainly nice to be able to tap into their subscriber base. I think Digicel has around 3.5 million mobile subscribers in PNG. And Vodafone has embarked on quite a significant capital expenditure program. And we have a very good relationship with both organizations.

But aside from that, the commercial banks, BSP recently dropped in a whole new core banking system. So fortunately for us, they've been a little bit distracted by that. ANZ, whilst they're still in PNG, are really only a corporate bank. They've got around 500, I think, corporate customers. And that's sort of in accordance with the broader Southeast Asia strategy that they wound back from retail banking in.

And Westpac are not really a formidable competitor, if I can be honest. On a couple of occasions, they have attempted to exit the market. We had a go actually of acquiring them about 3 or 4 years ago, but we couldn't get the local ICCC to approve the takeover.

So that's sort of where we stand. Johnson, perhaps you could talk a little bit about return on equity and shareholder returns.

Johnson Kalo   CFO & Company Secretary

Yes. I mean -- I guess, I can -- I'll talk around, I suppose, the framework. We've got an operating -- or a dividend policy of a payout range between 65% and 80%. We sort of operate -- over the last few dividends, we've paid out a roundabout 72% payout ratio, which has given us a 10% yield.

We see our earnings per share. And I'll -- again, excuse me for the localization, but I'll use the PGK metrics, it's PGK 0.37 per share -- earnings per share. So -- and that's a healthy payout or healthy earnings. And when you combine that with the 10% dividend, I think we're comfortable, I think, where we sit.

We will be looking to improve, as I mentioned in my brief presentation, improve our capital adequacy by raising Tier 2 capital. So that should also give a bit of a kick to EPS.

Daniel Tabbush  

Good. Okay. There's an interesting strategic question here just to try to understand the vision that your bank has for the Pan Pacific in the next 5 to 10 years. What is it that you're seeing there that is so interesting for your returns?

Gregory Pawson   Former CEO, MD & Director

I can probably answer that one. I think for us, first and foremost, the major opportunity continues to be in PNG. If you look at the structure and dynamics of the financial services sector, as I mentioned, one major bank, they've got a dominant sort of market share position. However, I would say they're not necessarily a formidable or aggressive competitor for us.

You've then got us coming in at around 16%. We're hoping to get close to 17% in terms of footings market share. So that's loans and deposits combined, and the Australian banks following behind us in the single-digit territory.

So if you look at the gap between us and BSP, you'd have to say there's a huge organic growth opportunity continuing and especially in light of the major resource projects that are anticipated to come onstream over the next 3 to 5 years as well.

However, in saying that, we have been actively looking at other markets, not specifically what I would refer to as Pan Pacific, but more Pacific. And you'll see from our history, we've looked at Fiji on a number of occasions, not necessarily for the commercial opportunity. It's a very small market. I think there's about 1 million people. It's got quite a competitive commercial banking structure there. There's 6 commercial banks as opposed to 4 here in PNG.

However, in terms of cost to operate, it has some potentially significant advantages to us. The cost of doing business in PNG tends to be artificially higher. We have, I guess, a disproportionate number of expatriates to help cover for some of the talent gaps that we have, particularly in technology and some of our high-level operations, which we are doing a huge digitalization program of work at the moment. We're about to embark on that.

And we think by virtue of the fact, too, that Fiji sits on and has access to the Southern Cross cable, which runs from Australia through to the U.S. gives us an opportunity to tap into a much, much lower cost of infrastructure and data. So that's sort of something that we've been looking at for a while now.

We had been talking to Westpac potentially about buying their business there. However, they were more committed to selling both PNG and Fiji together in one line, and we weren't really particularly interested in PNG given we've already got quite a significant retail franchise.

Pan Pacific is on the horizon. In what manner or form that might look like, we're not sure yet. It wouldn't be as a fully-fledged commercial banking operation as we are here in PNG. It would be more, I think, more of a niche play, particularly in the fintech space, perhaps the payment space. And then maybe, there's some sort of joint venture. But I would suggest that's probably 5 to 10 years out for us at this point of our journey.

Daniel Tabbush  

Okay. Good. Another set of questions from some of the clients here. If you could comment maybe on the regulator or the Central Bank, and in terms of new licenses or compliance with capital requirements, those sorts of things.

