BSP Financial Group Limited
Annual Report 2019

Plain-text annual report

ANNUAL REPORT BANK OF S OUTH PACIFIC LIMITED CONTENT Strategic Report Chairman’s Report A Brief History of BSP Board of Directors Group CEO’s Report Group Historical Summary Contributions by BSP to PNG Group Highlights Sales Operations & Support Broader Group Highlights Cook Island Fiji Samoa Solomon Islands Tonga Vanuatu Subsidiaries BSP Finance BSP Capital BSP Life Corporate Governance Financial Statements Directors’ Report Statements of Comprehensive Income Statements of Financial Position Statements of Changes in Shareholders’ Equity Statements of Cash Flow Notes to the Financial Statements Independent Auditor’s Report Shareholder Information Directors’ Information Management Teams Executive Management Team Management Teams Overseas Directory PNG Branch Directories Corporate Social Responsibility 36 46 47 49 50 51 52 53 98 104 108 110 112 116 119 120 122 4 6 8 12 16 17 18 20 22 26 28 29 30 30 31 31 32 34 34 35 Mt Tauvurvur, Rabaul, East New Britain Photo by Rocky Roe Photographics OUR CORE 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. PROFESSIONALISM We inspire, we change, and we live our values, and lead by example. COMMUNITY We respect, value and support the communities in which we operate. PEOPLE We respect and value our people and our customers. TEAMWORK We work with, and for, each other; we progress together. QUALITY We are commited to excellence whilst striving for continous improvement in products and services. APRA Disclaimer: BSP is not authorised under the Banking Act 1959 (Commonwealth of Australia) and is not supervised by the Australian Prudenti al Regulati on Authority (APRA). BSP’s products are not covered by the depositor protecti on provisions in secti on 13A of the Banking Act 1959 and will not be covered by the fi nancial claims scheme under Division 2AA of the Banking Act 1959. Chairman’s Report Sir Kostas Constantinou, OBE Despite challenging conditions continuing in 2019, our profit of K890.4m was up 5.5% on the previous year. BSP has continued to perform well, despite economic headwinds and uncertainties. Through capital discipline and prudent balance sheet management, we maintained our commitment to financial strength across all capital, funding and liquidity metrics. We finished 2019 with a capital adequacy ratio of 22% (2018 = 22.9%) and leverage ratio of 10.5% (2018 =10.3%) ... ratios that remain well in excess of the 12% and 6% prudential requirement respectively. Strategy Our diversification strategy is working, with growing offshore branch and subsidiary contributions. My fellow directors and I are pleased to report that BSP’s diversification strategy initiated in 2015 is gaining momentum. Just over 41% of BSP’s 2019 profit growth was generated by our offshore branches, with the remaining 45% and 14% from PNG and our subsidiaries respectively. Our offshore branches continue to grow, with four of the six now ranked “number one” in both loans and deposits in the countries they operate. Consequently, BSP has grown to become the South Pacific’s leading bank. We are also pleased to report that our expansion of BSP Finance continues to progress, with the Lao JV joining our portfolio in early 2020. Accordingly, our 2020 focus will be on bedding down the Lao JV and transitioning it to BSP Finance’s operating model. In short, we will apply the same successful approach deployed in Cambodia, that is beginning to produce strong results. Specifically, BSP Finance Cambodia delivered an outstanding 2019 profit result, where it more than tripled its 2018 profit and now matches BSP Finance PNG’s profit contribution. With our focus on delivering sustainable growth, we will continue to adopt a measured approach to exploring future asset finance growth opportunities within the Mekong Delta. BSP Life PNG is the youngest subsidiary of the BSP Group, with its operations commencing in January 2018. In 2019, it successfully launched its new life insurance system and introduced its new “Wantok Group Term Life” product to meet the needs of PNG’s employer based groups and associations. In late 2019, a sales team was established to market BSP Life’s new product “Wantok Delite”, a savings insurance product that was launched in early 2020. Enhancing Governance In 2019 we have invested in strengthening BSP’s governance practices, to ensure we meet the high standards expected of us. The recent Royal Commission in Australia identified that the Australian Banks had failed to implement policies and effective controls to fully comply with existing industry standards. In the BSP Group's efforts to ensure that we are in compliance with the regulatory requirements in all our jurisdictions, BSP’s Board has approved the establishment of an independent Group Compliance SBU (and added 16 new positions) to specifically implement and monitor the effectiveness of BSP's policies across the Group. In October 2019, the SBU began overseeing the Anti-Money Laundering / compliance business unit, audit business unit and the credit inspection business unit. Group Compliance will ensure that BSP continues to meet its ongoing compliance requirements, regulatory requirements and changes in the industry standards. 4 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportBSP has continued to perform well, despite economic headwinds and uncertainties. In 2019, we continued to invest and expand our digital footprint across all our countries to better serve our growing customer base. Standard & Poors Global (S&P) in its ratings assessment of BSP released on 20 May 2019, maintained BSP’s stand-alone credit profile of “b+”, which is an endorsement of BSP’s strong underlying performance. S&P reiterated that the maintaining of BSP’s overall rating at ‘B/Stable/B’ is not a reflection of BSP’s underlying performance, but as a consequence of its exposure to PNG. Given the latter, BSP Group’s net profit after tax increased by 5.5% over the previous year, to reach K890.4 million, with 75% of Group profit contributed by the PNG bank. Furthermore, our 2019 profit result equates to a compound annual growth rate (CAGR) of 13.7% between 2014 and 2019, an outstanding achievement. New Banking System As reported last year, BSP has embarked on the replacement of its existing core banking system (ICBS) with a new system (Oracle Flexcube). A project of this size and complexity is very challenging to deliver. Accordingly, to reduce risk we have made the decision to revise our implementation approach, which will see Vanuatu go live in October 2020, PNG in April 2021 and the remaining Offshore branches thereafter. Board Renewal Board renewal remains a continuing process and in December we farewelled Freda Talao, who retired as a BSP Director. Freda joined the Board in April 2012 and most recently chaired BSP’s Remuneration and Nomination Committee. I would like to thank Freda for her service, commitment and contribution to BSP over the past seven years. Financial Performance This year our revenue performance was slightly higher than last year, with only a small 0.3% increase in income to K2.17 billion. However, the result wasn’t unexpected, given slow global growth, coupled with delays to key domestic resource projects, producing a challenging period for PNG, our largest market. Recognising this challenge, cost control measures were employed that reduced expenditure by 5.3% to K918.4m in 2019. Outlook With a stagnating global economy and uncertainty around the timing of PNG’s key domestic resource projects, we expect challenging trading conditions to continue for the foreseeable future. Despite this uncertainty the Board and myself are confident we have the team and financial strength to execute effectively against our strategy. Finally, on behalf of the Board, I would like to thank our more than 4,300 staff for their hard work in challenging conditions that has benefited our customers, community and shareholders. Sir Kostas Constantinou, OBE BSP Group Chairman BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 5 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReport Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility KEY MILESTONES IN BSP’S DEVELOPMENT 1957 Commenced operations in Port Moresby in May 1957 as a branch of National Bank of Australasia Ltd. 1993 National Investment Holdings Ltd, a nationally owned company, acquired BSP from National Australia Bank. 2003 BSP is listed on the Port Moresby Stock Exchange. 2007 Acquired the National Bank of Solomon Islands Ltd and rebranded to BSP. 2014-2015 Commenced BSP Finance (Fiji) Ltd in 2014 and commenced BSP Finance (PNG) Ltd in 2015. 2017 Commenced Asset Finance operations in May 2017, in Cambodia (rebranded to BSP Finance Cambodia Ltd in January 2018) and commenced BSP Finance (Solomon Islands) Ltd in September 2017. 1974 BSP incorporated as Bank of South Pacific Ltd, a wholly owned subsidiary of the Australian parent. 2002 Merged with the state owned Papua New Guinea Banking Corporation (PNGBC). 2006 Established a presence in Fiji through the acquisition of Habib Bank Ltd’s Fiji operations, which were rebranded to BSP. 2009 Acquired Colonial Bank and Colonial Fiji Life Insurance Ltd from Commonwealth Bank of Australia and rebranded to BSP and BSP Life, respectively. 2015-2016 Acquired Westpac’s operations in Solomon Islands, Cook Islands, Samoa, Tonga and Vanuatu for A$125 million. 2018 Commenced a life insurance business in Papua New Guinea on 2nd January, 2018. Provisional licence issued in 2017 for a life insurance company (BSP Life (PNG) Ltd). Commenced a life insurance Wantok Delite Product 2nd January, 2019. A BRIEF HISTORY OF BSP BSP is the leading bank in PNG and has a long and proud track record of serving the needs of customers in PNG and other countries across the South Pacifi c. BSP’s operati ons date back to 1957, when it was founded in Port Moresby as a branch of Nati onal Bank of Australasia Ltd. In 1993, a consorti um of PNG businesses acquired the bank and created the fi rst and only PNG private sector owned bank at that ti me. BSP merged with the state-owned Papua New Guinea Banking Corporati on (PNGBC) in 2002, creati ng the largest bank in PNG. Other acquisiti ons followed, including Habib Bank in Fiji in 2006, Nati onal Bank of Solomon Islands in 2007 and Colonial Bank and Colonial Fiji Life Insurance Ltd in 2009. In 2015 and 2016, BSP completed the acquisiti on of Westpac’s operati ons in Cook Islands, Samoa, Solomon Islands, Tonga and Vanuatu, signifi cantly expanding and strengthening BSP’s geographic reach. In 2014, BSP Finance was launched in PNG and Fiji, followed by Cambodia and Solomon Islands in 2017. We expect BSP Finance Lao to commence its operati ons in early 2020. BSP Life PNG commenced its operati ons in January 2018. Today, BSP conti nues to be a leading force in PNG and the South Pacifi c markets with the largest branch network, and is a pioneer in bringing fi nancial innovati on and technology to the region. 6 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate 1957 Commenced operations in Port Moresby in May 1957 as a branch of National Bank of Australasia Ltd. 1993 National Investment Holdings Ltd, a nationally owned company, acquired BSP from National Australia Bank. 2003 BSP is listed on the Port Moresby Stock Exchange. 2007 Acquired the National Bank of Solomon Islands Ltd and rebranded to BSP. 2014-2015 Commenced BSP Finance (Fiji) Ltd in 2014 and commenced BSP Finance (PNG) Ltd in 2015. 2017 Commenced Asset Finance operations in May 2017, in Cambodia (rebranded to BSP Finance Cambodia Ltd in January 2018) and commenced BSP Finance (Solomon Islands) Ltd in September 2017. 2002 BSP incorporated as Bank of South Pacific Ltd, a wholly owned subsidiary of the Australian Merged with the state owned Papua New Guinea Banking Corporation (PNGBC). 1974 parent. 2006 Established a presence in Fiji through the acquisition of Habib Bank Ltd’s Fiji operations, which were rebranded to BSP. 2009 Acquired Colonial Bank and Colonial Fiji Life Insurance Ltd from Commonwealth Bank of Australia and rebranded to BSP and BSP Life, respectively. 2015-2016 Acquired Westpac’s operations in Solomon Islands, Cook Islands, Samoa, Tonga and Vanuatu for A$125 million. 2018 Commenced a life insurance business in Papua New Guinea on 2nd January, 2018. Provisional licence issued in 2017 for a life insurance company (BSP Life (PNG) Ltd). Commenced a life insurance Wantok Delite Product 2nd January, 2019. OUR REACH IN THE ASIA-PACIFIC REGION BRANCH 80+ Branches SUB-BRANCH 50 Sub-Branches 500 ATMs 350 Agents 11,000+ EFTPoS 4,000+ Staff STAFF BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 7 Board of Directors SIR KOSTAS G. CONSTANTINOU, OBE Chairman. Director since April 2009. Appointed Chairman February 2011. ROBIN FLEMING, CSM, MBA, MMGT Chief Executive Officer. Director since April 2013. Sir Kostas is a prominent business figure in Papua New Guinea (PNG), holding a number of high level public sector and private sector appointments. He is Chairman of various companies, including Airways Hotel and Apartments Ltd, Lamana Hotel Ltd, Lamana Development Ltd, Bank of South Pacific Ltd and Air Niugini Limited. He is a Director of Alotau International Hotel, Gazelle International in Kokopo, Loloata Island Resort Ltd, Hotel Coastwatchers Court Ltd, Waigani Assets Ltd, OPH Ltd, Rangeview Heights Ltd in Papua New Guinea, Heritage Park Hotel in Honiara, Taumeasina Island Resort in Samoa, Good Taste Company in New Zealand and Oil Search Ltd. Sir Kostas is also Vice President of the Employers Federation of PNG, Honorary Consul for Greece and Cyprus in Papua New Guinea and Trade Commissioner of Solomon Islands to PNG. Robin Fleming was appointed CEO of Bank of South Pacific Ltd in April 2013. Before his appointment as CEO, he had been Deputy CEO and Chief Risk Officer since 2009. Prior to that, Mr Fleming held senior executive roles as Chief Risk Officer, General Manager Corporate & International, and Head of Risk Management with BSP. Prior to the merger of BSP and PNGBC, Mr Fleming held senior management roles with PNGBC. He has worked in PNG for over 35 years and holds an MBA and a Master of Management from Charles Sturt University. Mr Fleming was made a Companion of the Star of Melanesia (CSM) in 2015 by the PNG Government for services to banking and the community. 8 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportERNEST BRIAN GANGLOFF, CPA, MAICD, MIIA, PNGID Non - Executive Director. Director since November 2013. ROBERT BRADSHAW, LLB Non-executive Director. Director since September 2017 Ernest Gangloff is an Accountant, registered with CPA PNG and the Accountants’ Registration Board. Ernest has extensive experience in the areas of risk management, internal audit and corporate governance. He has over 30 years professional experience with over 15 years in senior management positions. Mr. Gangloff retired as Partner with Deloitte in May 2013, and established Gangloff Consulting in June 2013. Mr Gangloff is an Adjunct Professor of Accounting at the University of Papua New Guinea and specialises in Risk Management and Governance. Robert Bradshaw was appointed to the BSP Board in September 2017. He is a Lawyer by profession, admitted to practice law in Papua New Guinea (PNG) in 1995. Mr Bradshaw holds a Bachelor of Laws from the University of PNG and has practised law for over 20 years. He was formerly a Partner in the firm Blake Dawson Waldron (now Ashurst). He commenced practice on his own as Bradshaw Lawyers in 2005. Mr Bradshaw has been involved in different areas of law, particularly in resource development, industrial relations, banking and finance and commercial litigation. GEOFFREY J. ROBB, BA, MBA, OAM, MAICD, GAICD Non - Executive Director. Director since April 2012. Geoffrey Robb is a highly qualified and experienced banker, having occupied several senior executive positions including Head of Resource Finance at Bank of America, Global Head of Acquisition Finance and Head of Complex and Strategic Transactions with ANZ Banking Group. As Head of Bank of America in Melbourne, he led resource financings with BHP, CRA, Elders Resources, Bougainville Copper, Ok Tedi and Porgera. He holds MBAs from the International Management Institute Geneva and Macquarie University. Mr Robb has travelled extensively in emerging markets and has received the Medal of the Order of Australia for his services to mountaineering and charity. He is also on the Board of BSP Capital Ltd and Bank South Pacific Tonga Ltd. