Bank South Pacific has just announced its 2020 financial results amid tough trading conditions. Chief Executive Robin Fleming talks to Business Advantage PNG about the bank’s plans for 2021, foreign exchange shortages, and the need for greater competition in Papua New Guinea’s banking sector.

Bank South Pacific kiosk. Credit: Bank South Pacific

Against the background of 2020’s COVID-19 economic downturn, a fall in net profits of just 10% may not be such a bad result for the Pacific’s largest bank. Indeed, BSP’s PNG banking revenues hardly fell at all compared to 2019.

Nevertheless, CEO Robin Fleming says the bank experienced financial stresses because of the impact of COVID-19 pandemic on businesses who have loans with the bank, although he feels it is better placed than some.

‘Every bank will have had to take up some additional provisions [set aside funds for potential losses], either specifically allocated to customers, or as an increase in overall general provisions in regard to the risk rating of that customer,’ he tells Business Advantage PNG.

‘The percentage increase has been much less for BSP than the percentage increase for other banks because we have always taken the approach that, if we are operating in higher risk countries, then our provisioning policy should be crafted to accommodate that.

‘If you are operating in a high risk area, you have to have capital and provisions and other balance sheet capability to deal with the unforeseen risks that do occur.’

Building blocks

For BSP, 2021 will be about putting in place the building blocks for greater performance in future years.

The bank has signalled its interest in listing on Australia’s ASX, a move that will require a change to its constitution. Fleming says the bank’s other main goals this year will be to bed down its operations in Vanuatu, and complete a major upgrade of its core banking system in PNG.

‘If you are in a two-bank – or two shareholder groups – market, there is no competition to drive banks to develop products that are going to be more competitive.’

The new system will enable the bank to push forward with its digital banking initiatives. While digital and mobile banking transactions are growing for BSP, Fleming would like to see them grow much faster.

‘Why wait for hours in a queue when you can do it on your phone from home?’ he asks.

Foreign exchange

Bank South Pacific’s Robin Fleming. Credit: BAI

BSP is at the coal face when it comes to dealing with PNG’s ongoing foreign exchange shortages. While Fleming acknowledging the negative impact of the closure of the Porgera gold mine, he says the FX situation is better than a year ago, with turnaround times on FX orders, apart from for big corporations, down to two-to-three weeks.

‘Total ordering has reduced from 12 months ago. We are still of the view that the next six months are going to be difficult, until such time as Porgera has those agreements finalised to re-establish mining operations. But hopefully, by the end of year, it will be somewhat better.’

Competition

Another issue facing PNG’s banking sector in 2021 is competition.

Kina Bank’s bid to run Westpac’s Pacific assets as a stand-alone operation under a new brand is now being reviewed by the regulators, while a number of smaller institutions have signalled their interest in acquiring banking licences.

Fleming believes firmly that there is insufficient competition in PNG banking.

‘If you are in a two-bank – or two shareholder groups – market, there is no competition to drive banks to develop products that are going to be more competitive. And there is no pressure to provide banking services to customers outside of the key larger centres.

‘We have got total approvals to the value of about K20 million at the moment, with the best part of K9 million being drawn down thus far. We are getting plenty of applications.’

‘We have operations in 60 centres where there is no-one else there,’ he points out.

‘If the banking system contracts to key centres, is that in the long term interest of PNG? There really does need to be more requirements on banks to get out of their comfort zone and to provide real banking services to customers outside of the profitable areas.

‘If Teachers Savings and Loans (TISA) want to get a licence, I welcome that. We need more competition.’

Cheaper loans

Department of Finance Secretary Dr Ken Ngangan (Front, Centre) and BSP Group CEO Robin Fleming (Back Row) together with some of the initial recipients of the FHOS. This first batch of participants in the FHOS are staff from the Department of Finance. Credit: BSP

BSP is also involved in delivering two government-initiated loan programs aimed at removing some of the barriers to credit in PNG: the now-established First Home Ownership Scheme (FHOS) and the recently-introduced SME lending program.

Initially funded by the national government, Fleming says the popular home loan scheme is now fully funded by BSP.

‘The K200–K300 million we have got in that fixed rate first home loan portfolio is more than adequate to enable us to have that four per cent fixed rate to continue to apply.

‘It means more Papua New Guineans being able to get into their own home.’

Fleming says most of the K100 million provided by the PNG government to help small and medium enterprises (SMEs) is also proving popular.

‘We have got total approvals to the value of about K20 million at the moment, with the best part of K9 million being drawn down thus far. We are getting plenty of applications.

‘Most of the loans we are approving have a lower probability of default and hence that funding is going to be available for many more customers over the longer term.’