Gregory Pawson   Former CEO, MD & Director

Yes, I'll start with that. And again, Johnson, you might want to add around some of the regulatory regime in terms of how that applies to us.

The Central Bank here is very well run. It's very efficient. It's very effective. It has a lot of interaction with the Reserve Bank of Australia. And the IMF have got quite a significant reform program happening at the moment in conjunction with the Bank of Papua New Guinea.

So the regulatory environment, as you would have expect, I think, is not that far from what you'd be accustomed to in Singapore, especially around AML/CTF, anti-bribery, corruption regulations, they're right up there in terms of, I think, being world-class. So there's absolutely no issues on that front. We have a good working relationship with them. I obviously chair the PNG Bankers Association, which represents the 4 major commercial banks here in PNG.

They recently granted two new commercial banking licenses, one to an organization called TISA, which is essentially a savings and loans operation. It's not a full commercial banking license at this point in time, but it does give them the ability to raise deposits through transactional accounts. We don't see them as being a major competitor of ours, certainly not for some time. And they're embarking on quite a significant capital investment program.

The other one is an organization called Credit Corporation, which is essentially an asset financing business, an investor. So they're one of the shareholders in BSP. And the large proportion of their income is derived from BSP dividends. And they've also got quite a significant residential and commercial property portfolio. So a bit of a fragmented business model, but they've also been granted an interim commercial banking license focused more so on the retail sector. But again, we don't really see them as being a major competitor.

The most controversial probably from a geopolitical point of view is the Bank of China. They do have a representative office here in PNG. We've actually been talking to them about correspondent banking arrangements quite favorably. There is some rumors that they might be looking to enter the PNG market. We're not sure if there's any legitimacy behind that or not.

But I might -- Johnson, if there's anything you would like to add in terms of the Central Bank itself.

Johnson Kalo   CFO & Company Secretary

Yes, just, we're -- it's a very sort of well-regulated and well-governed industry, and the commercial banks are subjected to your normal capital adequacy requirements. We have a minimum statutory -- or sorry, regulatory requirement is 12% total capital adequacy and 6% leverage capital adequacy. And as conservative operational matter, most of the banks would operate above those minimum limits, obviously. And as you saw from our presentation, we adopt the range of 16% to 20% as our capital adequacy limit.

There's large exposure limits in terms of credit that's on an individual basis as well as on a group basis. There's foreign currency exposure limits. There are fairly stringent exchange controls in place at the moment, and we spoke about those earlier in our presentation.

We don't use any sort of derivatives or forward position adoption in the market. We're straight sort of transaction-based, margin-based, FX trading in the market here. And that's, again, tightly controlled and subjected to strong regulatory limits -- daily limits as well as balance state limits.

Yes, there's governance regulations, Fit and Proper regulations. There's regulations around outsourcing as well, which are part of the prudential framework of the Central Bank here.

Daniel Tabbush  

Okay. Good. One question I'm wondering about, it seems like you can easily take market share from BSP because of your size and because of their size, and you're possibly more entrepreneurial than they are maybe, and with all these projects coming up, the flow-through to come through in new loans. There should be a reasonable amount of credit growth.

What I'm trying to wonder is your funding costs are maybe 1.5-ish percent. Your loan rates, maybe 8-ish percent. It's a very good spread there. Your LDR is really, really low. And your capital seems fairly high. I'm just wondering, how do you think about these things? Can you pass on higher rates? Are you able to take market share and see better growth? Can you expand your LDR?

Gregory Pawson   Former CEO, MD & Director

Yes, I'll start and again flick to Johnson because he manages that on a daily basis.

Look, the PNG financial services sector at the moment is very flush with liquidity. So that explains why we are more than self-funding. And obviously, with that excess liquidity, we look to invest that and get a reasonable return on it. It's a very unsophisticated financial market here in PNG.

The only real vehicle for investment outside having your funds sitting in the banks and getting paid next to nothing for your deposits is government securities and treasury bills. And those recently have come back on stream quite actively as the PNG government is looking to raise more funding onshore.

And the IMF program that they're running with the Central Bank at the moment is about tightening liquidity. So we just recently lifted our indicated lending rate by 25 basis points. By the way, we're the only bank that actually did do that, which the Central Bank has [ done ] before. But the desire there is to try and mop up some of this excess liquidity. They increased the cash reserve ratio as well for the commercial banks to also help facilitate that.

