I'd now like to hand the conference over to your speakers today, Mr. Johnson Kalo, CFO, and Mr. Greg Pawson, Managing Director and CEO. Greg, please go ahead.
Thanks very much, and good morning, everyone. Thank you for joining us. The ASX and the PNGX communications only went up at 9:30 A.M. this morning, so I doubt many of you have had time to read through the call back on the half year results announcement. An investor presentation pack has also been made available, and I'd encourage you to read through that when you have an opportunity. So look, I'll take this opportunity just to provide a high-level overview of our results for the first half of 2023 and give some additional context to the result and, of course, for the year ahead.
So look, it continues to be a very good narrative for 2023 and a consistent story of steady organic growth on track with our key objectives that we have in accordance with our 2025 strategic plan, which is currently under review. We've had a strong start, particularly with customer loan growth and digital revenues. We've also made some really good headway on reducing our cost of income and are aiming to be ahead of budget for the full year. The best outcome, I think, though, is the fact that we've been able to neutralize as best we could the impact of the increased tax rate for the commercial banking sector in PNG, with our net profit before tax slightly up 2%, half-on-half. We expect that trend to continue.
We're managing it very carefully through the second half, and, and of course, it's the second half of the financial year that's normally our strongest in terms of underlying revenue growth. So just walking through several of the key highlights, revenue up 5%. That's close to PGK 190 million. This was largely attributed to strong lending growth of 10%, and that was actually 17% in the business sector, with interest on loans up 21% and digital revenues continuing to perform well, up 53% against the prior comparative period. We've seen negative impacts on the revenue line, which were really beyond our control, although we've attempted to mitigate these impacts as best we could by booking stronger loan growth in the first half. Income on our investments was behind budget.
The yields on government securities and treasury bills in PNG really fell off a cliff and were half that of what they were in 2022, around 4%. This is mainly due to the government moving much more of its borrowing offshore. However, the yields are slowly starting to turn the other way and showing signs of strengthening, which I think all is well for the second half. Foreign exchange earnings were also quite tough in the first half and have been challenging for, for the whole financial sector in PNG, with the market shrinking by about 15%. However, again, revenues into the second half, July, August, are already looking much stronger. So we're quite confident of achieving our budget of around PGK 79.75 million for the full year, with those increasing flows coming through from the resources sector.
Pleasingly, our wealth businesses are also continuing to post good growth rates, and they now contribute around 15% of the total revenue for the organization. Our funds administration and funds management contracts with the three major super PNG super funds have also been extended for another three by three-year term. So that's securing revenues for us to around PGK 35 million. Customer growth was really pleasing, and I'm delighted to advise you we're now officially the second largest commercial bank in PNG by footings. In fact, our loan and deposits portfolios are now bigger than ANZ and Westpac combined. We continue to gain market share, and into the second half, we're onboarding over 3,500 customers per month. So we expect to finish 2023 very, very strongly in terms of new customer growth.
The market demand for our payment services has frankly been unprecedented, and we're expanding our sales teams to manage that demand. It's, it's a nice problem to have. Our strategic partnership with Nationwide Microfinance Bank is continuing to move from strength to strength, and through that, we are reaching over 700,000 Papua New Guineans. On the flip side, operating expenses were down 6% on the prior comparative period, and that was a deliberate strategy and due to close monitoring and effective management of costs internally. With respect to NIM, you'll see a far more detailed graphic on net interest margin in the investment pack.
The reason for that I touched on earlier, we've seen quite a marked decline on yields for our investment portfolio, which is largely PNG government securities and treasury bonds, and that impacted our NIM by close to 1%. However, the really good news is that the NIM on our loan portfolio has actually strengthened to 7%, and the demand for lending has remained very strong. In fact, our pipeline, forward pipeline is in very good shape. So we're forecasting our NIM will still be between that sort of 6%-8% range by the end of the year. And as I said, we expect it to improve from a half year position as the yields on our investment portfolio continue to improve. We're not seeing the same increasing interest rate cycle as Australia has, albeit this seems to have stabilized.
The PNG domestic market remains extremely liquid, with deposits flooding in, and our deposits to loan ratio is still very healthy at around 150%.... PNG's inflation rate has also stabilized somewhat. That's sort of sitting around the 5%-6%. The loan book has come in at PGK 2.4 billion. It's performing well, with non-performing loans to gross loans down from 12%-8% and provisions on gross loans down to 2.2%. We're really happy with that result, and that's well within our internal benchmarks. The ASX document, particularly the 4 D, will provide you with a very comprehensive overview of the results and importantly, an update on our strategic deliverables.
