Banking: Regional Giant that is BSP
Robin Fleming is almost destined to confound in person. For a start, Euromoney waits 75 minutes for a long-arranged meeting with Fleming to discuss the bank he runs, the Papua New Guineabased Bank South Pacific (BSP).
It is the region’s biggest bank; BSP’s systemic 60 per cent to 65 per cent market share keeps its home economy afloat; and it has offshoots in Fiji, Tonga, Vanuatu, the Solomon Islands and Samoa.
Unusually for a bank, BSP is also PNG’s biggest taxpayer, so there is a lot to talk about, except Mr Fleming lingers in the office next door, chatting and laughing with colleagues. And PNG’s fabled coffee has not made it to his waiting room. Admittedly, we are unlikely to be the most important engagement in his diary. In small-town Port Moresby, that would be, as Mr Fleming would admit, PNG’s prime minister, Peter O’Neill, Fleming’s former boss. Queensland-born Mr Fleming’s moniker amongst his mates apparently derives from his trademark handlebar moustache, and the nickname says less about him than it does about PNG’s blokey business community.
His office overlooks the raffish pivot of commercial life in Port Moresby, the expatriate-heavy Royal Papua Yacht Club, where the main bar seems culturally marooned in the 1970s. Not that Mr Fleming sails, nor is he a lion on Port Moresby’s boozy business circuit.
A devout man in a deeply Christian country of which he has become a citizen, the quietly spoken Mr Fleming says he works long hours and prefers the home life.
A BSP lifer, Fleming first came to PNG from Brisbane in 1980 on secondment from Australia’s then government-owned Commonwealth Bank, which sent staff to BSP’s state-owned forerunner Papua New Guinea Banking Corp (PNGBC), which Commonwealth once owned.
Then in his early 20s, Mr Fleming says he had a choice of working at PNGBC or in a Commonwealth branch in outback Queensland. “I decided that if I was going to do a hardship post, at least have something a bit more exciting and get paid a little bit more,” he recalls. “There was a sense of adventure.”
Notorious
Mr Fleming has had adventure in spades in PNG, a country notorious for corruption, crime and boom-bust economic cycles. An early posting with PNGBC was to restive Bougainville, where separatist tensions in the 1980s escalated into a civil war, which has kept closed what was then the country’s biggest earner, the Panguna gold and copper mine, for 28 years.
His job before becoming chief executive was chief risk officer. Mr Fleming has led BSP since 2013, taking over from Australian emerging market specialist Ian Clyne. But although he has been BSP boss for more than four years, it is still the ex-Indosuez and ING Mr Clyne who seems better known in Port Moresby for modernising and internationalising the bank. Mr Fleming says he does not much care what people say about him. “I don’t seek publicity,” he says. “Sometimes the more attraction you bring to yourself, the more the potential for government interference on fees and charges, [central] Bank of PNG interference on margins and the works.
“People say I’m a safe pair of hands and yet our profitability has gone to the stage where we have 60 per cent market share compared to 40 per cent when Mr Clyne left. I let the figures, the profit, talk for themselves.”
Those profits seem healthy on his watch. In full year 2017, the bank’s profit was K720 million ($FJ452.05 m), compared with K606 million ($FJ 380.48m) in 2016. As PNG’s main bank, BSP is advantaged by being locally systemic, having a share register and a franchise that strongly tilts to government interests, and having little competition. Australia’s ANZ and Westpac are BSP’s main two competitors, but their executives say they are limited by (Australian) governance rules as to the kind of business they can pursue in PNG. A long way behind in fourth position is Kina Bank, owned by a local consortium that bought out the PNG banking operations of Malaysia’s Maybank in 2015. Mr Fleming admits that BSP is the go-to bank for PNG’s state-owned entities, but describes the critical whispering campaign around that as “uninformed.”
