Thank you for standing by, and welcome to the Kina Securities Limited Full-year Results Ending 31st December 2023 conference call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Greg Pawson, Managing Director and CEO. Please go ahead.
Thank you, and good afternoon, everyone. Thanks for joining us today. Hopefully, most of you have had a chance to review the ASX release announcement, which also included the investor presentation. I have Johnson Kalo, our finance team, joining us from Port Moresby on the line as well. It was another very good narrative for 2023 for Kina and consistent story, steady growth as we closed out the midpoint of our 2025 strategic plan. The biggest challenge for us facing into 2023 was obviously the full impact of the 45% corporate bank tax rate on the sector. Our objective was to negate the impact as best we possibly could over the course of the year. I think it's fair to say that everything that we could control performed above our expectations.
So we were, again, the strongest performing bank in PNG for the 2023 fiscal year in terms of growth and revenue, net profit before tax, balance sheet, digital, and customer growth. It was a very busy year building out our corporate advisory team and a concerted effort to build better and more effective relationships with the multinational sector in particular, especially the resources sector. We also had some good success in terms of inaugural FX trades with 40 new corporates, which we onboarded, which will position us well for 2024. I'll now take you through a quick summary of the results headlines in accordance with our five strategic priorities. So firstly, looking at growth, revenue was up 10% year-on-year, up PGK 38 million to PGK 403 million. And that was largely attributed to net interest income on loans, which was up 23%, a record for the business.
Fees and commissions also up over 20%. Our fund administration and management businesses, KISS and KFM, were up 4% and 5% respectively. The revenue laggards were investments, which were down 38% year-on-year due to yields on government securities and treasury bills, quite frankly, crashing to an average yield of 3.5%. FX, which was actually 35% down at PGK 52 million against an aggressive budget at the onset of PGK 81 million. So while FX volumes bounced back in the final quarter, averaging around PGK 7 million per month, it was disappointing with market forces and the decline in gold volumes, the main contributing factors.
The structural issues regarding FX supply were challenging at times, although the central bank, Bank of Papua New Guinea, did intervene more frequently in the second half and improved our ranking to second as they adjusted their ranking methodology from size of capital base to size of forward order book, which reflected our status now as the second-largest retail bank in the country. We made significant inroads with the multinationals, with first-tier FX trades for Ok Tedi, Newcrest, Santos, Kumul Petroleum, TotalEnergies, Puma, Outstan, TPG Electric, and MRDC. As I said earlier, this should position us well for 2024 as we continue to get more flow from the export sector. The mid-tier revenues saw us land at 51.49 in net interest to non-interest income. That was very consistent with our strategic objective for diversification of our revenue base.
This compares to 70.33 years ago with digital revenue from a standing start of zero, actually three years ago, to PGK 65 million in 2023. That was up 44% on the previous year. OpEx was the star, relatively flat, actually up 5%, mainly due to administration and consultancy costs, which were up 23%. This was a great result with most other expense lines contained at or below plan and accounted for disciplined cost control measures in place to minimize the impact of the higher bank tax. It continues to be a priority for the team as we roll into 2024. While the impairment charge almost doubled to PGK 9.8 million, and that reflected our strong loan growth and the full implementation of the IFRS 9 modeling, despite that, and thanks to a huge effort by the business banking and credit teams, the provision on our gross loans fell to 2.2%.
Non-performing loans to gross loans fell from a peak of 14% during 2022 to 6.4%. So we were very happy with that result. Net profit before tax was up 19%, a solid result and reflecting the positive draws that we were able to achieve. As a result, and pleasingly, our cost to income was down from a peak of 62% in 2022 to 54% at the close of 2023. Net profit after tax slightly ahead of budget at PGK 105.2 million and flat, unfortunately, due to the previous year due to the impact of the bank tax. Overall lending was up 19% compared to 10% in the previous year. The superstar was business lending to the SME and commercial sectors, which was up 23%, and consumer lending up 11%.
Total new lending was at a record PGK 760 million with net growth of over PGK 410 million and 50% of that new loan growth drawn in the first half, which set us up really nicely for the year. We were also well ahead of total system growth, which was 6% for PNG, therefore increasing our market share by around 1.5%. Net growth in deposits was PGK 430 million and a 12% increase year-on-year with strong growth in low-cost transactional deposits due to new customer transaction flows and wholesale deposits from the new corporate customers that we onboarded over the course of the year. Net interest margin for the loan book slightly improved and was better year-on-year, settling at around 700 basis points.
