Thank you for standing by, and welcome to the Kina Securities Limited half year results ending thirty June twenty twenty-four. [Operator's Instructions]. I would now like to hand the conference over to Mr. Greg Pawson, Managing Director and CEO of Kina Securities. Please go ahead.
Thanks very much. Good afternoon, everyone. Look, thanks for joining us for this webcast on our first half 2024 results announcement. On the call this afternoon, I also have joining me Johnson Kalo, our Chief Financial Officer, and Ivan Vidovich , our Chief Transformation Officer. As usual, I'll take the ASX announcement and the investor presentation pack, which was uploaded at close of business yesterday, as read, and I'll take this opportunity to give more of a high-level overview of the result and provide some additional context for the second half. The 4D and 5D documents lodged also provide a very comprehensive, sorry, comprehensive, I should say, assessment of the results. Look, it's a very good narrative this half, and a continued and consistent story of steady growth.
The most pleasing aspect, though, is our revenue growth, which is up 17% half-on-half. This is our strongest revenue result half-on-half, and reflects, I think, the execution and success of our diversification strategy with all six key drivers of revenue growth on or above budget. These include net interest income, investments, fee income, including digital, FX, Kina Investment and Superannuation Services, and Kina Funds Management. Our specific call-outs to interest on loans, which was up 16%, digital up 35%, and FX up 71% half-on-half. These results are a reflection of solid loan drawdown activity, close to PGK 400 million at the close of June, which augurs well for the second half, primarily coming from home lending and SME, with increasingly more activity coming from our expansion of our business banking team into the key regional provincial locations across the country.
Overall, market system growth for lending, as published by the central bank, was relatively flat for the half at 3%. So this is a really good result for us. Digital continues to go from strength to strength, and with the deployment of another 1,000 POS terminals over the next six months, we're anticipating that growth run rate to continue. Increased FX flow is a really pleasing outcome, and again, a reflection of two years of hard work connecting with the export sectors, particularly the resource multinationals and the agri sector and TNG. We onboarded over 30 corporates in 2023, and we're also seeing increased flows, not just from that sector, but also from the state-owned entities.
The central bank, Bank of Papua New Guinea, has also been deliberately providing more frequent US dollar market interventions under the guidance of the International Monetary Fund as their advisor, and we have been a major beneficiary from this activity, given that we are now the second largest retail bank in the country. We're expecting this trend to continue through the second half, and, pleasingly again, our less capital-intensive non-interest revenue lines now contribute 50% of our total revenue. Including the extraordinary item we disclosed in June relating to the customer fraud, which I'll talk a little bit more about shortly, operating expenses were up 27%, primarily due to high administration and employee costs incurred in the first half. Now, this is largely seasonal and a similar trend to past years.
These front-ended costs included our employee bonus scheme, training and development expenses, ICT-related vendor and software costs, strengthening of our core infrastructure, and particularly cybersecurity, all of which were major contributing factors, together with a 6% depreciation of the exchange rate for Kina and the US dollar. Most of the software licensing and IT expenses for the organization are incurred in USD in the first half of the financial year. Now, this obviously had a negative impact on cost-to-income, which came in underlying at 58% and slightly higher than the first half of 2023. However, we're confident this will normalize over the remainder of this calendar financial year with disciplined expense management, as we showed in the latter half of 2023, on those expenses that we can control and a wider positive jaws from business momentum.
We're targeting a cost-to-income range of 52-54 basis points or better for the full year end. Our net interest margin is holding firm at overall 5.6%. If we carve out the loan book, a slight improvement to 7.2%, and we're actually currently in the process of lifting our business indicator lending rate by 25 basis points due to a deliberate tightening of monetary policy by the central bank, once again, under the guise of the International Monetary Fund program. Now, this tightening is an attempt to mop up some of the excess domestic liquidity now the government is raising more of its fiscal budget funding onshore. Wholesale deposit rates have moved up slightly, but not at the expense of our net interest margin.
The upside for the remainder of this year, though, is that yields on government securities and treasury bills have increased markedly from around 3% at the beginning of the year to circa 7% for one-year bonds, and as I mentioned, this is primarily due to the PNG Treasury deliberately raising more funds from the domestic market, and again, augurs well for earnings on our investment portfolio as we reset them and take advantage of the high yields as our existing bonds mature.
Ladies and gentlemen, we have temporarily lost connection with the speaker line. Please hold, and the conference will resume shortly.
Sorry, everyone. Greg Pawson back again. Slight technical hitch, but hopefully you can hear me okay. Overall deposits for the balance sheet were up 8%, half-on-half, and not a great deal of real pricing pressure coming through, and I think we remain the envy of the Australian banks, still being very flush with liquidity, with a deposit to loan ratio of around 150%. Taking all of that into consideration, the underlying NPAT result was up 7% to PGK 49.6 million, and statutory down 9% to PGK 42.2 million, impacted by the non-lending loss provision of PGK 7.4 million after tax.
