BSP Financial : Annual Report 2023

About this update from Bsp Financial Group Ltd.

Our Bank. Our People. Annual Report 2023 ANNUAL REPORT 2023 In this Annual Report, a reference to 'BSP', 'BSP Group', 'the Bank', 'the Company', 'the Group', 'our', 'us', and 'we' is to BSP Financial Group Limited ARBN: 649704656 and its subsidiaries unless it clearly means just BSP Financial Group Limited. BSP's Corporate Governance Statement is available on the company's website: www.bsp.com.pg/investor-relations/corporate-governance/ APRA Disclaimer: BSP is not authorised under the Banking Act 1959 (Commonwealth of Australia) and is not supervised by the Australian Prudential Regulation Authority (APRA). BSP's products are not covered by the depositor protection provisions in section 13A of the Banking Act 1959 and will not be covered by the financial claims scheme under Division 2AA of the Banking Act 1959. OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Contents Overview 2023 Highlights 4 Message from the Chairman and CEO 6 Our Business 8 Our Vision, Mission and Core Values 9 Performance Review Financial Performance 10 Our Community 20 Our People 22 Our Customers 24 Our Risk Management Framework 27 Corporate Governance Statement Board of Directors 32 Executive Team 36 Corporate Governance Framework 38 Board Governance 39 Board Committees 44 Risk Management and Compliance 47 Assurance and Control 48 Culture and Conduct 50 Continuous Disclosure 52 Commitment to Shareholders 52 Compliance with ASX and PNGX Corporate Governance Recommendations 53 Remuneration Report 54 Financial Statements 64 Shareholder Information 132 Honouring the Legacy 142 Corporate Directory 143 2 3 ANNUAL REPORT 2023 OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION 2023 Highlights FINANCIAL OPERATIONAL K890m 41% Statutory NPAT -18% Women in Leadership 1 1 2 3 4 K2.8b Total Income 8% K37.0b Total Assets 10% K16.7b Gross Loans 12% K1.43 FY23 Full Year Dividend -18% 38.5% Cost to Income Ratio +50bps 24.4% Capital Adequacy -70bps 21.5% Return on equity -610bps Measures representation at Executive and Senior Management level. Staff count as at 31st December 2023. Approved investments over three years to upgrade our operational and technological capabilities. Active branch count as at 31st December 2023. 4.6k Employed Staff 2 3.3m Customer Accounts 6.2k Shareholders K345m Capital Investments 3 120+ Branch Network 4 300+ Agent Network 4 5 ANNUAL REPORT 2023 Message from the Chairman & CEO OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Earlier this year, we both commenced our new roles at BSP. Our reflections and highlights for 2023 are overall very positive. This can largely be attributed to the great support from our customers, shareholders and employees across all the countries in which we operate. We inherited the leadership of a well- run institution that is the largest bank in the South Pacific. The team at BSP was well placed to deal with the impact in our region of global volatility, rising interest rates and inflation and, closer to home, the implementation of a new core banking system. Against this backdrop we delivered a well-balanced result, with revenue growth across all key business lines of the Group totaling 8%. Our operating efficiencies, an enhanced customer experience, and entrenching our already leading position in banking in the region across 2024 and beyond from this K500 million investment. After some initial system challenges, we are pleased to note that our monthly digital and EFTPOS terminal transactions grew by double-digits in 2023. This is the result of our efforts to migrate customers to digital channels that best meet their needs. We continue to invest in our digital offerings, as well as new offerings that will provide our customers with banking services comparable to leading offerings in other competitive markets. Strategy via digital channels. We have also significantly reduced branch waiting times in the second half of 2023, and set up dedicated business banking centres in key urban locations to support our customers. We have also partnered with the PNG government to leverage its business loan program, which it has made available on favourable terms to small businesses in the country to help stimulate economic growth. One of our key strategic priorities also involves a substantial step up in activity to support the development of our people at BSP, including by investing in our new "BSP Academy". Board renewal Left to Right: Robert Bradshaw and Mark Robinson expense grew 10% for the year, which was anticipated given the increased investment in technology. This increase in revenue and expenses delivered underlying profit growth of 8%, to K1.7 billion. Nevertheless, BSP's statutory net profit after tax (NPAT) declined by 18%, due largely to a K209m negative impact on NPAT from the increase in the Papua New Guinea company income tax rate from 2023. Technology and digital uplift Our customers and their banking needs remain the key focus for BSP. The Group's investment in our new core banking system in Papua New Guinea was a pivotal milestone for the bank. We not only replaced our legacy systems, but modernised our technology architecture, which has enabled us to more effectively cater to the needs of our customers. We thank our PNG customers for their patience during our 2023 implementation. We are committed to delivering operational To maintain our market leading position in the South Pacific, we are investing now to lay the foundation for growth, with the following areas of focus: Delivering an exceptional customer experience; Significant investments in risk and compliance; and Realising the ongoing benefits of our new core banking system. In short, our ultimate objective is for our bank to offer "world class" services in our region. Consequently, we have embarked on a program to invest in key enablers of our strategy, including new investments to deepen customer relationships right across the Group. Our investment in technology will enable us to use data more effectively to better understand customer needs and manage risks. Some of the actions we have taken have already resulted in positive outcomes, for example in our ability to pre-approve loans originated We were pleased to announce the appointment of Ian Tarutia to the BSP Board in April 2023. Ian held senior executive roles within the superannuation industry, with more than 30 years at Nasfund Limited, most recently as its Chief Executive Officer. Ian's appointment followed the retirement of the late Sir Kostas Constantinou, OBE as Chairman. Sir Kostas joined as a Director of BSP in 2009 and was appointed Chairman of the Board in 2011. During his tenure as Chairman, BSP achieved many significant milestones including the expansion of BSP's banking operations through acquisitions in several Pacific countries, as well as BSP's dual listing on the Australian Securities Exchange (ASX) in 2021. On behalf of the BSP Board and all shareholders, we recognise the late Sir Kostas for his significant contributions in this period. The BSP Board will continue to uphold its high standard of governance to ensure the delivery of our strategic priorities. Strong operating results, capital and dividends The improvement in the Bank's 2023 operating performance noted earlier, was achieved with the cost to income ratio increasing marginally to 38.5% and the net interest margin remaining relatively stable. We continue to prudently grow our balance sheet, with total assets increasing by 9.5% to K37 billion, supported by a robust 12% growth in net lending. BSP has also grown significantly stronger, holding more than twice as much Tier 1 capital and total assets as we did a decade ago. This strength is a key source of competitive advantage for BSP, giving us the financial capacity and confidence to invest for our customers and our shareholders. It also gives us the ability to cushion the impact of economic challenges, which inevitably emerge from time to time in our markets. In light of the above financial results, we declared a final dividend of K1.06 for 2023, bringing our full year dividend to K1.43. The 18% dividend reduction is on account of the reduction in net profit resulting from the increase in the company tax rate in 2023. Outlook The fundamentals of our South Pacific economies are improving with strong growth in 2023 and this trend is expected to continue in 2024, right across the region. Business investment in PNG is also increasing as PNG is entering an investment "super-cycle", with "mega- projects" of over K100 billion either being renewed, or in the pipeline. Given this favourable economic setting, we are confident BSP has the talented people and financial strength to execute our strategy effectively. We have a robust investment programme underway, as we maintain a prudent balance sheet, and disciplined risk management, to