However, overall net interest margin fell below our preferred range of 600-800 basis points due to the impact of the lower yields on our investment portfolio, I spoke about earlier. Now, these yields are expected to flatten and improve over 2024 as the PNG government raises more funding onshore. MiBank and our financial inclusion strategic partnership performed exceptionally well. We opened our first co-branded branch in Alotau, Milne Bay Province, in 2022. A new agency agreement enables Kina Bank to open MiBank accounts in MiBank's facilitation of our online onboarding. Transfers enable between the two banks. And MiBank has actually improved its net profit after tax from PGK 1 million to almost PGK 12 million since we acquired a 15% stake four years ago.
In terms of strengthening our resilience, we had a dedicated strategic program of work for reimagining risk completed its first year of best-practice governance enhancements, which included the remodeling of our board audit and risk committee into dedicated audit and risk committees and aligned to the roles and responsibilities with the management governance committees. The risk management framework was refreshed and endorsed by the board and the central bank. Risk appetite statements were enhanced with quantitative measures now effective for all material risks, which align with our 2025 strategic objectives. Enhancement of our non-performing loan management, as I mentioned, has driven an above-budget outcome and direct contribution to profit. Our NPL improved from a peak of 14% in 2022, as mentioned earlier, to 6.4% and provisions from 2.5%- 2%. Our provisioning models were comprehensively updated.
As mentioned, the IFRS 9 program has led enhancements to the current operating model and better predictive impairment moving forward. The loan book is in very good shape. In accordance with our digital-led strategy and PNG's leading digital bank, our ICT team was rebranded Kina Tech late in 2023 and delivered strong results with changes in management and architecture, which has facilitated more effective and sustainable outcomes for the business. Two senior executives and strategic, actually, and landmark management appointments for Kina were made in the second half of 2023 with Chalit Sukeer joining us as CIO and Aman Shandil as GM Technology.
The Kina Tech team moved quickly to complete a comprehensive review and identified five key areas for opportunity: the operating model, service delivery, systems resilience and recoverability, which incorporates the strengthening of our cybersecurity posture, our enterprise architecture, and improving project delivery of our main strategic business initiatives to ensure that they're on time and on budget. The major focus for the company, though, over 2023 was excellence in customer service. We continued our mantra of simplicity and consistency with a number of programs directed towards simplifying our internal processes. These were tested mid-year when our major competitors' system failures saw considerable numbers of their customers switch to Kina. This demand certainly tested our capacity to onboard new customers at scale, many of whom we directed to MiBank, who had offices within close proximity.
Our teams were also able to facilitate opening of MiBank accounts in the more remote locations. Over the year, we onboarded almost 40,000 new retail customers. That was growth of 20%, close to 2,000 new business customers, and 40 major corporate multinational accounts. Our EKYC, Know Your Customer Program, Kina DigiBankr, developed during 2023 and approved by the central bank, was launched earlier this year and enables new customers to onboard themselves. This is a first for the banking sector and PNG and enables, as I mentioned, new customers to onboard themselves, but most importantly for us organizationally to onboard at scale. The next extension of this is the issue of a virtual card to a Kina Wallet, which looks something similar to the Apple Wallet we have in Australia.
A version of this new technology will also be used with the two major superannuation funds, the contracts we have with Nasfund and Nambawan Super, to enable their members to switch to Kina under a white-label proposition, which we hope to launch in the next quarter. The focus on accounts and digital activation continues to deliver good results with active transactioning for commercial customers up 30% and personal customers up 45%. Close to 50% of our customers are now actively using, I should say, our online platforms. Corporate online activation doubled over the course of the year. We've selected a vendor for the replacement of our current platform to provide better integration with Xero. This will be the leading corporate online platform in PNG and cement our reputation as the country's leading digital bank.
Most critically, as private sector checks are to be phased out completely in June 2024. We're also the only bank in PNG able to issue Visa scheme debit cards on the spot in branch. We have three new co-branded branches with MiBank planned for Popondetta, Pukka, and Kundiawa. Now, they're targeted for opening over the course of 2024 with scoping work and business cases approved. We also launched out an inaugural Kina business center branch at Harbour City in NCD, a private banking suite, and the first of several digital hub service centers planned for NCD and Lae. The branch remodel design was also completed. Rollout is to commence over the course of 2024 for selected locations. Our Red Thunder initiative was also launched, which provides employers and their employees a mobile account opening service on-site.