I won't summarize those on this call, but again, invite you to read this part of the document, which gives, I think, a great overview of the several key initiatives that we've delivered in the first half against our five key strategic priorities: growth, resilience, service leadership, dynamic people and, of course, sustainable communities. With respect to the PNG economy, the prospects for a stronger 2023, I should say, are certainly baked into our forecast. The government's reference to the 4Ps and W, Porgera, P'nyang, Papua, Pasca, and Wafi-Golpu , are the five major resource projects, some of which have been approved and are in scope, some of which are pending approval, but we expect those approvals to be ratified by the end of this year. That's around $30 billion investment over the next five to six years.
The Papua LNG project has already commenced, and we're expecting construction on that project to start early in 2024. That's a joint venture between ExxonMobil, Total, and Santos, and certainly there's already a lot of activity in the market in relation to that project specifically. The PNG government's budget announcement of plans to increase the corporate tax rate for the commercial banking sector to 45% for the 2023 fiscal year, last November, continues to be challenged vehemently by the PNG Banking Association, and particularly as we're moving into the 2024 budget round, which is about to commence. So we've entered into an extended consultancy period with the PNG Treasury.
They're now listening, which is a good sign, and I think recognizing, along with some sound advice from the International Monetary Fund, that the medium-term unintended consequences of this increased tax, the highest tax rate of any financial services sector in the world, I might add, will see, potentially the investment of capital, potential for increase in interest rates. We're considering that at the moment, given the increased cost of capital because of the tax, the market instability and a lack of effective competition in the sector. PNG financial services sector need bigger banks, and certainly a high tax rate discourages that. So the support for more consultation, I can say, is encouraging, and it may lead to other options being explored and pursued.
But we'll keep fighting that battle and provide you with updates over the course of the second half as further information comes to light. I think, though, in the meantime, we continue to execute a robust plan to mitigate the earnings impact the best we can. And I think we've shown that to a certain degree in the first half. This includes, obviously, growth above system or market, our legal structure, M&A opportunities, and offshoring potential opportunities in accordance with our Pan Pacific aspirations. But of course, at the same time, recognizing and taking advantage of the strong organic growth opportunity which continues to prevail for us in PNG. So look, I'll wrap it up there. Thank you for listening. I, I think, what we'd like to do now is open this up for any questions.
Johnson Kalo, our CFO, who is in Port Moresby at the moment, will join me on answering any of those 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. We'll pause for a moment for questions to register. Once again, to ask a question, please press star one. Thank you. Our next... Apologies. We do have a question from Daryl Chia, a private investor. Please go ahead.
Oh, hi, good morning. My question is, in lieu of BSP's IT troubles, have you seen a lot of sort of new account openings and new retail deposits in the period post financial year? Thank you.
Thanks, Daryl. Yes, I deliberately actually left that out of the presentation this morning. But for those listening, the largest bank in PNG, Bank of South Pacific, just moved to a completely new infrastructure platform or Core Banking System, and unfortunately, that's been fraught with all sorts of issues around their ability to integrate... Certainly, Daryl, we are the benefactor of that. I mentioned that we're currently onboarding around 3,500 customers a month. We've had to open our branch network particularly in the larger centers in the National Capital District, which encompasses Port Moresby, Lae, and some of the larger provincial locations. We're now 6-7 days a week operating to keep up with demand.
The demand not only for new accounts, it's actually been for, our payment services as well. So we're expecting, again, that that trend will continue through the course of the year. And it really, I think, has, highlighted to the PNG government and, the regulator, Bank of Papua New Guinea, the risks associated with having one major bank. Because the impact is not only on BSP's customers, but obviously in relation to, all of the other commercial bank customers who are trying to transact with BSP's customers. So a good opportunity. We're, we're obviously being empathetic with BSP woes, but we're certainly taking advantage of them.
And just to follow up on that, and have you won any corporate customers as well?
Yes. We've currently got about 1,200 business customers that are presently being onboarded. Most of those fit within what we would call the commercial segment in PNG, which is around sort of PGK 5 million-PGK 50 million revenue turnover. Most of the corporate sector, the major clients, the multinationals, we already have transactional banking relationships with. The big opportunity there for us is obviously in the FX in the FX side of the business to to get a higher you know percentage of flow from those organizations.
All right, thanks for that. Appreciate it.
Thank you. The next question comes from John Poli from Morgans. Please go ahead.