support development in our region and deliver on our goal to offer "world class" services. Finally, on behalf of the Board and management, we would like to thank you for your ongoing support as shareholders. We also thank BSP's 4,600 employees for your hard work and commitment to serving our customers. Mr Robert G. Bradshaw Chairman Mr Mark T. Robinson Group Chief Executive Officer and Managing Director 6 7 ANNUAL REPORT 2023 Our Business OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Our Vision, Mission and Core Values BSP provides a range of financial services in PNG, Fiji, Solomon Islands, Samoa, Tonga, Cook Islands and Vanuatu. BSP serves both retail and corporate customers through its banking operations, and provides non-banking services, such as life insurance and create the largest Bank in PNG, and listed on the PNGX a few years later in 2003. Other acquisitions followed, including CBA's Colonial Bank in Fiji and a number of Westpac businesses across the South Pacific. We listed on the ASX in 2021 and trade under the ticker "BFL". advocate and partner for important economic developments in the South Pacific to the benefit of our communities, as well as our shareholders. Collectively, the Group's 4,600 employees serve our over 3 million Our vision Our mission To be the leading financial services provider in our chosen To create value for our stakeholders, by delivering innovative markets, helping customers, staff, shareholders and and cost effective financial services. communities prosper. funds management. Our bank was established in 1957 in Port Moresby, as a branch of National Australia Bank that was subsequently renamed to BSP upon its sale. In 2001, BSP purchased the state owned Papua New Guinea Banking Corporation to We have grown to be the largest financial services company in the South Pacific. Consequently, we have the strength and size to cushion the impacts of the challenges we face from time to time, but our position also allows us to be a strong customers from across the South Pacific. BSP remains the largest South Pacific bank, with the most extensive distribution network. Our branch network is complemented by a large electronic banking system that meets the banking needs of our customers. Our Values Integrity We are honest, committed, trustworthy and reliable in our dealings with our customers and each other. Leadership We inspire, we change and we live our values, and lead by example. Teamwork We work with and for each other, we progress together. Community We respect, value and support the communities in which we operate. Lending Market Share Deposit Market Share People We respect and value our people and our customers. Professionalism We commit ourselves to continual self-development to achieve standards of excellence in our performance. PNG Solomon Islands Cook Islands Tonga Samoa Fiji Vanuatu 65.6% PNG #1 Solomon 44.0% #1 Islands 35.5% Cook #2 Islands 29.2% Tonga #1 Samoa 35.2% #1 26.6% Fiji #1 Vanuatu 12.6% #4 #1 64.9% #1 55.0% #1 50.6% #1 44.5% #1 39.9% #1 23.8% #4 14.7% Quality We are committed to excellence whilst striving for continuous improvement in our products and services. Net Operating Income Net Profit After Income Tax PNG Bank PNG Bank K2,822m 74% K890m 61% Pacific Markets Pacific Markets Total Group 22% Group NPAT 31% operating income Non-Bank Entities Non-Bank Entities 4% 8% 8 9 ANNUAL REPORT 2023 Financial Performance Overview OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION BSP's excellent operating performance is underpinned by strong lending, deposit and payments fundamentals delivering revenue growth across all Group key business lines. At the same time, we continue to invest in growth enablers, such as technology and people, to maintain our competitive position and offer world class services. NET PROFIT AFTER TAX Statutory NPAT K890m -18% on FY22 Statutory profit fell 18% from FY22, owing to an increase in loan impairments, following the reversal of COVID-19 provisions in the prior two years, and the significantly higher company tax rate (45%). LOAN IMPAIRMENT AND PROVISIONS Impairment expenses Provisions to loans K182m 4.3% +188m on FY22 no change on FY22 An increase in loan impairments in 2023, following the reversal of provisions in the prior two years. DIVIDEND K1.43 -18% Per share, full year The Board declared a final dividend of K1.06, bringing our full year dividend to K1.43. The 18% reduction is mainly on account of