Foreign exchange issues will continue in the short term according to Robin Fleming, Chief Executive of Bank South Pacific (BSP). But he tells Business Advantage PNG that there are better longer-term prospects and that Papua New Guinea’s biggest bank is thriving in a challenging economic environment.

Bank South Pacific’s Robin Fleming. Source: EMTV

Fleming says that ‘for certain customers’ the foreign exchange issues are improving, while for others they are ‘far more difficult’.

‘The Central Bank did come in with a hundred million US during October [2017], which was able to clean out part of our backlog,’ he says. ‘But there still remains quite a high level of orders outstanding.

‘The biggest elephant in the room has been Puma Energy, and now that they have an agreement with Oil Search for direct satisfaction, at least for their orders going forward, it means that they won’t consume as much of the residual foreign exchange in the market for their particular needs.’

Fleming says stronger oil prices also help. ‘As it gets to a certain level, you’ll start to see some royalties starting to flow through.

‘Clearly, with the PNG LNG Project—which is one of the lowest cost producers in the world—there has had to be some concessions granted at the outset,’ he tells Business Advantage PNG.

‘If you’ve got accelerated depreciation and other similar concessions, that means that the Government doesn’t necessarily benefit in that first 10 years of a project.

‘We are starting to move closer and closer to a time when taxes will be coming through because accelerated depreciation has fallen off.

‘We’ve still been able to fulfil a reasonable level of quality credit applications.’

‘I think certainly the medium-to-longer term remains positive, but at the moment it’s going to be more of the same.’

Credit

Fleming says the BSP is performing well despite the challenging economic conditions.

‘While things are slow, we’ve still been able to fulfil a reasonable level of quality credit applications, keep the pipeline going.

‘Transactional activity certainly slowed down during the election period [in mid-2017], but that’s picked up again.

‘We continue our focus on cost consciousness: ‘don’t be extravagant.’

‘We’ve put a lot of investment into our electronic channels, with new emerging terminals, new chip cards to improve security, and also give ourselves a greater capability to continue our digital transactions.

‘And obviously we continue our focus on cost consciousness: ‘don’t be extravagant’. We’ve been able to maintain a balance sheet that is somewhat reflective of the more difficult economic conditions.

‘Our non-performing loans—total loans cross-group—are still only around about 1.2 to 1.3 per cent.’

Conservative

BSP’s loan market share in its countries of operation. Source: BSP

Fleming says the bank is taking a conservative approach to the provisioning for bad debts. He says the company maintains ‘a ratio of 4.9 to 5 per cent provisions of total loans’—more than three times the bank’s current rate of non-performing loans.

Fleming says this high level of provisioning will ‘allow for any growth in the balance sheet and any potential events that may occur.’

According to an investor presentation, BSP maintains an unusually high level of capital adequacy of 22.8 per cent—more than double the level held by Australian banks and almost twice the Bank of PNG’s prudential requirement.

Fleming says the bank needs to have additional capital ‘to deal with risks that other banks don’t necessarily have to cater for when you have a 60 per cent market share. In large part, it’s in recognition of the environment in which we operate.’

Overseas listing

The bank’s earnings multiple (price-to-earnings ratio) is typically between 12 and 15 times, according to Fleming. It suggests the stock is well-priced (currently at K9.55 a share). But with a strong dividend yield of about 12 per cent, and a return on equity of about 30 per cent, the bank exhibits some strong fundamentals.

‘The issues around foreign exchange, are an obstacle.’

It should make the company an attractive investment, but liquidity in BSP shares, which are listed on POMSoX, tends to be low. Fleming says to address the issue, the bank looked at a secondary listing on the Australian Securities Exchange.

But he says perceptions of sovereign risk with PNG, especially the issues around foreign exchange, are an obstacle.

Because of BSP’s market dominance, the company tends to be associated with the entire PNG economy, not just rated as an individual stock.

Fleming says that the negative perception of the company internationally—‘that noise around foreign exchange, around government fiscal capability, around your capacity to pay Australian dollar dividends on demand’—would go away if there is a significant foreign investment in the PNG economy.

‘I know there are issues because of the PNG economy, but we can be marked relatively harshly (by potential investors).’