He insists that BSP is very sound and is properly audited. “We’ve got certain risks within our portfolio, but none that we don’t think have got adequate provisions and which we don’t manage suitably,” he says. “I think a lot of the criticism will come from particularly the Australian banks,” adds Fleming. “When you have gone from 45 per cent market share four years ago to 60 per cent now… We are 45 per cent market share in foreign exchange now and we were 23 per cent two to three years ago. Our profitability has gone up, theirs has gone the other way.” Foreign exchange revenue at BSP rose 42 per cent in 2016 to K253 million ($FJ158.10m).
“The Australian banks have a very different view of PNG,” says Fleming. “They were very monoline businesses. There’s a lot of monoline, minimal risk businesses that they were participating in, like foreign exchange. Those margins contracted considerably three to four years ago when the Bank of PNG put a cap on the margins... which reduced their profits by about K120 million ($FJ74.99m) to K130 million ($FJ81.23m) each.”
History
Bank South Pacific has had a tortuous history and too often has been a plaything of politicians. It sprung from the local operations of two Australian banks, National Australia Bank (NAB) and Commonwealth Bank, dating from when PNG was under Australian administration. Both banks had been in PNG for many years, NAB since the 1950s and Commonwealth first setting up in 1916 to service the Australian military that had seized the then German colony during World War I. Australia remained the colonial power in Port Moresby until 1975, when PNG attained independence. NAB came under pressure to incorporate locally and it called its PNG offshoot Bank of South Pacific.
The lead-up to PNG independence also saw the then Australia Labor government gift Commonwealth Bank’s local unit to the new nation in 1974; it became the Papua New Guinea Banking Corporation. NAB would later sell its BSP stake to the government, which then sold on shares to politically connected local interests, including PNG’s influential Catholic diocese.
But PNGBC, which was chaired in the late 1990s by O’Neill, the current PM, remained under direct state ownership. And it had problems, plagued by what one former PNG banking official charitably described as “political lending”.
By 1999 the mismanaged PNG economy was on the brink of collapse and the World Bank and IMF stepped in. In return for support, PNG agreed to privatise much of its state sector, which had become a vehicle for political patronage and corruption. Australian banks ANZ and Westpac both bid to buy PNGBC, but the government rushed through a deal to sell it to the smaller but politically expedient BSP.
An official inquiry would later conclude that the sale was rushed and not done in a transparent and accountable manner. But it survived and the two entities became today’s Bank South Pacific. A long-time banker with Banque Indosuez and ING, Clyne arrived at BSP in 2008 to discover that “there’d been 30 years of underinvestment in everything.”
He had been in PNG with PNGBC in the 1980s before an international career with Banque Indosuez and ING. On Clyne’s new BSP watch from 2008, BSP acquired its Fiji division from Australia’s Commonwealth Bank and brought the World Bank’s International Finance Corporation onto the BSP register.
Five years out of BSP, Mr Clyne today represents international investor Richard Chandler’s interest in Lagos-based Union Bank of Nigeria, though remains a frequent visitor to PNG. “(BSP) was making US$40 million to US$50 million by default, but it had massive operational issues,” says Clyne. “It took about 60 to 90 minutes to simply open an account. I came in and demolished it, rebuilt it, rebranded it.
“BSP was in a terrible state when I took over and launched its transformation project in 2008. We initiated over 300 projects, and the modern BSP of today, including its Pacific acquisition strategy, was all in place when I left in 2013.”
BSP likes to say it is PNG’s largest privately owned bank, but that claim belies the official-looking composition of its share registry. BSP’s largest shareholder, with 18 per cent, is Kumul Consolidated, the government’s state-owned enterprise holding company. The government’s civil service pension fund, Nambawan Super, is next with 12 per cent. The state resources holding company, Mineral Resources Development Company and state-backed National Superannuation Fund each hold around 10 per cent. The IFC, which bought in 2010 in the wake of the financial crisis to help support the bank’s capital, has around 5 per cent after selling around 5 per cent to Fiji’s national pension fund in January. Indeed, BSP is something of a milch cow for these PNG government entities. In 2017, a year when BSP made K720.9 million ($FJ452.62m) in profit, it paid its shareholders K521.8 million ($FJ327.61m) in dividends, while paying K293 million ($FJ183.96m) in taxes, about 14 per cent of the PNG state budget. Fleming says BSP is PNG’s largest non-mining taxpayer, a rare situation for a bank anywhere. Is BSP too big to fail? Mr Fleming simply answers: “We have 60 per cent market share.”