the increase in the company tax rate in 2023. Underlying NPAT K1,099m 1 -4% on FY22 Underlying profit remained relatively stable, easing by 4%, after excluding all material changes to our tax obligations. NET INTEREST MARGIN (NIM) 5.65% -30 bps on FY22 With the exception of reduced investment yields from government securities, Group NIM was largely stable. CAPITAL ADEQUACY 24.4% -70 bps on FY22 Our capital measures are strong, with capital adequacy comfortably above 20%, which is much higher than the 12% regulatory requirement. VOLUME GROWTH +10% K9 to .8b +12% K2 to .6b +23% K2 to .2b 1 Underlying NPAT excludes tax expense of K209m, impacted by change in company income tax rate to 45% Business loans Retail mortgages Unsecured personal loans 10 11 ANNUAL REPORT 2023 OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Delivering for Shareholders BSP'S TOTAL SHAREHOLDER RETURN We maintained our long dividend history and our policy of paying out between 70% and 75% of our statutory profit as dividends. Based on the BSP share price at the end of 2023, the dividend yield remained in double digits. 467m Shares 6,165 Shareholders 97% South Pacific ownership 232% 107% 160% 22% 12% 73% 34% 72% 10% 2023 5 Year 10 Year Share price appreciation Shareholder dividends paid 10- YEAR ANNUAL DIVIDEND AND PAYOUT RATIO 70% 75% 76% 76% 76% 70% 75% 75% 75% 75% 0.76 0.86 1.04 1.23 1.37 1.34 1.30 1.73 1.74 1.43 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Dividend per share (K) Dividend Payout ratio RETURN ON EQUITY -610bps 29.7% 27.6% 21.5% Dec 21 Dec 22 Dec 23 Return on equity, has fallen from 27.6% in FY22, to 21.5% in FY23. Our reduced NPAT of K890m, coupled with our growth in capital, were the key drivers of the reduction. However, our returns remain significantly higher than regional peers. RETURN ON ASSETS -90bps 3.7% 3.4% 2.5% Dec 21 Dec 22 Dec 23 Return on assets declined 90bps to 2.5% in FY23. Our strong growth in assets, along with the fall in NPAT, contributed to the decline. 12 13 ANNUAL REPORT 2023 OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Profit and Loss Trends Operating Income Our profit has grown from K507m to K890m since 2014, we now hold substantially more capital against our assets than we did a decade ago. Statutory NPAT K890m -18% on FY22 Operating income K2,822m 120 +8.4% 2,603 100 2,822 Net interest income Driven by strong up 5.7%, loan FX income growth volume growth of [26%] 12% A$1,065m Margin reduced by A$1,185m 31bps NPAT +75% 890 507 Km A$213m A$374m FY14 FY23 ROE -820bps 29.7% % 21.5% FY14 FY23 +8.4% on FY22 FY22 Net interest income Total income for the Group grew by 8.4% in 2023 to K2.8 billion, with a strong contribution from our Pacific markets. Net interest income growth was primarily driven by a healthy 12% increase in lending volumes. Other operating FY23 income positively, driven by a 26% growth in FX income, due to higher inflows. Electronic banking income grew by 22%, a reflection of the double-digit growth in the use of our digital channels. PGK [millions] FY22 1 FY23 Change Revenue 2,603 2,822 8% Net interest income 1,745 1,845 6% FX income 362 458 26% Fee income 419 428 2% Insurance / other income 77 91 18% Operating expense 989 1,087 10% Operating profit 1,614 1,735 8% Impairment expense 2 -5 182 large Profit before tax 1,619 1,553 -4% Non- interest income also contributed 595 565 -6 -1 -24 NIM 5.65% Bps FY22 Lending Funding Investments FY23 Tax 3 534 663 24% NPAT 1,085 890 -18% Comparative for prior periods have been restated to reflect the modified retrospective transition to the new accounting standard IFRS 17 ( Insurance contracts ), which came into effect on 1 January 2023. 2022 negative impairment expense driven by COVID-19 provision releases. FY22 tax expense includes Additional Company Tax, which is presented as an operating expense in the financial statement. Volume growth in all core lines of our business, translated into revenue growth across the Group of 8%. Operating expenses were up by 10%, driven mainly by inflation, as well as our increased technology spend to support the delivery of our strategic priorities. Taken together, the Group delivered an 8% increase in operating profit. -30bps on FY22 banks in more developed markets. This is BSP's NIM is wider than what is seen in mainly on account of the mix of our assets, where only 15% of our loan book is invested in lower risk residential mortgages. The 30bps erosion of our NIM in 2023 