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 9 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportBoard of Directors (continues ) ARTHUR SAM, BComm, CPA, MAICD, GAICD Non- Executive Director. Director since 2016. Arthur Sam is a qualified and experienced accountant, registered under CPA PNG. He holds a Bachelor of Commerce from the University of Papua New Guinea, and a Graduate of the Australian Institute of Company Directors. He is the Audit and Managing Partner of Sam Kiak Tubangliu Certified Practising Accountants. Mr Sam previously worked with global accounting firms - PricewaterhouseCoopers, Deloitte and Ernst & Young, in managerial roles specialising in external and internal audit and risk management. Prior to joining the Board of BSP, he served on the NASFUND Board Audit and Risk Committee and the PNG Accountants Registration Board. Mr Sam has also been a member of the BSP Board Audit & Risk Compliance Committee since June 2013. STUART DAVIS, LLB, GAICD Non-executive Director. Director since August 2017 Stuart Davis is currently a Non-Executive director and Chairman of the Audit and Risk Committee of ASX 200 company NextDC Ltd, which builds and operates Data Centres in Australia, Non-Executive Director and Chairman of the Risk Committee of PayPal Australia Ltd, and Non-Executive Director and member of the Audit and Risk Committee of Bank South Pacific. Mr Davis previously was CEO of HSBC Bank in India from 2009 to 2012, one of the largest foreign banks in India with staff of 8,000 and pretax earnings in excess of USD800 million. Prior to that appointment, he was CEO of HSBC Bank in Australia from 2002 to 2009 and CEO of HSBC in Taiwan from 1999 to 2002, having joined the HSBC Group in 1981. Mr Davis previously served as a member of the Australia Bankers Association from 2003 to 2009, being Deputy Chairman from 2006 to 2009, was Chairman of the British India Chamber of Commerce in Mumbai and Chairman of the Taiwan British Chamber of Commerce in Taipei. He holds a Bachelor of Law Degree from the University of Adelaide and is a Graduate of the AICD. 10 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportAUGUSTINE MANO, BEcon, MSc Non - Executive Director. Director since August 2014. FAAMAUSILI DR. MATAGIALOFI LUA’IUFI, BA, MSC, PhD Non-Executive Director. Director since December 2016. FREDA TALAO, LLB, LLM, MPHIL, MAICD Non - Executive Director. Director since April 2012. Resigned December 2019 Mr Augustine Sanga Mano was appointed the Managing Director & CEO of Mineral Resources Development Company in March 2008. MRDC is a state-owned entity that manages all Royalties and Equities for Landowners and Provincial Governments in Petroleum and Mining Projects in PNG. Mr Mano graduated with double Degrees in Economics and Arts majoring in Environmental Science from the University of Papua New Guinea and holds Master of Science in Petroleum Economics from Dundee University, Scotland in the United Kingdom. Prior to his appointment, Mr Mano has been involved in the civil construction, real estate, transport and insurance. He has been involved with the Petroleum industry in various capacities before his appointment as Managing Director. He currently serves as Director on the board of MRDC, Mineral Resources Star Mountains, Mineral Resources Ok Tedi No. 2, Mineral Resources Ramu, Petroleum Resources Kutubu, Petroleum Resources Moran and Petroleum Resources Gobe and many other subsidiaries of MRDC in Mining and Petroleum Projects in PNG by virtue of his position. He is Chairman of the Pearl South Pacific Resort in Fiji, Star Mountains Plaza and Taumeasina Resort in Samoa. He is also serving as a Director on the boards of Hevilift, PNG Air, Bank South Pacific and Ok Tedi Mining Limited. He is also a Director in other private companies. in Faamausili Dr M. Lua’iufi is an experienced Public Sector practitioner and consultant. She holds a PhD in Management, an MSc in Management Sciences and a BA in Sociology and Political Science. Prior to establishing her own consultancy firm in late 2008, she worked in the Samoa Public Service Commission Office for 25 years, almost 12 of those years as Chief Executive Officer. Under her stewardship, the Samoa Public Service undertook various change management programmes to improve service delivery. Fa’amausili served in many Government SOE Boards in her capacity as CEO. late 2008, Since becoming a consultant she has performed more than 50 consultancy assignments in the domains of Human Resources Management, Organisational Development, Performance Management and Governance. She has performed consultancies in just about every Pacific island country and also worked very closely with most Pacific Island countries when she was a CEO. Currently a Councilor, member of the Executive Committee and member of the Finance Committee of the National University of Samoa. She is a Director of the Bank of the South Pacific Board and a member of the Remuneration and Nominations Committee. Is a member of the Australian Institute of Company Directors, member of the PNG Institute of Directors, Samoa Institute of Director and Samoa Human Resource Institute. She was the Pacific Residential Scholar (2007-2012) of the Australia New Zealand School of Government (ANZSOG) responsible for the development of emerging young Pacific Public Sector leaders. is a Freda Talao lawyer and development specialist. Previously she was a member of the External Stakeholders Advisory Panel (ESAP) to the Hidden Valley Joint Venture (HVJV) Mine owned by Newcrest Ltd and Harmony Gold in Wau, PNG, Deputy Registrar National Court, Executive Director, PEACE Foundation Melanesia and Senior Development Specialist with AUSAID. She was formally a consultant to Australian Law Firm Holding Redlich in Brisbane. Ms Talao’s previous Board roles includes Director on former Civil Aviation Authority (CAA), PNG Mama Graun Conservation Trust Fund, National Airports Corporation (NAC), Airport City Development Limited (ACDL) Board and the Individual and Community Rights Advocacy Forum (ICRAF). She was one of six PNG women nominated for the Nobel Peace Prize in 2005 as part of the 1000 Peace Women Project and awarded for her work with women, children, youth and communities. Ms Talao holds a Law Degree from University of Papua New Guinea, a Masters in Law from Bond University, Qld (LLM), a Master of Philosophy in Law from University of Queensland (MPHIL) and a Diploma in Business from the Southern Cross University. She is also a member of the Australian Institute of Company Directors (AICD). BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 11 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Group CEO’s Report Robin Fleming, CSM Group Chief Executi ve Offi cer I am extremely pleased to report to our shareholders that 2019 was another successful year fi nancially for the BSP group, with a record net profi t aft er tax (NPAT) of K890.4m. Our Group Chairman Sir Kostas Constanti nou OBE menti oned in his report a number of the headline fi nancial metrics BSP achieved in 2019 including profi t growth of 5.5% and a “Compound Average Growth Rate” (CAGR) of 13.7% over the past 6 years. Equally pleasing was the positi ve contributi ons from every one of the seven countries in which BSP operates and each of our business lines of banking, asset fi nance, life insurance and capital advisory. +K20m +3.1% 668 648 458 +K19m +12.5% 170 151 +K7m +16.4% 48 41 67 5 2015 2018 2019 2015 2018 2019 2015 2018 2019 PNG BANK [Km] Improved profi tability was achieved notwithstanding that economic conditi ons were somewhat more diffi cult in a number of countries. PNG’s GDP growth for 2019 was esti mated at 5.0%, which in part refl ected a full year of uninterrupted gas producti on following a number of months of disrupti ons to gas in 2018 following the devastati ng earthquake in February 2018. Growth in the non mining sector was forecast at 2.9% with lower outputs in palm oil due to volcanic acti vity in West New Britain contributi ng. OFFSHORE BRANCHES [Km] SUBSIDIARIES [Km] of years, foreign exchange availability and an absence of a headline resource project that would provide external sti mulus to the economy with foreign direct investment, has seen more borrowers experience credit stress. Our NPL’s as a percentage of total loans increased slightly to 1.9%. Furthermore, BSP is IFRS 9 compliant and our provisions to NPL coverage is sti ll conservati ve at 4.9%. Across the region most economies in which BSP operates experienced positi ve growth. Samoa’s GDP remained at around 3.4%, Tonga’s moderated to 3.5%, Cook Islands was strong at 4.2%, Solomon Islands moderated to around 2.8%, and Vanuatu’s was steady at 3.2%. Fiji’s economy contracted to around 1.7%. Whilst the region conti nues to be more suscepti ble to extreme weather events, in 2019 there was no cyclone or other weather event of nati onal signifi cance. Although, Samoa did suff er from a measles epidemic in the last quarter of 2019, which sadly saw the loss of life of many children and from an economic perspecti ve impacted visitor arrivals. Our prayers are with those families who lost loved ones. BSP’s fi nancial performance was both positi ve and pleasing when viewed in the context of the economic acti vity in our home market, Papua New Guinea. At a group level NPAT increased by 5.5% to K890.4m with PNG profi t increasing by 3.1%to K668m. Net interest income conti nued to increase with growth in lending in all countries. A combinati on of lower non mining GDP growth over a number Customer acquisiti on acti viti es saw conti nued increases in overall customer numbers and consequent uplift in transacti on numbers. Pleasingly, and whilst there is sti ll much more work required in relati on to changing customer behaviours, the number of banking transacti ons undertaken outside of our branch network increased by approximately 20% to an average of 12m per month. Conti nued focus will be placed on moving more of our customers to digital channels. Profi t [NPAT, Km] Net assets [Kb] Cost-to-income rati o [%] Capital adequacy rati o [%] Earnings per share [toea] Dividend per share [toea] Market Capitalisati on [Kb] 2019 2019 vs 2018 890 24.5 37.7 22.0 191 139 5.5 +5.5% +6.2% -323bps -91bps +5.5% +9.4% +14.8% 12 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate NPAT CONTRIBUTION MIX OFFSHORE BRANCH AND SUBSIDIARY 2019 NPAT CONTRIBUTION [%] 0.9% 13% 4.9% 18% 86% 77% 5.4% 19% 75% 38% BSP Fiji BSP Solomon Islands BSP Samoa BSP Tonga BSP Cook Islands BSP Vanuatu BSP Life Fiji 18% 9% 8% 4% 3% 15% BSP Life PNG 0% BSP Finance PNG BSP Finance Fiji BSP Finance Cambodia 2% 3% 2% BSP Finance SI BSP Capital 0% 0% Subsidiaries OSBs PNG Banks 2015 2018 2019 The board has maintained its dividend policy of 70% to 75% of prior year earnings, to the extent that this does not impact capital adequacy nor put growth at risk and a total of K653.94m was paid out in dividends in 2019 with the dividend yield a strong 12.2%. With a shareholder base that is 90% Papua New Guinean and includes Kumul Consolidated Holdings (18.2%), each of the four superannuati on funds in PNG being Nambawan Super (12.3%), Nasfund (9.7%), Teachers Savings & Loans (3.3%), Comrade Trustees (2.7%) as well as Fiji Nati onal Provident Fund (6.5%), Solomon Islands Nati onal Provident Fund (0.5%) and Samoa Provident Fund (0.027%) a majority of workers around the Pacifi c benefi t from BSP’s fi nancial performance and dividend distributi ons. Our investment in our new banking system Flexcube conti nued, with commitment of more people to the project and an increase in our fi nancial investment. This is a multi -year, multi -country task with the objecti ve of migrati ng the three existi ng banking systems we operate across the Pacifi c to one common platf orm with integrated applicati ons that will reduce our dependency on multi ple vendors. As is oft en the case with projects of this magnitude and complexity, recognising that conversion involves seven diff erent countries, the project has extended beyond the ti meframe that was initi ally envisaged. Current planning anti cipates a cut over date of October 2020 for Vanuatu and April 2021 for Papua New Guinea with other countries to follow. Senior executi ve and the board are provided with regular reports on progress with extensive focus on risks and issues, and as we move closer to conversion implementati on plans that minimise impacts on our customers and risks to our business will be the priority. Equal att enti on and management ti me was given to compliance and governance. This involved data integrity reviews across each country to ensure all fees and interest rates were aligned to products, regular publishing of interest rates publicly irrespecti ve of any regulatory requirement to publish or otherwise, and if any discrepancy was identi fi ed that our customers were not disadvantaged. To support this work new compliance positi ons were established in every country, and a new Strategic Business Unit was created, Compliance SBU with AML, Compliance, Audit and Credit Inspecti on moving from Group Risk to Compliance. This was complemented by increased weighti ngs in staff KPI’s used for short term incenti ves for compliance, audit and AML related acti viti es. Staff training and development, and especially development of future leaders within BSP conti nued to be a key strategy objecti ve. These investments include a graduate development program that has seen over 50 graduates join BSP over the past 5 years, and our marquee Leadership Management Development Program (LMDP). Our LMDP has been in place since 2014 and identi fi es future leaders in emerging, developing and senior role categories with development training in Australia, Singapore and internal secondments to provide parti cipants with skills necessary to take on more senior roles within BSP. The outlook for 2020 across the Group is for slower growth giving regard to economic conditi ons that remain challenged in most countries. Economic growth in PNG will be slower than previous years and will be dependent upon successful negoti ati on of a headline extracti ve industry project. Events of early 2020 related to the Coronavirus in China will also have an impact on the global economy and economies that are commodity based (PNG) and tourism based, (Fiji, Vanuatu and Cook Islands). Notwithstanding somewhat slower growth, key return on equity (ROE) and yield metrics are not expected to be challenged. Our board led by our Chairman Sir Kostas Constanti nou maintained eff ecti ve oversight of BSP’s operati onal performance, risk management systems and governance whilst also ensuring the board determined strategic objecti ves for BSP were acti vely monitored and managed. Their guidance and support greatly assisted with BSP’s achievements in 2019. In closing, our staff in all of our businesses and each of the countries in which we operate, are to be congratulated for their eff orts and support in delivering these record results for our shareholders, and I look forward to their ongoing commitment in 2020. Robin Fleming, CSM Group Chief Executi ve Offi cer Customer acquisiti on acti viti es saw conti nued increases in overall customer numbers and consequent uplift in transacti on numbers. Pictured customer opening his account at Kinim Sub-Branch in Madang, PNG. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 13 Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility South Pacific market leader We continue to grow and build scale ... in pursuit of sustainable market leadership LENDING DEPOSIT K13.2b In lending K19.3b In deposits DIVIDENDS PAID K677m Dividends paid MARKET CAPITALISATION K5.5b Market Capitalisati on 14 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Vanimo Aitape WEST SEPIK Wewak EAST SEPIK Lorengau MANUS NEW IRELAND Kavieng EAST NEW BRITAIN Rabaul Lihir Kokopo Tabubil Kiunga MADANG Madang ENGA Porgera JIWAKA HELA Tari Wabag WHP Mt. Hagen Mendi SHP Kundiawa CHIMBU Goroka EHP Kainantu Moro MOROBE WEST NEW BRITAIN Bialla Kimbe WESTERN PROVINCE GULF Lae Lae Top Town Bulolo Lae Market Lae Commercial Centre Daru Popondetta NORTHERN Buka AUTONOMOUS REGION OF BOUGAINVILLE Arawa NATIONAL CAPITAL DISTRICT Port Moresby Boroko Banking Centre Gordons Commercial Waigani Drive Waigani Banking Centre Vision City Habour City Motukea CENTRAL Alotau MILNE BAY FIJI Labasa VANUA LEVU Taveuni Savusavu TARO Lomaloma Gizo Noro Munda SOLOMON IS. VANUATU Auki Honiara Honiara Point Cruz Ranadi Espiritu Santos PORT VILLA Nabowalu Rakiraki Tavua Lautoka Ba Nadi Korovou VITI LEVU Ovalau Sigatoka Navua Suva Suva Central Dominion House Pacific House Centre Point Vunisea SAMOA COOK IS. TONGA Vava’u Salelologa APIA Apia Vaitelei Branch RAROTONGA NUKU’ ALOFA Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate Vanimo Aitape WEST SEPIK Wewak EAST SEPIK Lorengau MANUS NEW IRELAND Kavieng EAST NEW BRITAIN Rabaul Lihir Kokopo Tabubil Kiunga MADANG ENGA Porgera JIWAKA Madang HELA Tari Wabag WHP Mt. Hagen Mendi SHP Kundiawa CHIMBU Goroka EHP Kainantu MOROBE Moro WEST NEW BRITAIN Bialla Kimbe Buka AUTONOMOUS REGION OF BOUGAINVILLE Arawa WESTERN PROVINCE GULF Lae Bulolo Lae Top Town Lae Market Lae Commercial Centre Daru Popondetta NORTHERN NATIONAL CAPITAL DISTRICT Port Moresby Boroko Banking Centre Gordons Commercial Waigani Drive Waigani Banking Centre Vision City Habour City Motukea CENTRAL Alotau MILNE BAY FIJI Labasa VANUA LEVU Taveuni Savusavu TARO SOLOMON IS. VANUATU Nabowalu Rakiraki Tavua Lautoka Korovou Ba Nadi VITI LEVU Sigatoka Navua Ovalau Suva Suva Central Dominion House Pacific House Centre Point Vunisea SAMOA Salelologa APIA Apia Vaitelei Branch Lomaloma Gizo Noro Munda Auki Honiara Honiara Point Cruz Ranadi Espiritu Santos PORT VILLA COOK IS. TONGA Vava’u RAROTONGA NUKU’ ALOFA BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 15 HISTORICAL SUMMARY 16 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate Historical Summary BSP Group NPAT K890.4m 5.5% Increased from 2018 Dividend paid per Share K1.39 9.4% Increased from 2018 Expense/Income Rati o 37.7% Reduced by 3.3% from 2018 Profi t and Loss (K’000) 2016 2017 2018 2019 Net interest income 1,107,686 1,277,676 1,380,796 1,391,784 Non interest income 684,371 720,674 784,909 779,566 Bad and doubtf ul debt expense (98,622) (77,678) (82,440) (99,183) Other operati ng expenses (769,641) (852,148) (887,097) (819,248) Operati ng Profi t Profi t before tax Income tax (expense) Profi t/(loss) aft er tax Dividends (toea) Dividends paid per share1 Balance Sheet (K’000) 923,794 1,068,524 1,196,168 1,252,919 923,794 1,068,524 1,196,168 1,252,919 (280,343) (311,521) (352,096) (362,556) 643,451 757,003 844,072 890,363 88.0 111.0 127.0 139.0 Net loans and advances 10,102,909 11,209,493 12,530,649 13,200,807 Total assets Deposits Capital Performance Rati os Return on Assets Return on Equity Expense/Income Key Prudenti al Rati os Capital adequacy Liquid Asset Rati o Leverage rati o Exchange rates (One (1) PNG Kina buys): US Dollar AUS Dollar 20,831,803 22,369,861 23,081,223 24,527,118 16,912,349 17,901,692 18,232,766 19,339,056 2,314,337 2,628,335 2,872,135 3,117,033 3.3% 29.6% 42.9% 23.1% 35.8% 9.3% 3.5% 30.6% 42.6% 24.5% 36.9% 10.0% 3.7% 30.7% 41.0% 22.9% 33.6% 10.3% 3.7% 29.7% 37.7% 22.0% 30.0% 10.5% 0.3150 0.4354 0.3095 0.3965 0.2970 0.4208 0.2935 0.4188 1BSP has adopted the practi ce of paying an interim dividend based on half year results, in October of each year, and paying a fi nal dividend based on audited full year results, aft er the end of the fi nancial year, and no later than the end of the second quarter of the succeeding year. Contributi ons by BSP to PNG Taxes paid to PNG Government K362m Tax Payment (2019) All Amounts are expressed in K'000 2016 2017 2018 2019 Company income taxes paid to PNG Government Other taxes paid to PNG Government (IWT, FCWT,BWT) 292,443 257,210 354,947 361,987 10,226 8,214 10,018 16,872 GST paid and not able to be recouped 21,268 22,101 25,337 15,821 Donati ons, Sponsorships and Community Project 4,345 5,217 6,482 5,581 Total 328,282 292,742 396,784 400,261 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 17 Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Our Group Highlights PROFESSIONALISM We inspire, we change, and we live our values, and lead by example. 