Our underlying return on equity, 15.6%, and statutory 13.2%, which we will improve further over the second half. EPS at AUD 0.055, and a dividend per share for the half of AUD 0.04. Now, a couple of important items that we have disclosed, but I would like to give an update on. Firstly, the corporate tax rate for the banking sector was increased in 2023 from 30% to 45%, and while it was positioned as a short-term budget fix, it did actually roll into 2024. At the request of the PNG government, Treasury, and the PNG Bankers Association, KPMG has been commissioned to prepare a report on the economic impact, and as part of that submission, seek a repeal for the tax to be returned to its former 30%.
Now, this report is nearing completion. Actually, it'll be completed next week, and we will be socializing that with key government stakeholders, with an attempt, as I said, to have this higher tax rate repealed before the 2025 budget is announced. So I think the upside here, of course, is that the tax rate isn't going to go up, but hopefully it's more likely to come down. Now, the second item is in relation to the recent customer fraud that we announced in mid-June. I would like to reiterate that it was an unfortunate event, but an isolated incident involving a very small group of customers, and while the loss was recognized as a worst case scenario, recovery action is well underway. Now, this is from insurance, potential third party liabilities, and of course, the perpetrators themselves.
We're well advanced with these proceedings, and our insurance claim has been lodged, and I think it's important to note also that there was no exposure to our core infrastructure, and the event was not at all cyber-related. So regardless of these two factors, our forecast guidance is solid, and we are certainly excited about our continued prospects for the year ahead. We have some significant tech enhancements set to launch over the second half, including DigiBanker, which is our retail new account onboarding app. 40% of our new accounts originated for the first year of this year were successfully onboarded via that platform digitally, and we're aiming to lift this to 80% over the next twelve months.
We have a significant upgrade of our mobile banking apps to facilitate self-service, the introduction of the Kina digital wallet and virtual debit card, a first for PNG, and also another first, a new market-leading corporate online banking platform in conjunction with our strategic partner, iXL. Our Pei Beta platform, which is modeled on BPAY for PNG, is designed to reach considerably more of the market through digital touchpoints, other than those of the customers that bank with us, and XChange, which is another first in PNG, a white label, independent mobile app for personal remittances. We've also partnered with two of the top local fintechs that have been commissioned to digitize the government and local authorities. These are NiuPay and SNS Tech. They build the customer experience and e-commerce interface using our payment gateway, so we're very excited about that opportunity moving forward as well.
Look, I'll leave it there for now. Thank you. Apologies for that slight hitch halfway through, and very happy to open up for any questions that you may have. Back to you. Thanks, operator.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from David Fraser with MST Financial. Please go ahead.
Good afternoon, Greg, can you hear me all right?
Yeah, I can. There's a bit of background ground noise, but I think. [Crosstalk]
Yes, I am in a car. Yeah. Good. Just a quick one. We've obviously seen in the last couple of weeks some merger and acquisition activity in Australia, with Auswide merging with MyState. Just, you've made a point in the past that you're always looking at potential opportunities in the Pan Pacific and in PNG. I guess, how is that going? And looking forward to the remainder of the year and looking forward to next year.
Yeah. Thanks, David. Look, I'll hand over to Ivan Vidovic. He's our Head of Strategy, just to give you a bit of an update on that front.
Thank you for the question. David, can you hear me okay?
David, can you hear Ivan?
Yes, I can. Thank you.
Okay. Okay. Go ahead.
Thank you for the question. David, look, we are continuing to review several opportunities at present, and where they deliver near-term value for shareholders, but also provide a platform for growth for the future that is aligned to our strategy. We'll certainly look to take them forward. And we'll continue to keep the market updated as required.
Great. Thank you. The second question, Greg, I mean, you talked about the proposal, well, I guess the review of the tax by KPMG. Would a halfway house, somewhere between where you're currently staying and 30%, which originally it was, but obviously not as good as going all the way back to where you were, that presumably that might play into the government's mind?
Yeah. Sorry, David, I didn't get that. It was a bit unclear. You were talking about the government?
Yeah, no, I was just saying, just post the KPMG review, obviously y ou're paying 45% now, and the 30% historically, somewhere in between, would still be a potential upside, and whether that is would be some of the government's thinking.
Yes, absolutely. So as part of the submission, we asked KPMG to give us a view on the legislative aspect of having the tax repealed. So they're advising us on how we tackle that issue. We haven't really had any indication from the PNG government or the PNG Treasury around what that might look like, other than they are you know, prepared to consider our proposal. So I think I would hope that they're realizing having a rate of 45% for the financial sector at a time when they're you know, seeking further investment into the PNG economy, is just simply not a good look. And it was actually on their advice.
What was actually occurring is that each of the four commercial banks were lodging independent submissions, but they asked us to consolidate that and provide a report representing the PNG Bankers Association. So that's the approach that we're taking. That submission is meant to be ready to go next week, so we'll be starting stakeholder engagement with that from the ninth of September.