was largely driven by a reduced yield on investment securities, driven by strong market liquidity. Investment security yields have fallen since 2022, and 2023 saw most of the investment portfolio being repriced at these lower rates. We managed our lending and funding mix to ensure margin erosion across our book was limited to a modest 7bps. 14 15 ANNUAL REPORT 2023 OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Operating Expenses Operating expenses K1,087m +9.9% on FY22 Credit Quality and Provisions Impairment expenses IMPAIRMENT EXPENSE 182 K182m Km +K188m on FY22 -5 -43 FY21 FY22 FY23 Cost to income Cost to income 38.0% 38.5% +9.9% 18 19 21 1,087 16 24 989 Investments in risk and compliance Delinquency Rates • FY21 and FY22 contained large impairment 4.1% releases post COVID-19. FY23 did not have any carry forward provisions available for release, and provisions were aligned to underlying customer risk grades. • FY23 includes a single specific provision +90bps on FY22 of K28m for an exposure, which is fully secured. Delinquency rates and gross impaired assets also lifted sharply in 2023. However, excluding the single fully secured loan that has transferred to non-accrual status, the normalised delinquency rate reduces to 3.2%, which is in line with prior year trends. Increased Higher Salary inflation To optimise Infrastructure system cost volumes in operational maintenance and additional Pacific markets processing staff to support post and Operational the new core COVID-19 strengthen losses banking recovery competitive Legal system positioning provision Km A$415m releases A$457m FY22 Technology Cards Inflation Modernisation Others FY23 Strategy FY23 also contains a K40m uplift in impairments connected with our unsecured DELINQUENCY RATE personal loan portfolio, which is partially attributed to a larger asset book, but 90+ days, as a percentage of total loans does reflect some level of deterioration in credit quality in a challenging economic 4.1% environment. The Group experienced a relatively large K188m 3.1% 3.2% movement in impairment expenses from FY22 to FY23 and we note the following: Operating expense lifted 9.9% for FY23, an anticipated increase given the higher investment in technology, including higher amortisation costs following capitalisation of our new core banking system. Higher card costs were also incurred, owing to higher volumes, particularly in our wider Pacific Markets businesses, as international visitor numbers rebounded, with corresponding increase in card income. Wages growth was also a key driver of our expense increase, as we continued to invest heavily in our people. Despite this expenditure growth, our cost-to-income ratio was relatively steady, at 38.5% for the year. % Dec 21 Dec 22 Dec 23 Provisions to Loans PROVISIONS TO LOANS 4.3% 5.1% 4.3% 4.3% % Dec 21 Dec 22 Dec 23 No Change on FY22 16 17 ANNUAL REPORT 2023 Balance Sheet Strength Gross Loans FY21 FY22 FY23 K16.7b +12.3 Kb 14.4 14.9 16.7 +12.3% on FY22 OVERVIEW PERFORMANCE REVIEW CORPORATE GOVERNANCE REMUNERATION REPORT FINANCIAL SHAREHOLDER STATEMENT STATEMENTS INFORMATION Loan Book Mix Retail Mortgages, 15% Unsecured Personal, Loans Business Business 13% Segment Loans, 59% ~66% Others, Deposits K29.8b +10.8% on FY22 +10.8% 23.9 26.9 29.8 Kb Dec 21 Dec 22 Dec 23 6% Business Overdrafts, 7% All our key loan product categories experienced strong growth in 2023. Our Unsecured personal loans constitute 13% of the loan book and saw a business loan segments represents ~ 66% of our loan book. Retail mortgages strong growth of 23% during the year. make up around 15% and provides significant opportunity for growth. Total Assets K37.0b +9.5% on FY22 +9.5% 30.4 33.8 37.0 Kb Dec 21 Dec 22 Dec 23 +10% A$3.9b Capital Adequacy 24.4% -70bps 25.4% 25.1% 24.4% % 12% Dec 21 Dec 22 Dec 23 -70bps on FY22 Our capital measures are strong, with capital adequacy Total assets grew by 9.5% to K37b, with a strong 12% growth in lending. This was funded by a corresponding 11% increase comfortably above the 12% regulatory requirement. in deposits, which is predominantly domestic funding. A feature of our balance sheet remains the high levels of deposit funding, with a corresponding low loan to deposit ratio of 56%, reflecting our capacity to increase lending. 9.8 8.9 +12% A$1.0b +23% A$0.9b 2.6 2.3 2.2 Kb 1.8 Business Loans Retail Mortgages Unsecured Personal Loans 18 19

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