18 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 19 SALES Channel Growth BSP Treasury fosters and enhances relationships with clients, providing Financial Markets services, solutions and ensuring clients remain aware of the regulatory environment and its implications. 12 Million Digital Transactions PNG Treasury foreign exchange (FX) earnings were above prior year levels even though 2019 was again challenging, as import demand exceeded export supply of foreign currency. These difficult trading conditions continued throughout the year. 90% of total transactions were via digital channels. The official Bank of Papua New Guinea (BPNG) rate of exchange fell by 1.2% gradually over the year, to finish at USD 0.2935. The Bank’s PNG FX market share remained flat in 2019, increasing marginally to 43.5%. The Bank’s FX turnover rose 5.8% in 2019, while PNG’s FX market turnover rose 5.6%. 54% via mobile phones. 2.5 Million BSP Account Holders Over 25,000 SME Accounts 3 SME Banking Centres The SME market, and emerging and vibrant sector in the PNG Economy. 80+ Branches The Bank continued to invest surplus funds in government securities. Movements in the Government debt yield curve reflected evolving fiscal conditions. The 28 day Central Bank Bills were unchanged at 1.39%, 91 day Treasury Bills fell from 2.63% to 2.50%, 182 day Treasury Bills fell from 4.71% to 4.68%, whilst one (1) year Treasury fell from 7.93% to 7.06%. Yields on longer dated Government issued Inscribed Stock were generally stable. Operationally, PNG Treasury continues to mitigate risk and is actively focused on providing technical training, empowering staff to continue their development journey. Treasury dealing staff training encompasses weekly technical training (Australian Financial Markets Association Foreign Exchange Markets Accreditation), regulatory and internal compliance training, on the job cross training and sales training. The strong focus on training will continue in 2020. BSP’s Corporate and Retail businesses maintained momentum in 2019 with growth in our core business of housing and personal lending segments. Overall lending market share in PNG was 63% and whilst other countries market share was not as dominant, BSP is still ranked number one (1) in four Pacific countries. Corporate relationship teams remain located where our customers operate in Port Moresby, Lae, Mt Hagen, Madang and Kokopo. To meet the banking needs of all Papua New Guineans, Retail operates out of all provinces and districts. Customer satisfaction is Corporate’s top priority and once again we have achieved improved customer satisfaction scores in 2019. BSP’s survey results highlight continued gains in customer satisfaction on the Great emphasis is placed on Banking Education/Financial Literacy, offering deposit and savings products such as our Kid’s Account for youngsters and the Sumatin Account for students. 20 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDMarket Strength 44% Increased FX Market Share in PNG Banks FX Turnover increased by 5.8% in 2019 PNG’s FX Market Turnover increased by 5.6% 63% Overall Lending Market Share in PNG #1 in lending in 5 countries #1 in deposits in 4 countries. Our loan and deposit portfolios are predominantly PNG domiciled. key business drivers of: service, products, fees, charges and rates, premium branches and foreign exchange. Highlights were our BSP Digital Hub (Internet Banking) and Kundupei (electronic Payroll) and Relationship Managers fully meeting customers’ expectations. BSP’s “icare” customer service culture remains the team’s unwavering focus, leveraging all areas of the Bank through our “whole of BSP” network. Our People and leading Retail branch networks across Papua New Guinea and the South Pacific continue to provide solutions to enhance the financial health of our customers and communities. Around 80% of PNG’s population is rural based, and as PNG’s economy is heavily weighted towards domestic and export driven agriculture as well as extractive resource industries that are located in rural areas of PNG, we have 1,400 staff providing banking services to 1.8 million account holders at 89 branches and sub branches located across the country. All BSP’s points of representation provide real-time transaction banking services. The cash economy in PNG is still quite significant and the population of PNG is relatively young, with 50% aged less than 25. Both aspects provide unique challenges and our response is to place great emphasis on Banking Education/Financial Literacy and offering deposit and savings products such as our Kid’s Account for youngsters and the Sumatin Account for students. This is an investment in the future that it is already reaping rewards as the transactional volumes of our consumer customers increasing year on year. We have 160 trained trainers, delivering financial literacy courses across PNG, and a substantial effort is also being made through our branch network to educated customers and the community about the legal requirements of Anti-Money Laundering obligations and laws as they transition away from cash and into the formal financial system. The Small and Medium Enterprice (SME) market is also an emerging and vibrant sector of the PNG economy and BSP has more than 25,000 customers identifying themselves as part of this market segment. Specifically designed loan and transaction products are offered by BSP to our SME customers and we maintain three (3) dedicated branches in major centres in PNG to service this market. During 2019, BSP partnered with Australian Business Volunteers to support a “YES” program of training and mentoring SME customers of BSP to assist them develop their business activities. The program continues in 2020. BSP’s Corporate and Retail Sales Strategy was supported by the Digital SBU, which focuses on customer experience and the adoption of digital financial services as the better way to bank and make banking easier, quicker and more secure. Continued efforts to move customers from branches to digital platforms, included the development of the All-Aboard App on a new technology Axium device with android and Point-of-Sale functionality. The app has improved branch and customer service delivery, by enabling new customers’ pre- generated card transaction accounts with Mobile Banking, Internet Banking and Visa Debit card. BSP continues to strive to be digital relevant in all our markets across the Pacific and apply technology to gain greater efficiency. This is also influencing a new demand for collaboration and partnership from central banks, fintech and BSP corporates for system integration to achieve improved services. To better leverage our digital platforms, development and enhancement projects during the year included the creation of a BSP Digital Sandbox and a number of published APIs that will be launched in early 2020 to improve our technology delivery and internal processes. Banking 24/7 on your mobile, tablet or desktop computer gives the freedom to do everyday banking where and when you want, remains the focus for Digital. The BSP App and internet banking services, provide awareness and understanding for new banking self-service portals, expand financial inclusion in communities with the provision of Agency Banking services and contactless transactions with new Point-of-Sale devices at all retailers. Our People and leading Retail Branches across PNG and the Pacific continue to provide solutions to enhance the financial health of our customers 21 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsBANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19OPERATIONS AND SUPPORT Key Operations Summary BSP Launched SWIFT GPI Payments Enabled and improved cross border payments across corresponding banks. Awarded Security Champion Award 2019 by Visa Australia For demonstrated high standards of payment security excellence. The first bank from the South Pacific to win the award, and joins the Steller Group of Financial Institutions in Asia Pacific Awarded Best Private Sector Employer 2019 , by the PNGHRI BSP has been awarded this award consecutively since 2013. 22 BSP’s operation extends across seven (7) different countries and significant effort is undertaken daily to maintain operating effectiveness. Improvement included a common Payment Switch in the Cook Islands, Solomon Islands, Samoa and Tonga, similar to that in PNG. The new Payments Switch is EMV capable and with each installation old magnetic strip Visa cards are replaced with highly secure EMV chip cards, to enable secure payment at compatible point of sale (POS) terminals. BSP’s Operations SBU was awarded with the VISA Australasia Security Champion Award for 2019. The Award is presented to financial institution partners who have demonstrated the highest standards of payment security excellence, in line with international best practices. BSP is the first bank from the South Pacific to win the Award and joins a stellar group of financial institutions in Asia Pacific that have made significant contributions to the security and reliability of electronic payments. In November 2019, BSP successfully launched SWIFT GPI – a new standard of global payments which allows BSP to send and receive funds quickly and securely to anyone, anywhere in the world with full transparency over where a payment is at any given moment. SWIFT GPI dramatically improves cross- border payments across the correspondent banking network, especially for corporates for which speed, certainty and a smooth international payments experience is an absolute must. BSP also successfully deployed Retail Electronic Payments System (REPS) the interface between the Bank of Papua New Guinea (BPNG) and first round participants. This allows BSP cardholders to perform transactions on any BSP was recognised as best Private Sector Employer by the PNG Human Resource Institute (PNGHRI) in 2019 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDATM or EFTPoS devices throughout the country, regardless of which financial institution owns the hardware. before choosing a final career path. The aim of the GDP is to provide training programmes that ease graduates into the world of work and give them the skills necessary to become part of the larger BSP team. During 2019 BSP also worked on implementing a BSP Learning Portal to strengthen the new Core Banking Program (Compass), by implementing a software solution that drives enterprise opportunities and enhances business management processes with a tool that enables analysis of change impacts and equips our people with knowledge and competencies. The ability to measure staff’s awareness and understanding of BSP’s policies, procedures and processes; it will provide targeted training on the Group's processes and links results to the new Learning & Development module in our Human Resource system. Systems support is complimented by supporting our people. BSP was recognised as the “Best Private Sector Employer” by the PNG Human Resources Institute for the sixth consecutive year. This key achievement recognises BSP as a model organisation, leading in the best HR practices in PNG and the Pacific. This award has always been a testament of BSP’s commitment to continuously supporting our employees with people initiatives that matter. An example of such an initiative is the introduction of the maternity leave, with 12 weeks full pay, for our female employees across the BSP Group in 2019. BSP also completed and developed a Group wide Engagement Survey and Group Performance appraisals and developed new key partnership with the Australian Business Volunteers (ABV). The ABV partnership pairs up staff in BSP’s Leadership Development Program with experienced Australian mentors for our leadership group outside of PNG. A major achievement for the BSP HR Team was the successful implementation of the new HR/Payroll System (iChris) in Fiji. Consequently, the whole of BSP's operations are now using the same HR information system. The addition of other iChris modules going forward, will ensure a lot of our manual processes are automated. Effective risk management is necessary for the achievement of BSP’s vision. BSP has a Board approved Group Risk Appetite Statement that reflects the level of aggregated risk that BSP is willing to assume and manage in the pursuit of its business objectives. The CEO and the Executive team are responsible for implementing BSP’s Risk Management Strategy and frameworks, and for developing policies, controls, procedures and processes for identifying and managing risk in all activities. HR focused on further strengthening BSP Group’s approach to recruitment, which is merit-based, systematic, fair and transparent. BSP recruited 19 Graduates to undergo the BSP Graduate Development Program (GDP). The one year GDP Program offers graduates the opportunity to experience several different areas of business within the BSP Group BSP’s Credit Business Unit is responsible for underwriting and monitoring of the BSP’s loan portfolio within the Group Risk Appetite Statement. In addition to overall credit quality, Credit oversees compliance with credit policies, procedures and underwriting standards, monitoring sector concentration limits, implementation and management of Social and Environmental Management System and portfolio management reporting. Retail Electronic Payments System (REPS) the interface between the Bank of Papua New Guinea and first round participants. This allows BSP cardholders to perform transactions on any ATM or EFTPoS devices throughout the country, regardless which financial institution owns the hardware. 23 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsBANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 OPERATIONS AND SUPPORT (continued) BSP’s credit risk strategy underpins our Credit culture, as well as providing the blueprint to grow the business within defined parameters, sustain a quality loan portfolio across a diversified range of economic sectors and countries in which BSP operates. Key credit policies and procedures continue to be reviewed on an ongoing basis to ensure BSP is aligned with the banking, regulatory, compliance and industry environment and preserves prudent credit risk management standards. Credit Risk training and staff development was a key focus during the year. Through investment in Training resources our staff benefited from comprehensive internal credit training program designed to enhance the, effective delivery of key policy and procedures and BSP’s credit risk culture. BSP’s operational risk section focused on the identification, understanding and management of operational risks, reinforcement of existing controls and strengthening of the first and second line of defences in BSP. The Business Continuity Plans were also tested during the year to ensure that they operated as intended and where deficiencies had been identified that they were rectified appropriately across the Group. Annual risk awareness training is provided to all employees via an online course (and assessment) that targets general operational risks, fraud detection and prevention. The Operational Risk Business Unit continued to provide support to the Operational Risk Committee and Board Risk Committee, facilitating analysis and regular reporting of operational risk issues. Non-accrual loans for the Group increased to 2.0% (from 1.8% 2018) which reflects more subdued conditions in PNG and Solomon Islands in particular. Defaulting unsecured consumer loans rate increased by 10%, while the recovery rate of unsecured consumer loans remained consistent. BSP’s Market and Liquidity functions were enhanced during 2019 with additional staff and a broader remit across the Group. Market and Liquidity Risk Business Unit represents Group Risk at all Offshore Branches (OSB) and BSP Finance Asset and Liability Committees as well as Group Asset and Liability Committee for PNG and OSB’s preparing stress testing on Market and Liquidity Risk for PNG and all Offshore Branches. Market risk is focused on managing risk to BSP’s earnings arising from movements in Foreign Currency Exchange Rates and Interest Rates Risk. Market Risk arises through BSP’s trading and balance sheet activities and comprises general market risk and specific market risk. Liquidity risk captures the risk that BSP has capacity to fund increases in assets, or the risk of loss due to increased costs of ensuring that demands to meet financial obligations are met without disrupting normal day-to-day business. In 2019 Group Compliance was established as its own Strategic Business Unit (after previously being a Business Unit under Risk Management) in recognition of the evolving significance and impact of compliance functions, the growing expectations of stakeholders, and the increased levels of regulatory complexity, scrutiny and reporting. Group Compliance consists of 3 business units: Compliance & Anti-Money Laundering (AML), Internal Audit, and Credit Inspection. The Compliance & Anti-Money Laundering Business Unit ensures compliance risk is effectively managed and all applicable laws, regulations, standards, The Compliance & Anti-Money Laundering Business Unit ensures compliance