Since new experience, expatriate business bankers were also deployed to regional provincial locations over the year. Pleasingly, generated a strong pipeline of over PGK 150 million and PGK 50 million in loan settlements by the end of the calendar year for 2023. We also now have a fully capable and experienced corporate advisory team. A lot of activity across the company over the year focused on our people and culture. We reshaped the organizational structure for the executive management team to achieve a sharper and more effective focus on execution. Several new executive appointments were made, including Rayleigh Elston, Executive General Manager for Business Banking, Chalit Sukeer, who I mentioned, our CIO, Aman Shandil, GM Technology, Roppe Uyassi, our Country Head for PNG, Philip Keller, Chief Risk Officer, and most recently, Anne Steele, who's joined the company to lead our people and culture team. We restored our culture committee.
The company's values were refreshed to the acronym FIRST: Fair, Inspirational, Responsive, and We Serve Together as One. Our 2023 employment engagements results, which have just been published this week, actually, were also really pleasing with an uplift of 12% across the board in overall leadership and employee engagement. Kina was also awarded the Most Progressive Private Sector Organization Award for 2022-2023 by the PNG Human Resources Institute. The year was also the embedding phase of our ESG program. The program continued on from our total societal impact approach, which was based on community giving rather than the full spectrum of environment, social, and governance. With the mantra to be the most sustainable leader in PNG, our ESG team set about very quickly developing a strategy that would complement that aspiration.
So starting from a zero base, the ESG strategy incorporates global standards such as materiality assessment, scope 1 and 2, reporting on emissions, and a drive to build inclusivity for our staff and customers. The strategy entailed over 45 interviews with key stakeholders to understand what's important to them and where Kina can play to win with an ESG lens. The implementation plan followed with a number of key initiatives achieved in 2023, I should say, addressing our several material topics, which include climate change, inclusion and diversity, education, financial inclusion, accessibility, and affordability. We've got some very exciting plans for this year in agribusiness and the SME sectors as well. So look, that concludes my sort of update.
I thought I'd now hand over to Johnson Kalo, our Chief Financial Officer, who will have a few comments on the PNG economy and growth prospects for 2024 and our capital management, which I'm sure you are all interested in. So Johnson, over to you. Thank you.
Thank you very much, Greg. Excuse me. The PNG economy was projected to grow by just under 3% in 2023. The most recent government estimates in the 2024 budget and our forecasting total GDP growth of 5.3% in 2024. This growth will be driven by the resources sector of the GDP growing by 7% or more. This assumes that Porgera will recommence. We've, in fact, had the first pour of Porgera in the last week, coupled with some strong energy prices.
Non-resource GDP is expected to grow by 4.7% based off the spinoff benefits from Porgera reopening and continuing activity in agriculture and other primary industry sectors. In the next 12 months, we anticipate a continuation of the country's FX challenges as foreign currency inflows are still outweighed by import orders. In 2023, the currency's benchmark interbank rate against the US dollar has gradually depreciated by 5.1%. The PGK/USD rate is currently trading at 0.2685. We anticipate that this rate will continue to trend downwards at between 10-15 basis points over the course of the year, although the cross-rate with the AUD is expected to be a bit more stable. The bracketed note to this is that we note that against the basket of trading currencies, the depreciation in 2023 was less than against the USD mentioned above.
Inflation pressures have started to creep up again at the back end of this year with forecasted inflation rates between 3.5%-5% over the median term. Given the continuing nominal PGK depreciation, domestic price pressures are expected to be offset by the depreciation of PNG's trading partner currencies, which would keep the real exchange rate flat. However, in nominal terms, inflation is forecasted at 5% next year. In the 2024 budget, the government did not make any conclusive statements regarding the increased 15% tax on commercial banks, which is now at 45%. This tax appears as though it will remain in 2024. Despite a high frequency of consultation and as the elected chair of the PNG Bankers Association, we unfortunately failed to have the increased bank tax repealed, and it's suspected it has rolled into the 2024 fiscal year.
However, early in 2024, with the treasurer deposed from his position following the civil unrest in Port Moresby in early January, the prime minister assumed the treasurer's role and has publicly stated that the government is reviewing their position with regards to the tax. He also included this in his speech at the recent Kina Bank-sponsored Prime Minister's Back to Business Breakfast. We will continue to lobby for a repeal of the tax increase. Notwithstanding this, prospects for a stronger 2024 are baked into our forecast. The PNG's reference, which you may have heard in recent press releases and announcements, to the four P's and the W, which is Porgera, P'nyang, Papua LNG, Pasca, and the Wafi-Golpu projects, are the five major resource projects to which the government is committed with an investment of more than $30 billion over the next several years.
In terms of capital management, we are well placed to support our current level of assets and accommodate more short-term growth. However, this will be tested into the medium to long-term future.