Influential
The bank is the market leader in the Solomon Islands, with a 55 per cent market share in lending and holds 60 per cent of national deposits. It is also first in Tonga and the Cook Islands, third in Samoa and Fiji and fourth in Vanuatu. “We are systemic across the region,” Mr Fleming says. And an influential employer too; BSP’s headcount runs to around 4,200 across its region, with 2,700 staff in PNG and 800 in Fiji.
Some 75 per cent of BSP’s assets are in PNG. Its risk weighted capital is around 24 per cent, which Fleming says recognises the PNG-heavy aspect of its business. Mr Fleming claims group non-performing loans are 1.1 per cent overall and the bank has a provisions-to-loan ratio of 5 per cent.
Liquidity
Mr Fleming’s take is different from analysts in Australia, who are reportedly concerned about governance, BSP’s reliance on government business and PNG’s historically volatile economy. “There was nothing that arose that I felt would have been a showstopper,” argues Mr Fleming. But he admits that an offshore listing for BSP seems to have been kicked into the long grass for the time being. Mr Fleming says BSP does not need to raise capital.
“It’s more about determining fair value for BSP in a liquid market… giving our shareholders liquidity.” He also says that: “At some stage our shareholders need to diversify. The strength of BSP has become a weakness for the superannuation funds because the concentration of BSP within their own portfolios becomes quite high. They need to have some access to a market that will offer them the capability to balance their portfolios.” With remote villages tucked away in impenetrable ravines or beyond soaring peaks, PNG is one of the world’s least explored countries. Such terrain also makes it arguably the world’s most logistically challenging banking market.
For example, BSP’s cost of installing an ATM (ordinarily around US$10,000) can run to more than US$50,000 in remote PNG locations. But Fleming has decent claims to have seen more of it than most. Every month or so he flies to places that few adventure travellers would risk visiting, transiting remote jungle airfields that are a “ski jump in and ski jump out”.
BSP management does not have its own plane, so Fleming joins BSP’s airborne cash runs that move money around the country. (For security reasons, BSP rarely transports cash overland.) Often he will be the only person at a remote highland or island gathering in a shirt and tie, or even shoes.
“You’ve always got to ground yourself,” he says. “You are able to see how much of a difference having a bank account can mean.” It helps that financial inclusion is a priority of the central Bank of Papua New Guinea. Governor Loi Bakani says that when he took over the central bank in 2009, “we were 85 per cent unbanked because of the ruggedness of our country, the mountains and jungles. It was impossible to get access, and so our people had no access to any sort of financial services.” Now, Bakani says, about 70 per cent of 7.6 million Papuans are unbanked, but he believes mobile communications will get them connected.
“The country is about 90 per cent to 95 per cent covered by some sort of communication network,” he says. As ex-BSP CEO Clyne puts it: “In PNG, 95 per cent of your customer base loses the bank money, but you make it off 5 per cent. But you have to be there for the others.” BSP staff now take tablet devices and issue plastic cards on the spot in remote towns to get new customers signed up. “The big barrier,” says Mr Fleming, “is that this is still a cash economy, particularly when you get out into the subsistence economy.” Mr Fleming says he has a workday personal security detail, which he dismisses as “for show”. “Everyone knows where I live,” says Mr Fleming. “If someone wants to get me… you’ve got to pay (off) a security guard.” Though Mr Fleming seems to dismiss crime levels as exaggerated, he insists his staff escort Euromoney back to our Port Moresby hotel after our evening meeting. Says Mr Fleming: “Maybe businesses that make 30 per cent return on equity, like BSP, overstate that risk issue so they don’t have too much competition.”