risk is effectively managed and all applicable laws, regulations, standards, guidelines and rules are adhered with. 24 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDguidelines and rules are adhered with. In addition it ensures compliance with all AML/CTF laws and guidelines to avoid criminal and regulatory sanctions and to minimise the risk of the Bank being used for money laundering and terrorist financing. In line with the increased domestic and international focus in compliance and AML/CTF, BSP has further strengthened this function throughout 2019 by more than doubling its team size, all of whom are ACAMS trained, and introducing industry leading technology to detect and prevent financial crime. A major focus has been developing a compliance culture through the organisation with all staff required to complete at least two AML trainings during the year. The Internal Audit Business Unit independently evaluates and reports the effectiveness of BSP Group’s risk management, controls, and governance processes. It does this by conducting regular risk-based audits of BSP’s Papua New Guinea and offshore branch, sub-branch and agency network, and it’s technology, operations and support functions. Ninety-four (94) audits were completed across all countries and subsidiaries in 2019 with a major focus on adherence to AML/CTF policies and Central Bank requirements. Key areas audited throughout included various human resources functions, business continuity management and disaster recovery testing, the procurement to payables process, and transaction and channel. This Credit Inspection Business Unit independently assess loan submissions, compliance with credit policies & procedures, and portfolio quality assurance in order to enhance the standard of credit decisioning by detecting any material shortcomings in the assessment, approval, management, control, and reporting of credit and counterparty risk. Credit Inspection continues to review material credits and its coverage in 2020 will increase across all loan portfolios within the BSP Group. BSP’s Financial Reporting continued to improve/streamline the processes and now finalises PNG Bank results by the first working day of the month. It is also delivering cleaner reconciliations, reduced Group consolidation completion times, financial statements for both half year and annual reporting, and improved Subsidiary Reporting and Budgeting. In addition, the team has improved the capitalisation of fixed assets from work in progress, through increased cooperation with Business Units. Despite the recent efficiency gains, the team will continue to identify and address improvement areas where required in 2020. The Finance team has continued to support the Core Banking team with the data migration exercises and other modules. The successful implementation of IFRS 16 within the Bank and the Group was a major achievement. The growing expectations of stakeholders and the increased regulatory complexity, scrutiny and report paved way for the BSP to establish a new Group Compliance SBU. Key Operations Summary Training Focus Credit Risk training and staff development was a key focus during the year. 2.0% increase Group Non-accrual loans Reflecting more subdued conditions in PNG and Solomon Islands in particular. Meeting AML/CTF policies Ninety-four (94) audits were completed across all countries and subsidiaries in 2019 with a major focus on adherence to AML/CTF policies and Central Bank requirements. 25 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsBANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Broader Group PEOPLE We respect and value our people and our customers. 26 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 27 Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility BROADER GROUP Key Metrics COOK ISLANDS NPAT NZ$3.3m Net Profi t Aft er Tax 11.1% increase from 2018 DEPOSITS NZ$231.1m 18.5% increase from 2018 BSP Cook Islands has delivered a good fi nancial result in 2019, a Net Profi t Aft er Tax (NPAT) of NZD3.3m was achieved, representi ng an 11.1% increase on 2018. The performance was underpinned through loan growth of 2.1% in 2019, resulti ng in a gross loan positi on of NZD94.3m and a digital banking focus returning uplift in merchant revenue of 7.2%. Strong deposit growth has conti nued in 2019, BSP Cook Islands fi nished with total deposits of NZD231.1m, an 18.5% increase on 2018. Increases in Government and wholesale funds and general economic acti vity has underpinned the result. Overall, 2019 has been a good year and staff should be congratulated for their eff orts. Further investment has been made to expand services and reach throughout the Pa Enua, with all Southern Group Islands now represented with BSP agents. Parti cipati on in BSP fi nancial literacy programs conti nues to increase with over 1,300 completi ng the program in 2019. BSP’s strategic focus for 2020 conti nues to be based around customer e-channel experience and we expect to introduce several new initi ati ves to promote merchant acti vity and assist with online payments. Preparati on in anti cipati on of project compass, diligent management of the balance sheet, including placements, and maximising cost reducti on opportuniti es will be also is key focuses, to drive conti nual improvement in income and overall fi nancial returns. BSP’s strategic focus for 2020 conti nues to be based around the customer’s e-channel experience. Overall for BSP Cook Islands, 2019 has been a good year and staff should be congratulated for their eff orts. 28 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate FIJI BSP Fiji delivered another strong year of fi nancial performance in 2019, with Net Profi t aft er Tax (NPAT) of $52.1m, representi ng a substanti al increase of 23.2% over the prior year's result. The favourable result was underpinned by conti nued growth in the loan portf olio resulti ng in a further uplift in market share from 25.2% in December 2018 to 25.9% in December 2019, while operati ng expenses were ti ghtly controlled through diligent cost management. This result was achieved in a challenging business environment and refl ects the high- level commitment of BSP’s staff . The Fijian economy recorded its lowest growth rate in a decade (GDP growth forecast between 1.0% and 1.7% for 2019). The banking system liquidity dropped from an average of $650m in 2018 to around $300m in 2019 putti ng pressure on deposit rates. As a consequence, lending interest rates had to be increased by all Banks to counter the increased Cost of Funds. The business remained highly focused on good risk management practi ces by aligning operati ng policies, procedures and processes to that of the ‘Group’ and also on compliance with high Corporate Governance standards set by the Group Board. In 2019, BSP Fiji launched an EMV chip enabled Visa Debit card, whereby customers can use a combinati on of a ‘Touch & Go’, ‘Touch & PIN’ and ‘Insert & PIN’ payment methods depending on the number of transacti ons and the values. BSP’s strategic focus for 2020 will be to further improve our Digital capabiliti es and the overall customer experience through product enhancements and high service standards, as we strive to become the number one Bank in Fiji. Key Metrics NPAT FJ$52.1m Net Profi t Aft er Tax 23.2% increase from 2018 LOAN PORTFOLIO 25.9% Uplift in market share from 25.2% in December 2018 to 25.9% in December 2019 The business remained highly focused on good risk management practi ces by aligning operati ng policies, procedures and processes to that of the ‘Group’ and also on compliance with high Corporate Governance standards set by the Group Board. Customer service is our priority BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 29 Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility BROADER GROUP �CONTINUES� Key Metrics NPAT SB$94.1m 2% decrease from 2018 SAMOA SOLOMON ISLANDS BSP Samoa had a strong year in 2019. In a stable economic environment and despite the impact of the measles outbreak in the last quarter of the year, we achieved record fi nancial results, refl ecti ng strong underlying performance across our business. The strength of our balance sheet and a prudent growth strategy has led to the Bank maintaining strong market shares in both lending and deposits. In 2019, the Bank grew Net Profi t Aft er Tax (NPAT) by 46% to ST$15.4m, which generated a return on assets of 2.8% and return on equity of 17.5%. Loans grew 12% to $363m, while deposits grew 21% to $447m. Total assets rose to $553m, which was a 19% increase over the prior period. These results were achieved whilst maintaining focus on strong asset quality. Customer retenti on had been achieved by quicker credit decisions, effi cient drawdown processes and an expanded electronic footprint that included 20+ ATMs, 30+ agencies and over 420 EFTPoS terminals. The introducti on of BSP EMV chip enabled Visa Debit Cards with added security levels that match world class standards, also reaffi rms our commitment to innovati ve and technology soluti ons that provide convenience and security for our customers. We grew our commitment to our community via numerous events, placing priority on health and quality of life projects, renewable energy, the environment, fi nancial literacy, youth and sports development and educati on. BSP’s main community project in 2019, involved the installati on of water tanks for 3 villages and the funding of dining faciliti es for the Samoa Victi m Support Group’s School of Hope. BSP in support of the seven (7) staff members who were aff ected by the measles outbreak, donated $1,000 plus supplies to each member. In additi on, the bank joined the nati onal eff orts to provide much needed resources for the hospitals, by donati ng $60,000 in cash and supplies to the Government of Samoa. Our success is predicated upon the dedicati on and talent of BSP people delivering superior services to our customers, and the strength of our culture has been refl ected in the way we embed a values-driven approach to our work. Staff are to be acknowledged for their ongoing commitment, making possible strong results in 2019. As we move through 2020 and beyond, BSP is well positi oned to execute our long-term strategic vision. Key Metric NPAT ST$15.4m 46% increase from 2018 30 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD BSP Solomon Islands increased its loan portf olio by 5%, which is a very good result in the context of our overall market share. Market share reduced slightly from 55.5% in 2018 to 54.8% in 2019. While our deposits decreased by 0.03% in 2019, our market share increased to 53.3% from 52.2% in 2018. BSP Solomon Islands fi nancial result for 2019 was a Net Profi t Aft er Tax (NPAT) of SBD$94.1m, which represented a 2% decline on the prior year. The result was impacted by a number of operati onal issues, which have now been resolved with improved processes and controls in place. A Disaster recovery site was established and tested during the year. This year also saw BSP Solomon Islands introduce EMV Chip Cards technology to provide our customers greater protecti on and enhanced capability through tap and go functi onality. With eight (8) branches and seven (7) offi cial agents and 55 Branchless Agents, all BSP staff are to be proud of serving the majority of the Solomon Islands. The 2019 result for BSP Solomon Islands could not have been achieved without the eff orts of all of our 260 staff and they are thanked for their conti nued commitment to ensuring BSP remains the Premier Bank in the Solomon Islands. With eight (8) Branches and seven (7) offi cial agents and 55 Branchless Agents, BSP is the only Bank that is serving the majority of the Solomon Islands. Pictured, offi cial opening of SIPA’ ATM. Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate NPAT TOP$11.2m 5% increase from 2018 NPAT VUV186.5m Behind budget due to lower income generati on and credit quality TONGA VANUATU BSP Tonga Ltd has delivered another strong year of fi nancial performance in 2019, with a Net Profi t aft er Tax of T$11.2m, representi ng growth of 5% over the prior year. The favourable result was underpinned by conti nued growth in the loan portf olio of 6%, solidifying our No 1 positi on in the market, at 42% in loans and 40% in deposits. In additi on, operati ng expenses were ti ghtly controlled. February 2019 saw the completi on of Nuku’alofa Branch refurbishment, off ering customers and staff a spacious and modern banking experience. This was received extremely well by the Tongan market, refl ected in positi ve feedback and by our excellent customer survey results. BSP also successfully installed its backup Disaster Recovery site and upgraded its electronic channels network by introducing EMV Chip Card technology, which provides increased enhanced security for customers and touch and go capabiliti es on our EFTPoS machines. The other highlight of 2019 was the fi rst visit by the BSP Group Board to Tonga in July, which was greatly appreciated by staff and customers alike. In additi on to this, BSP has conti nued to expand its agency network with one (1) new MoneyGram agent and four (4) new BSP agents. The Island of Nomuka, situated in the Ha’apai group of islands was one of these new agents - BSP is the fi rst bank to provide banking services to these islands. BSP Tonga conti nued its commitment to the community with our digital fi nancial literacy program delivered to over 8,000 people throughout the Kingdom of Tonga. BSP Tonga also supported various community initi ati ves, including the upgrade our netball court and children’s playground, as well as major sponsorships to Open Heart Internati onal, SPAW, Heilala Festi val, One Tonga, Kolomotu’a Rugby 7s, Vava’u Tourist Associati on and Tonga Diabetes Associati on. Finally, I would like to acknowledge the staff both in Tonga and the support provided by PNG in their commitment to the business and in making the 2019 result possible. Our expanding footprint also allows us to work in conjuncti on with government initi ati ves, to bring fi nancial inclusion to a greater porti on of the populati on in the Pacifi c. Vanuatu will be the fi rst BSP country to implement the new Core Banking System (Oracle FLEXCUBE) in October 2020. The benefi ts of the new Core Banking System will include standardisati on of business processes within the group, improved ti melines through automated regulatory and management reporti ng, web based soluti on, common training across the group, greater level of customer centricity, operati onal control, product fl exibility and operati ng effi ciency whilst reducing the overall cost of maintaining the infrastructure. BSP Vanuatu conti nues to focus on expanding its banking services and being an acti ve corporate member in the community. With 27 ATMs, 30+ acti ve agents and over 450 EFTPoS terminals, BSP Vanuatu works to support communiti es and bring banking services to all Vanuatu populati on segments. Our expanding footprint also allows us to work in conjuncti on with government initi ati ves, to bring fi nancial inclusion to a greater porti on of the populati on. This is refl ected in the opening of three (3) new agencies in 2019 and plans for further expansion of the agency business in 2020. In March 2019, the second Port Vila Branch located at Freswota was offi cially opened. This additi onal presence in Port Vila enabled BSP to meet the needs and expectati ons of our growing customer base. In December 2019, our disaster recovery site was installed and operati onal. BSP Vanuatu acti vely parti cipates in the community as one of the major investors and employers in Vanuatu. With a strong focus on corporate responsibility, BSP Vanuatu plays an acti ve role in supporti ng the broader business community, initi ati ves and promoti ng go green projects within schools and communiti es. In September 2019, BSP Vanuatu appointed its fi rst ever Ni-Vanuatu female independent Director. including backing government led Financially, BSP Vanuatu declared a Net Profi t aft er Tax of VUV186m in 2019, with performance behind budget due to lower income generati on and credit quality, given more trying economic conditi ons. The outlook for 2020 is more positi ve and the business will look to further increase its profi tability and market share through various strategic and growth initi ati ves. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 31 Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Subsidiaries 32 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate TEAMWORK We work with, and for, each other; we progress together. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 33 Subsidiaries Key Highlights BSP FINANCE PGK4.3m Full Year Profit FJ$4.4m Full Year Profit US$2.9m Full Year Profit US$47m Loan Portfolio BSP CAPITAL PGK876k Profit Compared to a loss of K803k in 2018 34 BSP FINANCE Papua New Guinea BSP Finance PNG achieved a full year profit of K4.3m in 2019. Delays in key resource projects in the country meant marginal growth in profitability compared to the prior year. However, the loan book quality improved significantly, with the business reporting a lower level of defaults when compared to prior years. The next 12 months will be spent expanding our footprint in the country, by leveraging off the wider BSP network and establishing relationships with key personnel involved in major resource projects. Internally, the business will continue to review all its procedures from an efficiency standpoint, whilst ensuring that available technologies and systems are utilised more effectively. Fiji BSP Finance Fiji continued to perform well in 2019, recording a profit of FJ$4.4m despite a somewhat subdued economy. Depressed liquidity in the market threatened to derail operations in 2019, however the business was able to successfully navigate through this with support from BSP Bank Fiji. The opening of the Lautoka branch in 2019 was well received by the local community and reaffirmed the commitment of the company to offering financial products and services to as many Fijians as possible. Cambodia The business reported a profit of USD2.9m in 2019 that exceeded budget expectations. With a loan portfolio of USD47m, the business has fast established itself as one of the leading asset finance companies in Cambodia, despite a very competitive market. Internally, the business will continue to work closely with the BSP Group to develop a compliance focused culture and strong internal controls. While there will be some short term liquidity challenges until funding arrangements are finalised in 2020, the business is poised to experience another year of strong growth in a fast growing economy with great potential. Solomon Islands The establishment of procedures and improvement of processes were the main activities in 2019. With the business now stabilised, the team is focused on growing market share and increasing brand presence in 2020. Our speed to market will continue to be the key selling point amongst target customers in Honiara, with a view to increasing penetration in locations outside of the capital as well. Similarly, the company will continue to leverage off the BSP Group to maximise sales opportunities. From a resourcing perspective, the business will continue to invest in its people in 2020 through training and provision of support from PNG Head Office. BSP CAPITAL In 2019, BSP Capital delivered a significant turnaround with improvements across its business, resulting in a profit of K876k, compared to a loss of K803k in 2018. Funds under Management grew by 7.4% from K6.8bn to K7.2bn as at 31 December 2019. During the year BSP Capital entered into an agreement to sell its stockbroking business to JMP Securities (a subsidiary of Pertusio Capital). The sale was contingent on the PNG Securities Commission granting Securities licenses as well as PNGX granting membership to JMP Securities. Both conditions ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDGroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsKey Highlights BSP LIFE FJ$46.9m Investment portfolio grew by $46.9m in 2019, exceeding $760m Launch Wantok Group Term Life in March 2019 were satisfied in late 2019 and we are now in the process of transitioning the business to JMP Securities. data indicates BSP Life’s market share on Life inforce (annual premium) at 54%, Medical market share at 54% market and Term Life at 42%. Advisory transactions were also mired by the slow economic environment experienced during 2019. Nonetheless, we remain positive that a number of advisory initiatives will be progressed in 2020. The investment portfolio grew by $46.9m in 2019, exceeding $760m and placing BSP Life as Fiji’s largest institutional investor, outside of the Fiji National Provident Fund. BSP LIFE Fiji 2019 was the first full year of operations for BSP Life Fiji’s new core system. With the new system in place, it allowed the business to re-focus initiatives to support strategic goals and financial targets. The year started with our new managing director Michael Nacola replacing Malakai Naiyaga, who had built the BSP Life brand since acquisition from Colonial in 2010. Malakai’s term marked a significant chapter in BSP Life’s history, transitioning the Life and Health Insurance businesses from turbulent waters to a steady growth state. Sound financial outcomes through the decade are testament to Malakai’s leadership, laying the foundation for future growth. A new program on work-place culture called “The BSP Life Way” was introduced to invigorate our Vision and Values and strengthen our service excellence focus. Under the BSP Life Way, a number of strategic initiatives were implemented including developing a stronger risk and compliance culture; streamlining processes to optimise resources and improve customer outcomes; heightened focus on cost management; broadening our markets; improving our on-line presence through a website re-design and introduction of a customer self-service portal; development of a new endowment product for Life and new suite of Medical products for Health; new marketing positioning to support the brand; support for the rollout of BSP Life in PNG; plus strategic investments to support the growing investment portfolio. The year culminated with a new organisation structure to support the strategic focus for the next decade. BSP Life also continued its financial literacy education, advocating life and health insurance as integral parts of strengthening financial futures for all Fijians. Financially, 2019 delivered above budget profit outcomes for the Health and Life businesses. Group shareholder profit was $20.6m, above budget by 40%. The Life business recorded a profit of $20.4m, above budget by 41%. The Health business recorded a profit of $1.5m, above budget by 22% and doubling 2018 profit. These were positive outcomes considering the subdued economic environment and competitive landscape. New Business for both Companies improved by 19% over the prior year. Inforce growth (total premiums received) for the Life business was 12% above budget and a 60% improvement on the prior year’s growth. Industry The favorable investment returns experienced in 2018 continued in 2019. The strong performance of our listed equities contributed significantly to the overall portfolio performance. Our private equities comprising the Sofitel Resort and Spa, Rooster Poultry and the Oceania Hospital in Suva, performed satisfactorily and are poised for further growth in 2020. New key investments included a 15% share acquisition in Port Denarau Marina, further strengthening our presence in the growing tourism sector; a property earmarked for a mixed retail and commercial development in Nadi; and a major refurbishment of the Sofitel Resort and Spa of approximately $40m. Returns from the portfolio supports dividends to our parent Company, BSP, and provides sustainable bonuses to policyholders. BSP Life will undertake further substantive investments in 2020 and will also explore opportunities to increase offshore investments and the private equities portfolio. The outlook for 2020 is challenging with only 1.7% GDP growth anticipated, however the business is well positioned to expand, focussing on developing stronger relationships with key partners to grow value for shareholders and policyholders. PNG BSP Life PNG Limited (BSP Life PNG) is the youngest subsidiary of the BSP Group which commenced operations in PNG in January 2018 and 2019 was a continuation of the businesses establishment phase. In March 2019, BSP Life PNG launched its second life insurance product called “Wantok Group Term Life”, which is largely distributed via the Broker channel. This product is mainly targeted towards employer based groups and associations who want to provide life insurance cover to their employees or members. At the end of 2019, BSP Life PNG had inforce premium of K2.5m from this product. BSP Life PNG successfully implemented its Life Insurance System (BLIS) – Phase 1 for the Group Term Life product in May 2019 and Phase 2 in December 2019 for the anticipated endowment product (AEP). A new Sales Unit was established at Level 1 Boroko Banking Centre in November 2019. BSP Life’s strategic focus for 2020 is to deliver rapid premium income growth from the Wantok Group Term Life and Wantok Delite, endowment product and continue capacity building for staff and agents through regular training programs. 35 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Corporate Governance Report LEADERSHIP We inspire, we change, and we live our values, and lead by example. 36 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate BSP has adopted an approach to corporate governance that is underpinned by our Core Values of Integrity, Leadership, People, Professionalism, Quality, Teamwork and Community. This approach is supported by a comprehensive framework of corporate governance principles and policies. The BSP Board has demonstrated its commitment to developing and maintaining a standard of corporate governance that seeks to match global practi ce. The Board ensures that it complies with the requirements of the PNG Exchange Markets (PNGX). The Board, management and staff of BSP are very much aware of their responsibiliti es to the people of Papua New Guinea and the various countries that BSP operates in. The Board has adopted a statement of Corporate Governance Principles which outlines the approach BSP has adopted to corporate governance. These Corporate Governance Principles provide a framework that helps to ensure that BSP deals fairly and openly with all its stakeholders – regulators, shareholders , customers and staff alike. BSP’s Corporate Governance Principles are available in the Investor Relati ons secti on of BSP’s website at www.bsp.com.pg. BSP also complies with the Prudenti al Standards/Statements dealing with corporate governance issued by the regulators/central banks in the various countries that it operates in. These Prudenti al Standards/Statements currently include: - • The Bank of Papua New Guinea (BPNG) introduced its new Banking Prudenti al Standard BPS300: Corporate Governance (issued under Secti on 27 of the Banks and Financial Insti tuti ons Act 2000) in August 2016. The Eff ecti ve Date of this Prudenti al Standard was 1 January, 2017, with full compliance by 31 December, 2018. • The Reserve Bank of Fiji Banking Supervision Policy Statement No. 11: Governance (Oct 2007). • The Nati onal Reserve Bank of Tonga Prudenti al Statement No. 9 (revised 2014): Governance. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 37 Corporate Governance Report THE BOARD OF DIRECTORS Roles and Responsibility of the Board The roles and responsibilities of the Board are defined in the Board Charter. This document also details the matters reserved for the Board and matters that have been delegated to management with oversight by the Board. The Board, with the support of its Committees, is responsible to the Shareholders for the overall performance of BSP, including its strategic direction; establishing goals for management; and monitoring the achievement of those goals with a view to optimising BSP performance and increasing shareholder value. The key functions of the Board are: • setting overall strategy of BSP, including operating, financial, dividends, and risk management; • appointing the Chief Executive Officer and setting an appropriate remuneration package; • appointing General Managers and setting appropriate remuneration packages; • appointing the Company Secretary and setting an appropriate remuneration package; • endorsing appropriate policy settings for management; • reviewing Board composition and performance; • reviewing the performance of management; • approving an annual strategic plan and an annual budget for BSP and monitoring results on a regular basis; • ensuring that appropriate risk management systems are in place, and are operating to protect BSP’s financial position and assets; • ensuring that BSP complies with the law and relevant regulations, and conforms with the highest standards of financial and ethical behaviour; • approving acquisitions and disposals material to the business; • establishing authority levels; • setting Directors’ remuneration via the Remuneration and Nomination Committee; • selecting, with the assistance of the Board Audit Committee, and recommending to Shareholders, the appointment of external auditors; and • approving financial statements. A number of these responsibilities have been delegated by the Board to various Committees. The Committees and their responsibilities are detailed in Section 2, Board Committees. The Board has delegated to management responsibility for: • developing the annual operating and capital expenditure budgets for Board approval, and monitoring performance against these budgets; • developing and implementing strategies within the framework approved by the Board, and providing the Board with recommendations on key strategic issues; • appointing management below the level of General Manager and preparing and maintaining succession plans for these senior roles; • developing and maintaining effective risk management policies and procedures; and • keeping the Board and the market fully informed of material developments. Membership, Expertise, Size and Composition of the Board The Corporate Governance Principles affirm that the majority of the Board should be independent. Directors of BSP are meticulous in handling situations where there could potentially be conflicts of interest, by declaring their interest in advance, and absenting themselves from any consideration of matters where a conflict might arise. The BSP’s Corporate Governance Principles require Directors to disclose any new directorships and equity interests at each Board Meeting. 38 The maximum number of Directors, as prescribed by the Constitution approved by Shareholders, is ten. At the date of this report there are nine Directors, with eight Non - Executive all of whom (including the Chairman) are considered by the Board to be independent; and the Chief Executive Officer who is not considered to be independent by reason of being an Executive of BSP. BSP in the ordinary course of business conducts transactions with Directors, their spouses, parents and children and/ or parties which any of them control. These transactions include loans, deposits, and foreign currency transactions. Such transactions are carried out on commercial terms at market rates and do not require shareholder approval under Papua New Guinea Company Law. Where they involve loans, procedures follow BSP’s standard credit approval and review processes which do not have any involvement of Directors, and BSP holds security in accordance with its standard procedures. As a result, BSP considers that Directors are able to maintain their independence even where a Director is a party to a transaction of this kind because they would not have been involved in the approval process for that transaction. Under the Constitution, at each Annual General Meeting (AGM) one-third of the BSP’s Directors, in addition to any Director appointed during the year, excluding the Chief Executive Officer, must offer themselves for re- election by the Shareholders. A Director is normally appointed for an initial term of three years. At the end of the term of three years, the Director will become eligible for reappointment by the Shareholders for a further term of three years and, if not reappointed, retires automatically. A Director is not permitted to hold office for a period exceeding three terms of three years or nine years, whichever is the lesser. Details regarding the length of service of each Director are set out in the “Board of Directors” section. The Board has undertaken a renewal and succession planning process in recent years with the aim of maintaining a proactive and effective Board in line with the directions of the BSP Group. The Board has implemented an independent Board evaluation process to underpin the assessment of its performance. Consistent with Recommendation 2.2, BSP has a Board skills matrix process. These skills include Risk Management, Regulatory/ Government Policy, business and financial acumen, experience as a Non-Executive Director, remuneration and corporate governance. The Board, therefore, has a broad range of skills, experience and expertise that enables it to meet its objectives. Details of the Directors’ business backgrounds and experience are provided on pages 8 - 11. The Board accepts that it has a responsibility to Shareholders to ensure that it maintains an appropriate mix of skills and experience (without gender bias) within its membership. Consequently, the Board gives careful consideration to setting criteria for new appointments it may recommend to Shareholders in accordance with the Constitution. It has delegated the initial screening process involved to its Remuneration and Nomination Committee which, in accordance with its Charter, may seek independent advice on possible new candidates for Directorships. All Directors must be satisfied that the best candidate has been selected. Consistent with Recommendation 1.2, BSP undertakes appropriate checks before appointing a person as a Director or offering them to Shareholders as a candidate for election, and has appropriate procedures in place to ensure material information relevant to a decision to elect or re-elect a Director is disclosed in notices of meeting provided to Shareholders. Nominees of the Board and/or Shareholders must meet the ‘fit and proper person’ criteria outlined in BPNG Banking Prudential Standard BPS310: Fit and Proper Requirements before they can take their place on the Board. ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDGroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsConsistent with Recommendation 2.6, BSP has a program for inducting new Directors and providing appropriate professional development opportunities for Directors. Director and those of BSP. These arrangements are designed to ensure that the independence and integrity of the Board are maintained. On joining the Board, new Directors are provided with an Appointment Letter setting out the terms of the appointment, a Board induction pack and undertake a comprehensive induction program. In particular, the Appointment Letter specifies the term of appointment, BSP’s expectations in relation to time commitment and Committee work, the Director’s remuneration arrangements, the Director’s disclosure and confidentiality obligations, the Director’s insurance and indemnity entitlements, and BSP’s key corporate governance policies. BSP’s Senior Management also enter into employment contracts which set out their terms of employment, including their position, duties, reporting lines, remuneration and termination arrangements. Role and Selection of the Chairman The Chairman is elected by the Directors and holds the position for a maximum of six consecutive years unless in a certain exceptional instance. The role includes: • ensuring all new Board members are fully aware of their duties and responsibilities; • providing effective leadership on BSP’s strategy; • presenting the views of the Board to the public; • ensuring the Board meets regularly throughout the year, and that minutes are taken and recorded accurately; • setting the agenda of meetings and maintaining proper conduct during meetings; and BSP fully complies with the requirements of the BPNG Prudential Standard 4/2003 – Limits on Loans to Related Parties. Related Party Transactions are summarised in Financial Note 30. The Directors’ information on page 106 provides details of the Directors’ Interests. Meetings of the Board and Attendance Scheduled meetings of the Board are held at least six times a year, and the Board meets on other occasions as necessary to deal with matters requiring attention. Meetings of Board Committees are scheduled regularly during the year. The Board has a policy of rotating its meetings between locations where the Group has a significant presence. On these occasions the Board also visits company operations and meets with local management and key customers. The Chairman, in consultation with the Chief Executive Officer, determines meeting agendas. Meetings provide regular opportunities for the Board to assess BSP’s management of financial, strategic and major risk areas. To help ensure that all Directors are able to contribute meaningfully, papers are provided to Board members one week in advance of the meeting. Broad ranging discussion on all agenda items is encouraged, with healthy debate seen as vital to the decision making process. Financial Note 27, Directors’ and Executive remuneration, provides attendance details of Directors at Board meetings during 2019. • reviewing the performance of Non-Executive Directors. Review of Board Performance Director Independence and Conflict of Interest Directors are determined to be independent if they are judged to be free from any material or other business relationship with BSP that would compromise their independence. Prior to appointment, Directors are required to provide information to the Board for it to assess their independence. In assessing the independence of Directors, the Board will consider a number of criteria including: • the Director is not an executive of the Group; • the Director is not a substantial shareholder of BSP or otherwise associated directly with a substantial shareholder of BSP; • the Director has not within the last three years been a material consultant or a principal of a material professional adviser to BSP, or an employee materially associated with a service provider; • the Director is not a material supplier to BSP, or a material consultant to BSP, or an employee materially associated with a material supplier or customer; • the Director has no material contractual relationship with BSP other than as a Director of BSP; • the Director is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of BSP. This information is assessed by the Board to determine whether on balance the relationship could, or could reasonably be perceived to, materially interfere with the exercise of the Director’s responsibilities. Materiality is assessed on a case-by-case basis. As noted earlier, the Board is cognisant of the need to avoid conflicts of interest and it has in place policies and procedures for the reporting of any matter, which may give rise to a conflict between the interests of a Consistent with Recommendation 1.6, BSP has a process for periodically evaluating the performance of the Board, its Committees and individual Directors. The key findings of the 2019 Performance Review are available in Investor Relations section of BSP’s website at www.bsp.com.pg. The Remuneration and Nomination Committee reviews at least annually the processes by which the Board regularly assesses its own performance in meeting its responsibilities. It is intended to extend the assessment of the Board as a whole to include an assessment of the contribution of each individual Director. The Board is cognisant of the need to continually identify areas for improvement; to ensure that it meets the highest standards of corporate governance; and for the Board and each Director to make an appropriate contribution to the Group’s objective of providing value to all its stakeholders. The performance review is facilitated annually by an external consultant. The Board with the assistance of the Remuneration and Nomination Committee sets the targets for the Chief Executive Officer and Senior Management members under BSP’s employee incentive arrangements described below. These incentive arrangements are administered by the Remuneration and Nomination Committee. Performance against the relevant targets is assessed periodically throughout the year and a formal evaluation is undertaken annually. Board Access to Information and Advice All Directors have unrestricted access to company records and information and receive regular detailed financial and operational reports to enable them to carry out their duties. The General Managers of each PNG Strategic Business Unit, Country Managers and General Managers of subsidiaries make regular presentations to the Board on their areas of responsibility. The Chairman and the other Non-Executive Directors have the opportunity 39 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsCorporate Governance Report to meet with the Chief Executive Officer, General Managers, Heads of Subsidiaries and Country Heads for further consultation, and to discuss issues associated with the fulfilment of their roles as Directors. enhanced monitoring of BSP's Compliance Risk, AML/CTF & regulatory requirements. Sir Kostas G. Constantinou and Augustine Mano are not members of any Board committees. The Board recognises that in certain circumstances, individual Directors may need to seek independent professional advice, at the expense of BSP, on matters arising in the course of their duties. Any advice so received is made available to other Directors. Any Director seeking such advice is required to give prior notice to the Chairman of his or her intention to seek independent professional advice. Company Secretary The Company Secretary, through the Chairman, is directly accountable to the Board for proper functioning of the Board. Each Director may seek the advice of the Company Secretary. Under the Constitution, the Company Secretary may only be appointed or removed by the Board. BOARD COMMITTEES Board Committees and Membership During 2019, four Committees of the Board were in operation whose functions and powers were governed by their respective charters. These Committees were the Board Audit Committee (BAC), Board Risk and Compliance Committee (BRCC), the Remuneration and Nomination Committee (RNC) and the Disclosure Committee. Membership of the Committees and a record of attendance at Committee meetings during the year are detailed in table below. Remuneration details are provided in Financial Note 28. Membership of Board Committees during 2019: The names and relevant qualifications and experience of Committee members, and the number of times the Committees met and the number of meetings each member attended, are set out in the “Board of Directors” section. Board and Committee Charters BSP’s Board and Committee Charters are available in the Investor Relations section of BSP’s website at www.bsp.com.pg. The BRCC and BRC Charters were updated to reflect the changed responsibilities. Committee Structure Committee members are chosen for the skills, experience and other qualities they bring to the Committee. At the next Board meeting following each Committee meeting, the Board is given a report by the Chairman of the respective Committees and minutes of the meeting are tabled. Board Audit & Compliance Committee The BACC assists the Board to discharge its responsibilities of oversight and governance in relation to financial and audit matters. The responsibilities of the BACC include monitoring: • the integrity of BSP’s financial statements and their independent audit; • the financial reporting principles and policies, controls and procedures; • BSP’s internal audit process; • the effectiveness of internal controls; • monitor the controls and effectiveness of BSP's compliance obligations; • the systems for ensuring operational efficiency and cost control; • the systems for approval and monitoring of expenditure including Board Audit & Compliance Commitee * capital expenditure; and Geoff Robb Ernest Gangloff Arthur Sam Stuart Davis Frank Bouraga1 Board Risk Committee * Geoff Robb Ernest Gangloff Arthur Sam Stuart Davis Charles Lee1 Priscilla Kevin1 Remuneration and Nomination Committee Freda Talao (Chairperson) Faamausili Dr Matagialofi Lua’iufi Robert Bradshaw 5/6 6/6 6/6 6/6 6/6 5/6 6/6 6/6 6/6 6/6 6/6 7/7 6/7 7/7 1Charles Lee, Frank Bouraga and Priscilla Kevin are non executive and non directors, appointed by the board for board development purposes. * Board members who attend BAC to discuss the year end and half year accounts. * During the year the Board allocated the responsibility of compliance to the BAC which was renamed BACC with BRCC now BRC focusing on risk issues the amendment was to provide 40 • review and monitor the processes for monitoring compliance with laws and regulations (both in PNG and in overseas jurisdictions, where BSP operates) and the implementation of Board decisions by management. Membership of the BACC is formed amongst the Non-Executive Directors, excluding the Chairman. The BACC must have a minimum of three Non- Executive Directors, the majority of whom must be independent. The Board may also appoint to the BACC additional individuals who are not executives or members of the Board who have specialised skills to assist the BACC. The chairman of the BACC must be an appropriately experienced independent Non-Executive Director, other than the Chairman (or other Board committee chairman). The BACC must meet at least four times annually and special meetings may be convened as required. All meetings must be minuted and tabled at the subsequent BACC meeting. The BACC regularly reports to the Board at the earliest possible Board meeting after each BACC meeting about any matters that should be brought to the attention of the Board and any recommendations requiring Board action. Board Risk and Compliance Committee The BRC (formerly BRCC) assists the Board to discharge its responsibilities of oversight and governance in relation to the implementation of BSP’s risk management framework and for the management of BSP’s compliance obligations. The responsibilities of the BRC are to: • review and monitor the principles, policies, strategies, processes and control frameworks for the management of risk (such as credit risk, market risk, liquidity risk, operational risk, compliance risk, reputational risk and other risks); ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDGroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams• oversee BSP’s risk profile and risk management strategy, and (b) considering whether BSP is obliged or is required to respond to a recommend BSP’s risk appetite statement; and market rumour or media speculation; and (c) overseeing the Disclosure Officer’s administration of the Continuous Membership of the BRC is formed amongst the Non-Executive Directors, excluding the Chairman. The BRC must have a minimum of three Non- Executive Directors, the majority of whom must be independent. The Board may also appoint to the BRC additional individuals who are not executives or members of the Board who have specialised skills to assist the BRC. The chairman of the BRC must be an appropriately experienced independent Non-Executive Director, other than the Chairman (or other Board committee chairman). The BRC must meet at least four times annually and special meetings may be convened as required. All meetings must be minuted and tabled at the subsequent BRC meeting. The BRC regularly reports to the Board at the earliest possible Board meeting after each BRC meeting about any matters that should be brought to the attention of the Board and any recommendations requiring Board action. Remuneration and Nomination Committee The RNC assists BSP in fulfilling its oversight responsibilities regarding the remuneration, succession and recruitment of Directors, Executives and other BSP employees. The responsibilities of the RNC are: • to oversee the selection and appointment of a Chief Executive Officer, and setting of an appropriate remuneration and benefits package for recommendation to the full Board; • • to determine and review appropriate remuneration and benefits of Directors for recommendation to the full Board, and subsequently to the shareholders; in conjunction with the Chief Executive Officer, to identify and maintain a clear succession plan for the Executive Management Team, ensuring an appropriate mix of skills and experience as well as appropriate remuneration and benefits packages are in place and reviewed regularly; and • to ensure that the Board itself maintains an appropriate mix of skills and experience necessary to fulfill its responsibilities to shareholders while maintaining a world class Corporate Governance regime. The RNC is comprised of three Non-Executive Directors. The Chairman of the Remuneration and Nomination Committee must be one of the independent Directors, other than the Chairman of the Board. Each member should be capable of making a valuable contribution to the Committee, and membership is reviewed annually by the Board. A review of the performance of Committee members will form part of the Board’s performance review. Disclosure Committee The Board has established a new disclosure committee comprising of the Chairman (or in his absence another Non-Executive Director), the CEO, the Chief Financial Officer of BSP, the Chief Risk Officer and the Company Secretary (Disclosure Committee). The chairman of the Disclosure Committee is the most senior Director present. The members of the Disclosure Committee may vary from time to time, but will consist of at least a Non-Executive Director, two Executive Employees (not including the Company Secretary) and the Company Secretary. The Disclosure Committee is responsible for, among other things: (a) approving the release of any announcement to PNGX, other than: (i) an announcement that relates to a matter which is both material and strategically important, which will require approval by the Board; or (ii) procedural matters such as notice of changes to equity securities or directors’ holdings, which will require approval by the Disclosure Officer; Disclosure Policy. Annual Financial Statements The BACC reviews the annual financial statements to determine whether they are complete and consistent with the information known to Committee members and to assess whether the financial statements reflect appropriate accounting principles. In particular it: • pays attention to complex and/or unusual transactions; • focuses on judgmental areas, for example those involving valuation of assets and liabilities; provisions; litigation reserves; and other commitments and contingencies; • meets with management and the external auditors to review the financial statements and the results of the audit; and • satisfies itself as to the accuracy of the financial accounts, and signs off on the financial accounts of BSP before they are submitted to the Board. External Audit The BACC is responsible for making recommendations to the Board on appointment and terms of engagement of BSP’s external auditors. The selection is made from appropriately qualified auditors in accordance with Board policy. The Board submits the name of the external auditors to Shareholders for ratification on an annual basis. In line with the Prudential Standard of the BPNG, the signing partner in the external audit firm must be rotated every five years. The Committee reviews annually the performance of the external auditors and, where appropriate, makes recommendations to the Board regarding the continuation or otherwise of their appointment, consistent with the BPNG’s Prudential Standard No. 7/2005 - External Auditors, while ensuring their independence is in line with Board policy. There is a review of the external auditor’s proposed audit scope and approach, to ensure there are no unjustified restrictions. Meetings are held separately with the external auditors to discuss any matters that the Committee or the external auditors believe should be discussed privately. The external auditor attends meetings of the BACC at which the external audit and half yearly review are agenda items. The Committee ensures that significant findings and recommendations made by the external auditors are received and discussed promptly, and that management responds to recommendations by the external auditors in a timely manner. The duly appointed external audit firm may not be engaged by BSP to provide specialist advisory or consultancy services to a bank while that same auditor/ audit firm is engaged for services to conduct BSPs annual audit and related services. Services related to the preparation of a bank’s corporate tax return are not prohibited. The external auditor is invited to the Annual General Meeting of Shareholders and is available to answer relevant questions from Shareholders. The BPNG Prudential Standards provide for a tri-partite meeting between BPNG, the external auditors, and BSP, if required. BSP’s external audit firm is currently PricewaterhouseCoopers (PwC). Representatives of PwC will attend the next Annual General Meeting in May 2020, and be available to answer shareholder questions regarding the audit. 