Pardon me. This is the operator. We have temporarily lost Mr. Johnson's line. Please wait a moment while we get him back on the line. Thank you. Thank you. We are still attempting to get Mr. Johnson on the line. Mr. Greg will continue the presentation in the meantime.
Thank you. Apologies for the interruption, everyone. I think I'm just reflecting on Johnson's notes. I think he was just about to talk about capital management. So look, in terms of our capital management plan, we're well placed to support our current level of asset growth and accommodate more short-term growth. However, if that growth rate of 20% continues into the future, the next sort of 3-5 years will certainly be tested. We're confident we're operating in a reasonable capital adequacy range for sorry, a financial services institution in an emerging market. At current levels, we have room for a further PGK 630 million of lending assets before we hit the bottom of our capital adequacy range of 16%, bearing in mind the prudential limit is 12%. So there's still a bit of a buffer there.
The key issue for our capital management plan becomes improving regulatory capital without unnecessarily impairing earnings per share. A Tier 2 Capital raising becomes an option from this viewpoint, and it's something that we're considering at the moment, although margin and volumes on this specialized form of debt capital do require diligent management. But we'll be progressing some thoughts around that program over the coming months. So look, I'll leave it there. That sort of concludes the formal presentation, and I think we'll now open it up for any questions. Thank you.
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 Richard Coles from Morgans. Please go ahead. Your first question comes from John Polinelli from Morgans. Please go ahead.
Thanks, and congratulations, Greg. Thanks, Johnson. Just quick question. I noticed in your results, you talk about, if you're looking ahead, Pan-Pacific region opportunities. Just sort of keen to understand a little bit more where you're looking and whatnot around that.
Yes. So that's always been on the radar screen for us. We still are actively looking at M&A opportunities, probably more so the Pacific region. Many will be aware in the past of our attempt to acquire the Westpac Pacific businesses. While not necessarily those businesses, I think they made a call recently for, we believe, geopolitical reasons to remain in the Pacific. But certainly, there are some opportunities that we are looking at.
Great. Thanks. I'll just ask one more question. On the cost-to-income ratio, which obviously you've done a really good job to bring that down, is it safe? Probably not safe is the right word, but how should we think about sort of the forward trajectory of that? Is the plan still to bring it down closer to the 50%, and in what timeframe?
Yes. Absolutely. So we have a plan at the moment, I think, by the end of the 2025 calendar year to get to 50. Certainly, one of the M&A transactions we're looking at would enable us to do that potentially a little earlier. But yeah, it's certainly one of our biggest priorities. It continues to be one of our biggest priorities.
Great. Thanks. I'll jump back in the queue. Thank you.
Thank you. Once again, to ask a question, please press star one. Your next question comes from Richard Coles from Morgans. Please go ahead.
Thanks, Greg. So just understanding, do you think you can continue along the 20% loan growth near-term that you've been doing? I guess that's the first question. Second question is just in relation to FX. I know you mentioned it's still a difficult environment for FX, but there was a pretty positive movement in your FX income in the second half versus the first half. Just wondering, is the second half more reflective of where you'll be into next year, or is it still pretty choppy and difficult to tell?
No. Look, I think it'll be hopefully a different position for us this year. As I mentioned in the presentation, most of the FX flow is obviously coming from the export sector, which is predominantly resources and a very small percentage agriculture, particularly coffee. So we've been working hard in the coffee region of Goroka in the Eastern Highlands. We've got a team on the ground there working hard to capture more flow from those relationships. And with the 40 or so corporates that we onboarded, we're expecting our share of flow to increase over the course of a year. And we've got some good alliance, good support, actually, I should say, from the government and the PNG Treasury for those corporates to support us as a locally domiciled PNG bank.
So I think the prospects this year are far more positive for us than they have been in the last couple of years. And I would hope that that performance from the second half will continue into the first half of 2024. Sorry, what was the other question, Richard, before that?
Just sort of, you mentioned if you grow at 20% loan growth 3-5 years, you'll start having some. Do you think you can grow at that rate? I mean, you've been pretty good at maintaining around 20%, but realizing you're getting bigger. So just the ability to maintain recent growth rates, does that need to come down a bit? I know you're going into new areas, but just your answer to that.