Morning, Greg. Thanks. Thanks for taking the question, and congratulations. Just quick, keen to get a little bit more information behind that, 10% improvement in the cost of income. You know, what's driving that? Are we gonna expect to see that continue trend downward in line with what you've previously stated?
Thanks, John. Yeah, look, I'll get Johnson to provide a little bit more color around that. It's largely looking at sort of our operating expenses, some of the larger supply contracts that we have, that we've been able to successfully renegotiate. We've also got a new head of technology, actually executive for what we're branding Kina Tech, joining us mid-September, and he's been really useful, particularly in the ICT space, helping us understand, you know, where we can make some really effective savings around some of the investments that we have been doing, but also need to be doing moving forward. But Johnson, I might hand over to you to just add a little bit more color around that and where you think we're going to land for the full year.
Yeah, sure. Thank you, Greg. Morning, John, and all others on the call. Just, yeah, just a little bit more to add to that. Cost controls, we've been quite vigilant under the current conditions that we're operating. Yeah, so we have been very cautious with our approach to costs in general. There's a little bit of sort of good fortune involved. The amortization of intangibles related to the 2019 acquisition of ANZ's branch assets fell away at the end of last year. So that gave us a little bit of a boost.
But nonetheless, we remain confident that we with continued cost control in our staff area and in those IT related areas we will continue to achieve our cost to income targets. We came in around about 56% for the half year, and we think we will track along that trajectory towards the year end.
Thanks. If I can just ask a quick follow-up, just on FX and Johnson or Greg, whoever wants to take it. Just conscious that you made a comment there, that you saw the market sort of pull away a bit due to liquidity. Just, and I know it's not a like for like, but in BSP's results, they called out sort of a 14%-15% improvement or increase in their FX revenue. Totally appreciate they're much more diversified across more markets, but-
Yeah.
What are you seeing in PNG? Is it the trading band, the 50 basis point above and below, that's really constricting it, or are you just not seeing the FX come in?
It's just supply, John, largely. The resources sector has been fairly slow in the first half of the year. BSP is a major recipient of the central bank interventions. They get around 50% of those market interventions, and they're made clearly because they're the largest bank. So that's helped in their result. And also they're the principal banker to Ok Tedi, so they get the majority of flow from that mine as well. But it's largely... I think, again, it's more seasonal. It tends to heat up more in the second half of the year, and we've certainly seen that in our July and August results.
Great. I'd be happy to take another question, unless there's someone else that wants one? No, I'll go again. Just quickly, last one, and then I'll hand you back. Just what response, obviously, your market share is increasing and, you know, is that a result of, like the previous question about BSP's tech issues, is it a result of that? You know, Westpac, ANZ, just not servicing the region?
... the trading resource at the region, or is it you actually are, you know, taking customers because they're better, you know, get a better proposition, better pricing? How are you seeing BSP react with that?
I would say, John, it's the latter. I think we have a better customer proposition across the board. But, you know, we used to actually boast about the fact that we didn't have queues outside our branches, but unfortunately, at the moment, our queues are actually bigger than BSP's. Look, I think our overall proposition for customers in retail, the work that we've done around segmentation of our customer base to better understand what their needs are and the products that they're after. I can confidently say, even with BSP's new core banking system, there's been a lot of, you know, negative, I think, impact around customer experience in relation to that, but also the actual service itself.
So we clearly have a leading digital proposition, you know, through our platforms, Kina Connect, WhatsApp Banking, and our mobile online. We're gonna be in a position to launch eKYC, where customers can onboard themselves before the end of the year, well ahead of the other commercial banks. We'll be the first bank to issue virtual cards on a Kina Wallet, which is sort of similar to Apple Pay, in the market as well. So I think that's probably the starting point. There's no sort of... So we've had really good loan growth in the first half of this year. In fact, the best that we've had, certainly in the 5, 6 years I've been with the organization.
I think it's just a function of, you know, we've invested well in terms of getting good commercial bankers. We brought 10 in from offshore. We've put them into provincial locations, and then the reason we acquired ANZ retail branch network was to really have coverage across the entire country. We've got that now, and I think we're starting to see results coming through from that because in many of those provincial locations, there's really only been one bank in town, and that's BSP. Westpac are relatively inactive. They're not really doing enough. I think there's a lot of navel gazing going on in that organization. We're still hearing that, you know, that they've got intentions at some point in time of exiting the Pacific. That still seems to be an objective of theirs.