41 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsCorporate Governance Report Internal Audit BSP has an internal audit function. The BACC approves, on the recommendation of management, the appointment of the Head of Internal Audit. The Committee meets regularly with the Head of Internal Audit. Reviews are undertaken of the scope of the work of the internal audit function to ensure no unjustified restrictions or limitations have been placed upon the Internal Audit Business Unit. The BACC also reviews the qualifications of internal audit personnel and endorses the appointment, replacement, reassignment or dismissal of the internal auditors. The BACC meets separately with the internal auditors to discuss any matters that the Committee, or the internal auditors, believe should be discussed privately. The internal auditor has direct access to the BACC and to the full Board. The Committee ensures that significant findings and recommendations made by the internal auditors are received and discussed promptly, and that management responds to recommendations by the internal auditors on a timely basis. Compliance The BACC reviews the effectiveness of the systems for monitoring compliance with all legal and regulatory obligations and the Constitution. It also reviews the results of management’s investigation and follow-up (including disciplinary action) of any fraudulent acts, or non-compliance. The Committee obtains regular updates from management and BSP’s legal officers regarding compliance matters, and satisfies itself that all regulatory compliance matters have been considered in the preparation of the financial statements. Reviews of the findings of any examinations by regulatory agencies are undertaken and the Chairman of the BACC has the right to approach a regulator directly in the event of a prudential issue arising. RISK MANAGEMENT Approach to Risk Management The Group’s Risk Management activities are aligned to the achievement of the Group’s Objectives, Goals and Strategy. The Board, in consultation with the Executive Committee, determines the Group’s risk appetite and risk tolerance and this is expressed in the Group Risk Appetite Statement. These benchmarks are used in the risk identification, analysis and risk evaluation processes. Consistent with Recommendation 7.2, the Board or a Committee reviews the risk management framework at least annually. BSP recognises the following major risks: Credit Risk: The potential for financial loss where a customer or counter party fails to meet its financial obligation to the Group. IT Risk: The current and potential threat to earnings, capital or reputation as a result of a failure of information systems managed, maintained and operated by the Bank. Market Risk: The potential financial loss arising from the Group’s activities in financial, including foreign exchange, markets. Liquidity Risk: The risk of failure to adequately meet cash demand in the short term. Interest Risk: Risk to earnings from movement in interest rates. Compliance Risk: The risk of loss or penalties imposed by a regulator for non compliance with regulations, prudential standards and policies. Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people, or from external events, including legal. The Credit Committee monitors credit risk. The Group Asset & Liability Committee monitors market risk, interest risk, and liquidity risk, and operational risk is monitored by the Operational Risk Committee. Compliance and AML is monitored by the recently established Compliance and AML business unit, including the maintenance of a risk register system that has been implemented across the Group. The Executive Committee and the Board overview the highest tier of risks within these risk registers. The Group’s Risk Management Policy ensures that the Group has in place acceptable limits for the risks identified by employees. The risk management approach encompasses the following: • defining the types of risks that will be addressed by each functional or policy area (i.e. credit risk, interest rate risk, liquidity risk, operational risk; • ensuring that mechanisms for managing (identifying, measuring, and controlling) risk are implemented and maintained to provide for organisation-wide risk management; • developing information systems to provide early warning, or immediate alert, of events or situations that may occur, or already exist, that could create one or more types of risk for the Group; • creating and maintaining risk management tools, including those requested by the Board, such as policies, procedures, risk registers, controls and independent testing, management and training, and planning; instituting and reviewing risk measurement techniques that Directors and management may use to establish the Group’s risk tolerance, risk identification approaches, risk supervision or controls, and risk monitoring processes; • • developing processes for those areas that represent potential risks; and • establishing appropriate management reporting systems regarding these risks so individual managers are provided with a sufficient level of detail to adequately manage and control the Group’s risk exposures. 42 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDGroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams Risk Management Roles and Responsibilities The Board accepts responsibility for ensuring it has a clear understanding of the types of risks inherent in the Group’s activities. Therefore, responsibility for overall risk management in BSP is vested with the Board. However, every employee from Executive Management to the newest recruit has a responsibility and a part to play in the process. There is a formal system of financial and operational delegations from the Board to the Chief Executive Officer, and from the Chief Executive Officer to the General Managers. These delegations reflect the Group’s risk appetite, and are cascaded down to managers who have skills and experience to exercise them judiciously. The Board defines the accountabilities (including delegated approval/ control authorities/limits) and reporting/monitoring requirements for the risk management process. The severity of risks identified in the risk identification, analysis and evaluation processes, and noted in the SBU Risk Registers, is used to determine the approval/control authorities/limits. The Board undertakes an annual review of the Group’s Enterprise Risks. The Board has adopted guidelines, with the help of management analysis, covering the maximum loss exposure the Group is able and willing to assume. These guidelines are detailed in the Group’s Risk Appetite Statement and Risk Policy and Procedures Manual which have been approved by the Board. The Board has also delegated to the BRC responsibility for overview of loss control and for overseeing the risk management function. The BRC is responsible for receiving reports and providing regular updates and recommendations to the Board on the risk management activities of the Group, especially relating to risk issues that are outside of the authority of the Group’s Executive Committee and other delegated Committees to approve. Management Assurance The Board is provided with regular reports about BSP’s financial condition and its operating performance. Annually, the Chief Executive Officer and the Chief Financial Officer certify to the Board that: • • in their opinion, the financial records of the Group have been properly maintained; in their opinion, the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of BSP; and • their opinions above have been formed on the basis of a sound system of risk management and internal control applying to BSP, which is operating effectively; • Additionally all General Managers and Country Managers provide bi- annual statements attesting that; • they have assessed and documented the risks and internal control procedures in their Strategic Business Unit; • they have identified any changes in business, operations and computer systems and the risks that may arise from those changes; • the risk management and internal compliance and control systems are appropriate and operating efficiently and effectively; and • any weaknesses in the risk management and internal compliance and control systems have been identified and remedial action taken. ETHICAL BEHAVIOUR BSP acknowledges the need for Directors and employees at all levels to observe the highest standards of ethical behaviour when undertaking BSP business. To this end, the Board has adopted: • a Code of Conduct for both Directors and members of the Executive Management Team of the Group and stipulated that each Director comply with the Code; and • a Corporate Mission, Objectives, and Core Values Statement which establishes principles to guide all employees in the day to day performance of their individual functions within the Group. While BSP’s Corporate Governance Principles provides that the Board must ensure it maintains an appropriate mix of skills and experience without gender bias, BSP has not adopted a standalone Board diversity policy, which complies with Recommendation 1.5. To ensure the maintenance of high standards of corporate behaviour on an ongoing basis, the Board encourages Senior Management to periodically issue staff Toksaves to reinforce both the Code and Core Values Statements. All Directors are encouraged to maintain membership of an appropriate Directors’ Association to keep abreast of current trends in Directors’ duties, responsibilities and corporate governance issues. BSP is committed to a culture in which it is safe and acceptable for employees, customers and suppliers to raise concerns about poor or unacceptable practices, irregularities, corruption, fraud and misconduct. The Group has adopted a whistle-blowing policy that is designed to support and encourage staff to report in good faith matters such as: • unacceptable practices; • irregularities or conduct which is an offence or a breach of laws of the countries in which BSP operates in (actions and decisions against the laws of relevant countries including non-compliance); • corruption; • fraud; • misrepresentation of facts; • decisions made and actions taken outside established BSP policies & procedures; • sexual harassment; • abuse of Delegated Authorities; • misuse of Group assets; • disclosures related to miscarriages of justice; • health and safety risks, including risks to the public as well as other employees; • damage to the environment; 43 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsCorporate Governance Report • other unethical conduct; • • abuse of power, or use of the Group’s powers and authority for any failure to comply with appropriate professional standards; unauthorised purpose or personal gain; and • breach of statutory codes of practice. SHAREHOLDER COMMUNICATIONS BSP commits to dealing fairly, transparently and openly with both current and prospective Shareholders using available channels and technologies to communicate widely and promptly. BSP commits to facilitating participation in shareholder meetings, and dealing promptly with shareholder enquiries. BSP’s Code of Conduct for Employees and Directors is available at www. bsp.com.pg in the Investor Relations section. Directors and management of the Group are subject to Securities Act 1997 restrictions for buying, selling or subscribing for securities in the Group if they are in possession of inside information, i.e. information which is not generally available and, if it were generally available, a reasonable person would expect to have a material effect on the price or value of the securities of the Group. Further, Directors and management may only trade in the securities of the Group, subject to the foregoing insider trading restrictions, during each of the eight weeks following the announcements of half yearly profit and yearly profit or the date of issue of a prospectus. Management should discuss proposed share trades with the Chief Executive Officer in advance, who in turn will keep the Chairman of the Board appraised of management activities. Directors should discuss proposed share trades with the Chairman in advance. In addition, Directors and management must not trade in any other entity if inside information on such entity comes to the attention of the Director or management by virtue of holding office as an Officer of the Group. BSP’s Code of Conduct also requires its employees to act with high standards of honesty, integrity, fairness and equity in all aspects of their employment with BSP. MARKET DISCLOSURE The Group’s continuous disclosure regime is fundamental to the rights of Shareholders to receive information concerning their securities. An important aspect of the Group’s shareholder communication policy is to comply with the continuous disclosure regime and to implement best practice disclosure policy. BSP has adopted a Continuous Disclosure Policy. This is available at www.bsp.com.pg in the Investor Relations section. Market announcements are posted to BSP’s website immediately after release to the market. All market announcements made by BSP since 2012 are currently available on the website. Where BSP provides financial results’ briefings to analysts or media, these briefings are published on the website as soon as possible after the event. In any event, no material information which has not been previously released to the market is covered in such briefings. The material upon which the briefing is based (such as slides or presentations) is released to the market prior to the briefing. The Group’s insider trading rules are important adjuncts to the continuous disclosure regime in ensuring that Shareholders are given fair access to material information regarding securities. BSP seeks to limit the opportunity for insider trading in its own securities through its continuous disclosure policies and the dealing rules applying to its employees and Directors. BSP has adopted a Securities Dealing Policy. This is available at www.bsp.com.pg in the Investor Relations section. Our Shareholder Communication Policy is built around compliance with disclosure obligations and aspiring to be at the forefront of best practice in disclosure. Our framework for communicating with Shareholders is to concisely and accurately communicate: • the BSP strategy; • how we implement that strategy; and • the financial results consequent upon our strategy and its implementation. The Group uses shareholder forums such as the Annual General Meeting, and quarterly investor briefings, within disclosure policies, to communicate financial performance and strategies. BSP’s Shareholder Communication Policy is available at www.bsp.com.pg in the Investor Relations section. Consistent with Recommendation 6.4, BSP gives Shareholders the option to send and receive communications from BSP and its share registry electronically. From 2017, BSP and its share registry will use technology to facilitate the participation of Shareholders in meetings consistent with Recommendation 6.3. To facilitate effective communication between BSP and its Shareholders, potential investors, analysts and other financial markets participants, BSP conducts periodic market briefings, including half and full year results announcements and attendance at conferences. Shareholders, potential investors, analysts and other financial markets participants are given access to BSP Directors and Senior Management at these events, and the presentation material provided at these events announcement to the market prior to commencement and subsequently uploaded to BSP’s website. REMUNERATION Executive Remuneration BSP remuneration policy for Senior Management (including the Chief Executive Officer and the Chief Financial Officer) is comprised of a fixed component and an at risk component that is a combination of short term rewards and long term incentives. Remuneration packages are approved by the Remuneration and Nomination Committee, and details are provided by the Committee to the Board. Fixed remuneration is reviewed at the time of contract renewal taking into account the nature of the role, comparable market pay levels, and individual and business performance. Members of Senior Management who serve as Directors of subsidiaries of BSP receive no fees for their service as a Director. 