In terms of forward lending growth, look, very positive. We, over the past 3 to 4 years, have had double-digit net lending growth on our loan book. The activity this year has continued to be very, very strong, and we're forecasting again to be in double-digit growth. And pleasingly, the revenue from our net interest earnings income has been sort of at or above budget this year, which has been a really terrific result. And we think that we're quite positive that, that trend will continue.

In part, that was due to the expansion of our business banking franchise into some of the key provincial locations. So we put experienced business bankers, most of which expatriates from Malaysia and the Philippines actually, very well experienced bankers into these locations.

And they're doing a terrific job in terms of driving business volume because 80% actually of the loan opportunity is in PNG outside of the key centers of Port Moresby and Lae ironically. So I think that's a strategy that's been delivering some really pleasing results for us.

Daniel Tabbush  

Okay. There's an interesting question that came up. I hope you guys are okay with this one. I think it's great. What is the key risk or what are the key risks that keep management up at night?

Gregory Pawson   Former CEO, MD & Director

Look, I think the biggest one from my perspective, and I'll let the guys follow on from that, is probably around policy.

Daniel Tabbush  

Okay.

Gregory Pawson   Former CEO, MD & Director

Just the uncertainty around what potentially the PNG government might do. I mean, we're a significant contributor to GDP growth as is the resources sector. And we're also an easy target when it comes to raising revenue on their part. So it's something that we actively lobby against as a Bankers Association. When I say against, just the silly and stupid policy decisions.

But I think there's that. The IMF program itself doesn't, I don't think -- suggest that there's any potential risks coming our way. There has been a marginal depreciation of the currency, the cross rate against the U.S. dollar. But because the Australian dollar has been holding up against the U.S. dollar, it hasn't created really any real issues for us.

But maybe Deepak and Johnson, you might want to contribute to that.

Johnson Kalo   CFO & Company Secretary

Yes. Look, I think I'll just jump in with a typical CFO response to that one. It's operational costs and operating risk, which is something which need to be continually worked on. It's a market with its own peculiars set of unique risks. It's an emerging market. So business continuity, and those sorts of issues are always attendant to operations.

I think our adoption of technology in processes is going to help, and it's also going to present risks. So that's one aspect of the operations that sort of are worth thinking about.

Deepak?

Deepak Gupta   Former Executive General Manager of Wealth Management & Corporate Advisory

Yes. So I'd say policy consistency. There's been a few unusual decisions made over the years. So that is a risk. I don't think the risk is any different to most emerging markets. That's just a risk of being an emerging market.

Another one is just around these projects. We don't see that there's any risk around those projects, but we do view that they are a key additional positive factor. There's a lot of positives for our business already. But those projects really add a whole new layer of growth that we're not -- nobody's really allowing for. And again, we don't see that risk coming through, but I think about that from time to time.

The good thing is that we've got good close relationships with some of these large multinationals. They are committed. We actually met up with one yesterday. They actually took us through their commitment to the region. It's what they're doing in the country around the gas project is very important in a global strategic sense for their business.

So -- but I think those will be -- the other one would be, I suppose, just PNG's place in the financial world in a global sense. And obviously, there's a lot of global regulatory issues that crop up from time to time. But I think PNG is a developing nation, and I think it's got a good, solid, proven history to respond to issues as they come up. So this is something that's the other 3 for me.

Daniel Tabbush  

Right. Okay. That's great. Okay. I think we've covered many of the questions from the audience and a few of mine as well. I'd like to thank everybody for that.

Maleeha, I'm ready to pass it over to you for now. I think that's pretty good for the fireside chat at least.

Maleeha Hadi  

Great. Thank you very much. Thank you, Daniel. Thank you, everyone, from Kina for this -- for a lot of insights into the company. I would also like to thank our attendees, who joined this session live and asked some very relevant questions. It's been a very interesting discussion.

For those of you who still have queries, feel free to post them on the webinar's insight or you can contact Kina Bank via the IR button on Smartkarma. We have shared the link in the chatbox for the same.

With that, I would like to wrap up today's webinar. Thank you, everyone, and have a great week ahead. Thank you.

Gregory Pawson   Former CEO, MD & Director

Thank you, everybody.

Deepak Gupta   Former Executive General Manager of Wealth Management & Corporate Advisory

Thank you, everyone.

Johnson Kalo   CFO & Company Secretary

Thank you.