And ANZ, of course, really aren't a competitor for us in terms of retail commercial banking in the corporate space because they bought, they bank the majority of the Australian multinationals. But as I say, that's not really a direct sort of competition for us. So, we get some business at the smaller end of the commercial portfolio from ANZ, but I would argue some of those customers probably should have come over with the acquisition and didn't. And then, you know, of course, with BSP's problems, we're benefiting from that. But I think it is largely due to the fact we're starting to sort of get some runs on the board in terms of how we operate as an organization.
And as a result of that, have a much better service offering than both Westpac and BSP.
Great. Thank you. I'll leave it there. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one. Your next question comes from Glen Wellum from MST Financial. Please go ahead.
Yes, good day, guys. Well done on the result. Just a question. A while ago, you sort of highlighted you may look to grow corporate banking outside of PNG. Just wondering how that's tracking and where you're heading with that?
Thanks, Glen. No, look, it's largely, not, not in relation to corporate banking per se, but other markets, so looking at other jurisdictions. You know, you'll be aware we've been thinking about Fiji for some time. We're still doing some work around that. We think, as a market, there's a really captive talent pool there, particularly in relation to IT, which we would like to take advantage of. And if there was an opportunity to buy a business as a going concern there, even if it was, you know, not just a commercial bank, but, you know, in the payment space, that would certainly be something that we'd be looking at. As well, and those discussions are ongoing. The corporate market in PNG is largely in relation to the resource sector.
We have good relationships with them, and that's important. I think, you know, coming from sort of the fourth biggest bank to the second biggest bank, all is well for our credibility with the multinationals, and as a result, they are starting to give us more business, which is good. Of course, having the Asian Development Bank, a triple-A investment grade, financial services organization, one of our biggest shareholders, helps with that as well in terms of building credibility.
Great, thanks for that. I haven't had a chance to go through all the details of your loan growth, but it looks very strong. Can you give us a bit of color about where that strength is or what the catalyst has been for this year for that?
Oh, as I said before to John, I think it's just a compelling value proposition. You know, we've got some good talent on the ground. We've been running quite an aggressive refinance campaign over the past two months, which again, you know, some really good momentum in terms of pipeline building as a result of that. And it's the fact that we now have a presence in the provincial locations. I mean, we've got 10 commercial bankers now in locations like Lae, Kokopo, you know, Goroka, Madang, Mount Hagen. We didn't have any presence in those locations this time last year, and as a result, we're seeing some really good activity come through from that.
But I think, you know, I'm humble about this, but I think we've got by far and away the best business banking team, even compared to BSP. In that sort of mid-market segment, which I described before as sort of, you know, organizations turning over PGK 5 million-PGK 50 million, that's our sweet spot. And the domestic economy in PNG is actually quite active at the moment, and one of the reasons that we put those additional bankers into the provincial locations is, you know, preparing ourselves to ride the wave when construction of these big resource projects commences, which will be sort of early into 2024.
Yeah. Okay. So most of the loan growth is sort of more the mid-market, but will be driven by one of those larger resource projects. I mean, is there any particular industry that you'd like to call out that you seem to be doing better in or?
No. I think it's actually quite diversified, and that's deliberate. Again, by sort of expanding outside of just NCD and, Lae, where we were primarily, you know, centered before, and we would attempt to service customers out of those locations, from elsewhere, across PNG. Just wasn't the right value proposition. We needed to have commercial bankers in, you know, the likes of Mount Hagen, Madang, et cetera, that know what they're doing and can make decisions for customers on the spot. Look, we're, we're not, we're not big in the corporate sector. We'll, we'll, we'll participate in syndicated facilities, and a good example of that is Vodafone, the second-largest telco in PNG. I mean, this is public information, but, you know, for those larger, corporates, really, all of the banks need to participate because of the regulations around single borrower limits.
You know, you can't lend more than 25% of your capital base to one single entity, and we, we wouldn't—we're, we're sort of risk-averse around that. We wouldn't do that. But we tend to be more stronger in competing in that sort of PGK 5 million-PGK 50 million space, which, as I say, is a big market in PNG, and the only sort of our other active competitor there is BSP. And, and we're not, you know, the really, the really pleasing thing, too, is that we're not competing on price. It's, it's actually the, the, the customer value proposition that's bringing customers across.
Great. Thanks for that, and well done.
Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Pawson for closing remarks.
All right. Well, thank you everyone for joining. As I mentioned at the beginning of my presentation, please look through the documentation that's been uploaded to the ASX this morning. It's probably our most comprehensive investment pack, so there's a lot of information there, and please do not hesitate to reach out to myself or Johnson if you would like any more color or further information on the result. Full steam ahead for the second half, and thanks for joining us this morning.
That does conclude our conference for today. Thank you for participating. You may now disconnect.