Great. Thank you. I've got a couple other questions, but they're sort of technical, and I'll ring John offline. So thanks very much.
Okay.
Your time.
All right. Thank you, David.
Thank you. [Operator's Instructions]. Your next question comes from Richard Coles with Morgans Financial. Please go ahead.
Oh, good day, Greg. How you going there?
Hi, Richard. Good, thanks. You're coming across nice and clear. Thank you.
Thanks. Yeah. Thanks. Just a couple of questions. Loan growth in sort of the half was sort of, looks like it was about 3.7% on sort of a sequential basis. You've always sort of managed to get to sort of, double digit levels, just maybe an outlook on what you're seeing on loan growth. I know you tend to have a stronger second half, so that, that's the first question.
Yeah. So we had, during the first half of the year, if you look. You're basing that on, I think, on our financial year-end result.
Yes.
We did have some deliberate runoff, particularly with large exposures. So we classify anything above 35 million as a large exposure, and we have a concentration limit on that that sits at about 40% of our overall balance sheet. So the way we manage that is where we have an opportunity to bring on a higher, you know, a more preferred or I should say lower risk grade customer, we will do that at the expense of a higher risk grade customer. So there was a little bit of movement in the first half of that result, and we're just looking into the attrition rate, which seemed a little bit higher than what it normally is. It's normally about 20% of the portfolio. You know, 70% of our books sits in commercial lending.
Those loans tend to have a shorter term, so they run off quicker. But we're still very confident we'll be in double digit territory for the full year. We've got a very strong forward pipeline. In fact, our results from July and August are looking very solid.
Okay. Thank you for that. And just in relation to costs, obviously, I mean, understand there was an impact from the fraud, but the cost-to-income ratio was still up a little bit on prior year. Maybe what you're seeing in relation to costs, and you've typically had strong seasonality and a drop into the second half, how you're thinking a bout the cost-to-income for the full year?
I touched on that. So we've got a target range of fifty-two. [Crosstalk]
Sorry, I did miss that part of the call, so sorry about that.
Oh, okay. It could have been because of the technical hits we had. But we've got a target range of 52-54 basis points, and we'll obviously try to improve on that as much as we can. What I said in the expense commentary, Richard, is a lot of our costs are front-ended, particularly IT, software. There were some additional expenses with infrastructure and cyber, some consultancy costs related to that as well, and our employee bonus scheme, which for 2023 is paid out in the first quarter of the financial year. So we expect that to normalize quite quickly over the balance of this financial year and fall within that target range that I just gave you.
Okay. So just understanding that, I mean, that would imply a very an improvement. Yeah, you did a 52% cost-to-income ratio in the second half last year. To get to 54, you're gonna have to do better this year.
Yeah.
So is that sort of what you're saying on a normalized basis? Okay. Okay, no worries.
Absolutely.
Thank you for that.
Okay, that's very useful. And maybe just one last one, Greg, if I can ask you. I mean, the tax rate up there is 50% to 45% now.
Yeah.
But, you know, I guess your tax rate, when we just look at your accounts and as a percentage of, you know, tax as a percentage of net profit before tax, tax, it's coming out at around 42%. Is there any reason why that's lower than the tax rate that's the statutory level?
That's probably a good one for Johnson. I think you're on the line.
Yeah, I'm on the line. Thanks for your question. Yeah, the reason for that is we have a mixture of businesses, and our non-bank businesses continue to enjoy the 30% tax rate. It's from 45% to 42% is not a big jump, so you can imagine the bank is the more dominant mix, but that's the reason why.
No, no worries.
So, Richard [crosstalk].
Yeah, that, that makes sense. That makes a lot of sense.
Yeah. [Crrosstalk].
Yep, yep. Just, just. [Crrosstalk].
So, Richard, that's a Kina investment super. Anyways, the fund administration and Kina funds management.
No, no worries. So Johnson, would forty-two, going forward, be a fair assumption given the mix of those two businesses?
For you, if the tax rates stay the same way as they are, they would probably be in the short term, but in the longer term, we're looking to diversify, you know, increasingly and as a strategy, as a normal business strategy, but also as an attempt at a tax mitigation strategy. And the corporate sort of restructuring of our businesses and realigning our revenue and expense flows is a major sort of strategic activity for us, and we, you know, we will try to reduce the tax impact via those measures as well in the future.
No problem. And Greg, just a final one from me. I mean, just a little bit of a jump in the bad debts to loan ratio. I think you mentioned loan book growth, and then there was also just some personal ones, so could you just maybe touch on that a little bit more, if that's okay?
Yeah. No, nothing is concerned. We inherited a number of non-performing personal loans with the ANZ acquisition that we were seeking to sort of remediate. So we made the call in line with our auditors' recommendation to write those off. So that impacted that ratio slightly, but certainly nothing in relation to our home lending, you know, our broader personal lending or business portfolio.
Thanks very much, guys.
Thanks, Richard.
Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.