Which bank is the most “unquestionably strong” of its ASX-listed cohorts on a capital adequacy basis and also produces the highest net interest margins and sector-leading lending growth?
Not the Commonwealth Bank, which is all about what went unquestionably wrong with its money-laundering affair rather than how unquestionably strong its balance sheet is.
Don’t look at the other Four Pillars either. Look further north – no, not at the Bank of Queensland but even further upwards to the Port Moresby based Kina Securities.
On the raw comparisons, Kina should be the poster child of the banking sector: its capital adequacy stands at a whopping 30%, compared with the local average of around 12%. Despite the drag of holding so many assets as capital, the bank’s return on equity is a creditable 13%.
In calendar 2016 Kina generated loan growth of 62% to 606m kina ($242m), with a net interest margin of more than 8%. In comparison, CBA last week reported 5.6% loan growth (on a much bigger book of course) and on an across-the-board margin of 2.1%
The PNG economy may be perennially dodgy but that hasn’t overly affected Kina’s loan quality: impairments are now running at 0.01%, compared with the CBA’s higher but still solid 0.15%. This is despite Kina’s book being skewed to more risky business lending – 69% of the book – with housing lending accounting for only 17%.
(We’re picking on the CBA because it’s the biggest bank and the only one of the Big Four to report June balance date results).
Kina listed in July 2015 at $1 a share, the product of stockbroker and wealth manager Kina Group merging with Maybank, PNG’s fourth biggest bank. The bank competes with Westpac, ANZ and Bank South Pacific, which makes for an Aussie-style oligopoly.
Kina’s wealth-management operations hold 6.2bn kina of funds under management and 5.6bn kina of funds under advice, which is not insignificant in the PNG context.
Ahead of its August 23 half-year results Kina last week pre-announced an underlying profit of 10m kina, 50% lower. The statutory profit of 3m kina reflected a one off 7m kina lease termination payment.
Having lost its US offshore correspondent bank for foreign exchange purposes last year, Kina has established a new one with Commerce International Merchant Bankers. The reduction in first half earnings was attributed to lower foreign exchange income because of the termination of the former relationship, which implies a strong reliance on trading income.
Kina trades on an earnings multiple of less than ten times, a sharp discount to the Australian sector average of around 14 times.
There’s a fundamental reason: while the company might be well run its earnings are 100% exposed to PNG, a nation reliant on a few resource projects for economic growth. On official figures GDP grew by an average 4.14% in the decade to 2016, but in 2016 the growth slowed to 2.6% in 2016 and the economy is forecast to grow by 2.7% this year. But some commentators claim the island nation is now in recession.
The talking point of this month’s disputed election – which saw controversial PM Peter O’Neill returned to power – was the country’s budget blowout and its uncomfortable public debt that stands at 34.5% of GDP.
While the kina (as in the currency) has depreciated in recent years, it is still considered too high for the country’s good.
Kina Securities is a quirky and oft-overlooked member of the ASX banking club. But with higher returns there are also risks and the country’s parlous economy explains why.
Then again, a money laundering scandal is something you would expect to afflict a third world bank and not our leading financial institution.
In June, Kina said long-serving CEO Syd Yates would step aside in favour of Greg Pawson. As a former Westpac head honcho for the bank’s south East Asia pacific operations, Pawson is at least familiar with the travails of operating in the region.