Yeah. I think this year, we're sort of thinking around between 15%-20% is probably appropriate. I mean, if some of these resource projects go underway, you're going to see a lot of activity, particularly on the Highlands Highway from Lae up into the LNG and mine locations. And we certainly want to be the recipients of that in our investment in 10 new commercial bankers, all of whom are expatriates from offshore and from markets like the Philippines and Malaysia, very experienced bankers. I talked to some of the statistics that they've delivered already that's at the ground running. So we expect to get a lot more new lending business from the provincial locations. Up until probably 2022, the bulk of our loan growth was coming out of the National Capital District, which is largely Port Moresby and nearby Central Province. So yeah, we're confident about that.
We will have a big push this year, though, on consumer lending, particularly our home loan portfolio. We were forecasting growth of about 15% last year for that business. Obviously, those loans are a little bit stickier. They stay on our book for longer. The commercial book, the tenor averages about, I think, 10-12 years. So the runoff rate on that portfolio is much faster than the home loan book. So we want to get a bit of rebalance happening in that space. And we've got a review underway at the moment around what we classify as concentration risk in terms of large exposures. We're in pretty good shape in that respect, but there are some larger transactions that we would like to potentially participate in. But we would do that as part of a syndicate.
We actually developed a syndication policy late in 2023, which we're keen to test out over the course of this year. Yeah, I think I'm quite positive. The business is quite positive that we'll land somewhere between 15%-20% growth this year.
Okay. And sorry, just a final question. I mean, your digital revenue's growing very, very strongly. I mean, do you have any idea how big the pie is that you're going for in that market? I mean, you did PGK 60 million of revenue this year. I mean, how big the opportunity is? And just remind us, with that revenue, is there any capital drag at all? Is there operating capital? Can you give us, is there a basis point to revenue or anything that we need to think about with that?
No, not really. I mean, we are doing some costing work at the moment across a number of products that we have. But the digital revenue is virtually straight to the bottom line, and it's a very low overhead. I mean, we have to give you an example of that. For PGK 65 million in revenue, I think we have a team of about 20 sales representatives that support those channels. So it's very profitable from a product cost line perspective as with FX. The upside is still significant, I would say. We've got quite a big policy now of around, I think, 5,500 terminals. Our plan this year is to get that to around 7,500. And the actual main objective of our policy is to become the merchant terminal of choice.
A phenomenon that you're very familiar with in Australia where a merchant will only have one supplier for their terminals. PNG, most merchants use the three banks that are competing in the business sector, Westpac, ourselves, and obviously BSP. There's certainly upside for us with some of the larger merchants to have them just using our terminals. We think we're hovering around probably a 25% market share. We'd like to get that to 35% by the end of this year.
Thanks very much, Greg. That's excellent. And maybe one last one. Just the potential hybrid that you might be looking at, is that a 2-3-year journey? Is it something you're looking at sooner, just sort of how you're thinking about that potential Tier 2?
Yeah. I think probably this year. So we now have the ability through our Kina funds management, which is one of three licensed fund managers in PNG. The Securities Commission approved our ability to issue corporate bonds. And we're thinking, again, if we're able to sustain this level of loan growth and get all sort of five key drivers of revenue contributing at the same time, there could be an opportunity for us to put a Kina corporate bond into the market. There's still an excess of domestic liquidity. I mean, you can see that in the structure of our balance sheet with the deposit-to-loan ratio at around 150%. So yeah, we're getting some external support on that from the World Bank and a few other development agencies operating in PNG who are quite keen to create a secondary bond market.
I mean, really, the only other area to park your money at the moment outside of is the bank, and we're paying very little on deposits. I think our cost of funds is just over 1%. It's really government securities and treasury bills. Those yields are hovering around 3.5%-4% at the moment, depending on the term. So there's a huge opportunity to swap some of that domestic liquidity up in the form of Tier 2 Capital. We've been working on this for a couple of months. Hopefully, over the next few months, we'll be able to kind of pull that thinking together.
I might just throw in one last one. I've said that about three times. But just in relation to capital ratio, Greg, where do you see—I mean, the regulatory minimum's 12. Where do you see your buffer minimum?
Well, at the moment, the board range is sort of 16%-18%. We fell, I think, from just over 21%, 22%- 20% this year. That was a function of, obviously, the loan growth. We think that's appropriate at the moment, especially in light of the fact that we are, as I mentioned earlier to John, at potential M&A opportunities where we would like to be able to do that without having to come back to market to raise capital. So I think we're in a good position. Bear in mind, too, some of the additional risks, I think, associated with operating in an emerging market. It's good to have a little bit of that buffer. But the board range, or the board trigger, if you like, is sort of between 16%-18%. We're comfortable at that range, I think.
Thanks very much, Greg. Good numbers.
Thanks, Richard.
Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now just connect.