Banking

The Company

Bank South Pacific (BSP) is the largest bank in Papua New Guinea and the South Pacific. It is a widely recognised brand in the area, and a regional leader in innovation in the financial sector. With the largest branch, rural and electronic banking networks in PNG, Fiji and the Solomon Islands, BSP has transformed itself into a modern, emerging markets-focused bank, and strives to deliver international best practice standards and services. BSP has taken a “whole of bank” approach to its corporate clients to meet all aspects of business, staff and customer needs. For example, no other financial institution has the ability to deliver electronic solutions to facilitate landowner royalty payments in remote areas of PNG. In addition, BSP offers premium banking service centres in all the major towns in PNG, Fiji and the Solomon Islands.

In 2013 the group’s total revenue increased by 19% to PGK1.56bn ($634.14m), compared to PGK1.29bn ($524.39m) the previous year. Most of the revenue growth came from the non-interest income stream, in particular foreign exchange earnings in PNG. Non-interest income contributed over 51% of total revenue in 2013. Operating profit before tax increased by 11.3% to PGK594.7m ($241.75m) for 2013, compared to PGK534.1m ($217.11m) the previous year. Net profit after tax was up 7.2% to PGK436.8m ($177.56m) – roughly 5% better than BSP Capital’s forecast – as compared to PGK407.7m ($165.73m) in 2012. Its cost-to-income ratio was 55%, up from 53% in 2012. That was due to increased depreciation and amortisation charges, and premises and equipment expenses. The majority of depreciation and amortisation expenses were from BSP’s modernisation programme.

The balance sheet remained robust with total assets increasing by PGK2.5bn ($1.02bn) to PGK15.81bn ($4.63bn) in 2013. The customer loan and receivable portfolio recorded a net growth of PGK493.4m ($200.57m), taking the total portfolio to PGK5.26bn ($2.14bn). Strong competition in the PNG corporate lending market affected BSP’s loan sales. Its net interest income may come under pressure again in 2014 as competition prevails.

BSP’s capital adequacy ratio (CAR) was 19.4% at the end of 2013, down from 24% in 2012. A decline in CAR reflects a continued growth in the assets on the bank’s balance sheet and total dividend payments of PGK272.73m ($110.86m) to shareholders in 2013. BSP’s CAR remains above the 12% minimum prudential requirement set by the Bank of PNG.

Deposits continued to grow, particularly in the corporate segment in Fiji and in the retail and government sector in PNG. The group recorded PGK12.2bn ($4.96bn) in customer deposits in 2013. BSP has achieved a significant growth in transactions across ATM, EFTPOS, mobile banking and KunduPei. More customers are now using mobile phones to do their banking, and phone transactions may increase as more people become accustomed to this.

Company Strategy

BSP Group has achieved solid growth in assets and profits over the years. We believe that earnings growth will continue in 2014 as cost control measures are applied to operations. Completion of BSP’s transformation and modernisation programme in 2013 may also result in an additional cost savings for the group. We forecast BSP’s net profit after tax will reach PGK474m ($192.68m) in 2014, which may mean increased dividends to shareholders. BSP has continued to introduce innovative banking products in the Pacific and we expect this to continue. PNG’s GDP is anticipated to grow at 20% in 2015, and this should also weigh prominently in BSPs operations in the future.

BSP is currently trading at PGK7.40 ($3.01) per share at a forward P/E of 7.95 times earnings. Our 12-month price target is PGK9.77 ($3.97) per share, which represents a 32.02% premium to the current share price. We forecast a total return of 41%, including share price growth plus the dividend yield.