44 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDGroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNon-Executive Director Remuneration Non-Executive Directors are remunerated on a fixed basis within an aggregate Directors’ fee pool approved periodically by Shareholders. The LTIP is administered by the Remuneration and Nomination Committee, who reviews and endorses the proposed EPS performance target, employee participation, employee awards and any planned changes to the Board for approval. Under the Constitution, the Board determines the total amount paid to each Non-Executive Director as remuneration, subject to the aggregate amount not exceeding the amount fixed by the Shareholders in the Annual General Meeting. Shareholders are required to approve any change to this aggregate amount. In 2018, the Shareholders approved an increase in the pool to PGK 4.5 million. Directors may also be reimbursed their reasonable travel and other expenses incurred in attending to BSP business. Directors may also receive additional remuneration if they, perform any additional services at the request of the Board. Non-Executive Directors are not paid any retirement or superannuation benefits, nor do they participate in any share or share option programs or the employee incentive schemes described below. If the EPS target for a cycle is achieved, the matrix set out below is used to determine the award at the end of that cycle. Exercising the performance rights is subject to the condition that BSP’s net profit after tax (NPAT) for the vesting year is above BSP’s NPAT in the issuing year. Participants are personally responsible for any income tax liability in respect of payments made under the LTIP. If a participant resigns their employment for health reasons or retires prior to vesting, awards may be made in full or pro rata at the time of exit, at the discretion of the Board. If a participant resigns or their employment is terminated on disciplinary grounds prior to the vesting, awards are not granted. A table of fees paid to Directors during 2019 is produced on page 77. WEBSITE Employee Incentive Schemes BSP has established the following incentive arrangements to assist in the recruitment, retention and motivation of Senior Management and employees, and to directly link performance and behaviour to long term financial results and shareholder value. Shareholders can access BSP’s financial reports, market announcements, corporate governance policies and various other shareholder resources from the “Investor Relations” tab of its website at www.bsp.com.pg. Shareholders can also access details of BSP’s history, business and structure from the “About Us” tab of the website. BSP does not currently have any equity-based remuneration schemes. Under BSP’s employee incentive arrangements below, participants are not currently entitled to receive grants of shares or share options. Long Term Incentive Plan BSP also has a Long Term Incentive Plan (LTIP) for certain senior employees. The LTIP is currently in use. SUSTAINABILITY RISKS identifies and manages its material exposures to economic, BSP environmental and social sustainability risks within the risk management framework described above. In particular, BSP has a separate Social and Environmental Management Systems Policy which identifies and manages these risks. This policy applies to all Directors and employees of BSP. While performance rights are calculated by reference to earnings per share (EPS), participants are not entitled to receive grants of shares or share options. Rather, participants are entitled to receive an amount up to 10%, 15% or 30% of their fixed annual remuneration depending on their level of seniority. Under the Social and Environmental Management Systems Policy, BSP has adopted performance standards, completes due diligence and risk assessments, and undertakes incident and grievance reporting. BSP will not support or assist any project that causes or is likely to breach social or environmental regulation in the countries in which it operates. The LTIP runs on a two year performance cycle, commencing on 1 January in the first year and ending on 31 December the following year. # 1 2 3 Approved EPS Hurdles EPS target to achieved Target NPAT Percentage of Performance Rights to exercise 107.5% > 102.5% > 97.5% > As recommended by RNC and approved by Board each LTIP cycle. As recommended by RNC and approved by Board each LTIP cycle 150% of Performance Rights 100% of Performance Rights 50% of Performance Rights 45 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Financial Statements Directors' Report Statements of Comprehensive Income Statements of Financial Positi on Statements of Changes in Shareholders’ Equity Statements of Cash Flows Notes to the Financial Statements Independent Auditor's Report INTEGRITY We are honest, committ ed, trustworthy and reliable in our dealings with our customers and each other. 46 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Social Teams Responsibility Corporate Directors’ Report for the year ended 31 December 2019 The Directors take pleasure in presenti ng the Financial Statements of the Bank of South Pacifi c Limited and its subsidiaries (Bank and the Group) for the year ended 31 December 2019. In order to comply with the provisions of the Companies Act 1997, the Directors report as follows: Principal acti viti es The principal acti vity of the Bank of South Pacifi c Limited (BSP) is the provision of commercial banking and fi nance services. The Group’s acti viti es also include fund management and life business services throughout Papua New Guinea and the Asia Pacifi c region. BSP is a company listed on the PNG Exchange Markets (PNGX), incorporated under the Companies Act of Papua New Guinea, and is an authorised Bank under the Banks and Financial Insti tuti ons Act of Papua New Guinea. The Group is also licensed to operate in the Solomon Islands, Fiji, Cook Islands, Samoa, Tonga, Vanuatu and Cambodia. The registered offi ce is at Secti on 34, Allotment 6 & 7, Klinki Street, Waigani Drive, Port Moresby. Review of operati ons For the year ended 31 December 2019, the Group’s profi t aft er tax was K890.363 million (2018: K844.072 million). The Bank’s profi t aft er tax was K845.828 million (2018: K787.446 million). The Directors are of the view that there are reasonable grounds to believe that the Bank and the Group will be able to pay their debts as and when they become due and payable; and the att ached fi nancial statements and notes thereto are in accordance with the PNG Companies Act 1997, including compliance with accounti ng standards and give a true and fair view of the fi nancial positi on and performance of the Bank and the Group. The results of the Bank and the Group operati ons during the fi nancial year have, in the opinion of the Directors, not been materially aff ected by items of an abnormal nature, other than those disclosed in the fi nancial statements. In the opinion of the Directors, no circumstances have arisen, that make adherence to the existi ng method of valuati on of assets or liabiliti es of the Bank and the Group misleading or inappropriate. At the date of this report the Directors are not aware of any circumstances that would render the values att ributed to current assets in the fi nancial statements misleading. No conti ngent liability other than that disclosed in the notes to the att ached fi nancial statements has become enforceable, or is likely to become enforceable, within a period of twelve months from the date of this report, that will materially aff ect the Bank and the Group in its ability to meet obligati ons as and when they fall due. Dividends Dividend totalling K653.940 million were paid in 2019 (2018: K597.364 million). A detailed breakup of this is provided in Note 24. Directors and offi cers The following were directors of the Bank of South Pacifi c Limited at 31 December 2019: Sir K Constanti nou, OBE Mr. E B Gangloff Mr. G Robb, OAM Mr. R Fleming, CSM Mr. A Mano Dr. F Lua’iufi Mr. S Davis Mr. R Bradshaw Mr. A Sam Details of directors’ tenure and directors and executi ves’ remunerati on during the year are provided in Note 28 of the Notes to the Financial Statements. The CEO Robin Fleming is the only executi ve director. The company secretary is Mary Johns. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 47 Directors’ Report (continued) for the year ended 31 December 2019 Independent auditor’s report The financial statements have been audited and should be read in conjunction with the independent auditor’s report on page 98. Details of amounts paid to the auditors for audit and other services are shown in Note 42 of the Notes to the Financial Statements. Donations and sponsorships Donations and sponsorship by the Group during the year amounted to K5.581 million (2018:K8.004 million). Change in accounting policies Changes to accounting policies that impacted the Group's result during the year are included in Note 1(A) of the Notes to the Financial Statements. For, and on behalf of, the Directors. Dated and signed in accordance with a resolution of the Directors in Port Moresby this 26th day of February 2020. Sir Kostas G. Constantinou, OBE Chairman Robin Fleming, CSM Group Chief Executive Officer/Managing Director 48 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDSTATEMENTS OF COMPREHENSIVE INCOME for the Year Ended 31 December 2019 Consolidated Bank All amounts are expressed in K’000 Note 2019 2018 2019 2018 Interest income Interest expense Net interest income Fee and commission income Other income Net banking operating income Net insurance premium income Investment revenue Increase in policy liabilities Policy maintenance and investment expenses Claims, surrender and maturities Share of profits from associates and jointly controlled entities Net insurance operating income 2 2 3 4 40(b) 40(a) 1,585,773 1,561,691 1,477,235 1,460,484 (193,989) (180,895) (180,464) (166,090) 1,391,784 1,380,796 1,296,771 1,294,394 384,761 364,130 382,508 363,488 346,951 373,366 347,892 353,528 2,140,675 2,126,792 2,017,088 1,995,814 152,233 168,829 (59,746) (119,138) (116,927) 5,424 30,675 143,097 156,547 (71,616) (111,385) (97,295) 19,565 38,913 - - - - - - - - - - - - - - Net operating income before impairment and operating expenses 2,171,350 2,165,705 2,017,088 1,995,814 Impairment on financial assets Impairment on subsidiary Operating expenses Profit before income tax Income tax expense Net profit for the year Other comprehensive income Items that may be subsequently reclassified to profit or loss: Translation of financial information of foreign operations to presentation currency Items that will not be reclassified to profit or loss: Recognition of deferred tax on asset revaluation reserve Fair value gain on remeasurement of investment securities Net movement in asset revaluation Other comprehensive income, net of tax Total comprehensive income for the year Earnings per share - basic and diluted (toea) 5 8 5 6 25 25 25 25 24 (99,183) (82,440) (88,092) - (819,248) 1,252,919 - (887,097) 1,196,168 - (740,729) 1,188,267 (71,639) (803) (806,833) 1,116,539 (362,556) (352,096) (342,439) (329,093) 890,363 844,072 845,828 787,446 10,620 1,052 5,493 1,267 3,642 (14) (5,719) 8,529 898,892 4,948 8 1,624 7,632 851,704 3,664 (14) (5,714) 3,429 849,257 5,435 8 - 6,710 794,156 190.6 180.6 181.0 168.5 The attached notes form an integral part of these Financial Statements. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 49 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsSTATEMENTS OF FINANCIAL POSITION As at 31 December 2019 All amounts are expressed in K’000 Note 2019 2018 2019 2018 Consolidated Bank ASSETS Cash and balances with Central Bank Treasury and Central Bank bills Amounts due from other banks Statutory deposits with Central Banks Other financial assets Loans, advances and other receivables from customers Property, plant and equipment Assets subject to operating lease Investment in joint ventures Investment in subsidiaries Intangible assets Investment properties Deferred tax assets Tax receivable Other assets Total assets LIABILITIES Amounts due to other banks Customer deposits Subordinated debt securities Other liabilities Deferred tax liabilities Other provisions Total liabilities SHAREHOLDERS’ EQUITY Ordinary shares Retained earnings Other reserves 10 11 12 17 13 14 14 9 8 7 16 6 6 18 19 20 21 22 6 23 24 25 25 1,816,564 2,459,497 1,022,469 1,766,601 1,253,449 2,494,700 1,510,406 2,420,088 966,707 2,480,356 854,019 997,816 796,180 1,685,544 1,693,300 1,622,035 2,121,071 2,555,443 1,572,755 2,073,873 13,200,807 12,530,649 11,819,970 11,232,725 879,942 48,133 202,040 - 196,206 168,360 250,846 27,588 366,994 693,277 52,433 175,579 - 174,623 153,665 239,607 12,753 205,482 698,755 48,133 20,787 378,263 177,601 - 246,086 30,275 276,618 538,181 52,433 20,038 347,597 152,551 - 234,391 17,020 162,293 24,527,118 23,081,223 21,890,853 20,696,380 83,931 51,539 162,145 116,019 19,339,056 18,232,766 17,981,756 16,959,170 - 75,525 - 1,751,894 1,623,992 759,755 31,542 31,163 - 75,525 766,981 - 203,662 194,103 186,574 177,799 21,410,085 20,209,088 19,090,230 18,095,494 372,310 372,364 372,310 372,364 2,394,382 2,156,873 2,173,836 1,976,138 346,513 339,320 254,477 252,384 Equity attributable to the members of the company 3,113,205 2,868,557 2,800,623 2,600,886 Minority interests Total shareholders’ equity Total equity and liabilities 3,828 3,578 - - 3,117,033 2,872,135 2,800,623 2,600,886 24,527,118 23,081,223 21,890,853 20,696,380 The attached notes form an integral part of these Financial Statements. 50 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDAll amounts are expressed in K’000 Note Share capital Reserves Retained earnings Minority Interests Total STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY for the Year Ended 31 December 2019 Bank Balance as at 1 January 2018 IFRS 9 transition provisions 373,001 260,374 - - Restated balance as at 1 January 2018 373,001 260,374 Net profit Other comprehensive income Total comprehensive income Dividends paid during the year Share buyback Total transactions with owners Transfer from asset revaluation reserve BSP Life policy reserve Balance at 31 December 2018 Net profit Other comprehensive income Total comprehensive income Dividends paid during the year Share buyback Total transactions with owners Transfer from asset revaluation reserve BSP Life policy reserve Balance at 31 December 2019 Group Balance as at 1 January 2018 IFRS 9 transition provisions Restated balance as at 1 January 2018 Net profit Other comprehensive income Total comprehensive income Dividends paid during the year Share buyback Loss attributable to minority interests Total transactions with owners Transfer from asset revaluation reserve BSP Life policy reserve Balance at 31 December 2018 Net profit Other comprehensive income Total comprehensive income Dividends paid during the year Share buyback Gain attributable to minority interests Total transactions with owners Transfer from asset revaluation reserve BSP Life policy reserve Balance at 31 December 2019 25 24 25 25 25 24 25 25 25 24 25 25 25 25 24 25 25 25 - - - - (637) (637) - - 372,364 - - - - (54) (54) - - 372,310 373,001 - 373,001 - - - - (637) - (637) - - 372,364 - - - - (54) - (54) - - 372,310 1,777,627 (10,221) 1,767,406 787,446 - 787,446 (593,414) - (593,414) 18,116 (3,416) 1,976,138 845,828 - 845,828 (649,466) - (649,466) 4,933 (3,597) 2,173,836 - 6,710 6,710 - - - (18,116) 3,416 252,384 - 3,429 3,429 - - - (4,933) 3,597 254,477 346,388 1,904,462 - (9,903) 346,388 1,894,559 - 7,632 7,632 - - - - (18,116) 3,416 339,320 - 8,529 8,529 - - - - (4,933) 3,597 346,513 844,072 - 844,072 (597,364) - 906 (596,458) 18,116 (3,416) 2,156,873 890,363 - 890,363 (653,940) - (250) (654,190) 4,933 (3,597) 2,394,382 - - - - - - - - - - - - - - - - - - - - - 4,484 - 4,484 - - - - - (906) (906) - - 3,578 - - - - - 250 250 - - 2,411,002 (10,221) 2,400,781 787,446 6,710 794,156 (593,414) (637) (594,051) - - 2,600,886 845,828 3,429 849,257 (649,466) (54) (649,520) - - 2,800,623 2,628,335 (9,903) 2,618,432 844,072 7,632 851,704 (597,364) (637) - (598,001) - - 2,872,135 890,363 8,529 898,892 (653,940) (54) - (653,994) - - 3,828 3,117,033 The attached notes form an integral part of these Financial Statements. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 51 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams STATEMENTS OF CASH FLOWS for the Year Ended 31 December 2019 All amounts are expressed in K’000 Note 2019 2018 2019 2018 Consolidated Bank CASH FLOW FROM OPERATING ACTIVITIES Interest received Fees and other income Interest paid Amounts paid to suppliers and employees Operating cash flow before changes in operating assets & liabilities 1,605,387 1,544,691 1,480,232 1,442,960 779,565 784,910 719,567 680,110 (167,913) (776,812) (183,137) (722,282) (153,354) (646,339) (169,364) (628,865) 29 1,440,227 1,424,182 1,400,106 1,324,841 Increase in loans, advances and other receivables to customers (737,195) (1,377,537) (644,594) (1,188,543) Increase in statutory deposits with the Central Banks Increase in bills receivable and other assets Increase in customer deposits Movement in bills payable and other liabilities Net cash flow from operations before income tax (81,058) (87,166) (201,387) (121,256) 1,106,290 (184) 1,526,693 446,549 232,175 516,947 (71,265) (98,089) 1,022,586 (207,231) 1,401,513 Income taxes paid 6 (383,287) (420,430) (363,837) Net cash flow from/(used in) operating activities 1,143,406 96,517 1,037,676 (80,939) (103,872) 250,889 152,467 354,843 (402,213) (47,370) CASH FLOW FROM INVESTING ACTIVITIES Decrease in government securities Expenditure on property, plant and equipment Expenditure on software development costs Proceeds from disposal of property, plant and equipment Additional funding of subsidiaries Net cash flow used in investing activities CASH FLOW FROM FINANCING ACTIVITIES Share buyback Dividends paid Principal repayments of borrowings Proceeds from borrowings Subordinated debt securities matured Net cash flow used in financing activities Net (decrease)/increase in cash and cash equivalents Effect of exchange rate movements on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 8 24 25 22 22 21 29 29 429,961 (82,780) 695,907 (32,766) 561,386 (79,249) 785,053 (25,804) (52,108) (79,163) (49,979) (75,468) 7,076 - 966 - 302,149 584,944 (54) (637) (653,940) (61,153) (597,364) (102,866) 7,076 (30,666) 408,568 (54) (649,466) (61,153) 966 (10,000) 674,747 (637) (593,414) (102,866) 33,670 80,273 33,670 80,273 (75,525) - (75,525) - (757,002) (620,594) (752,528) (616,644) 688,553 60,867 693,716 10,620 2,055,929 2,755,102 1,052 1,994,010 2,055,929 5,493 1,646,868 2,346,077 10,733 1,267 1,634,868 1,646,868 The attached notes form an integral part of these Financial Statements. 52 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 1. ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these Financial Statements are set out below. These policies have been consistently applied to all the periods presented unless otherwise stated. The assets and liabilities are presented in order of liquidity on the Statements of Financial Position. A(i) Basis of Presentation and General Accounting Policies The Financial Statements of the Bank of South Pacific Limited (the Bank) and the Group are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and interpretations of these standards issued by the International Financial Reporting Interpretations Committee. They are prepared on the basis of the historical cost convention, as modified by the revaluation of certain non-current assets, financial instruments and liabilities. - IFRS 3 ‘Business combination’ – a company remeasures its previously held interest in a joint operation when it obtains control of the business. - IFRS 11 ‘Joint arrangements’ – a company does not remeasure its previously held interest in a joint operation when it obtains control of the business. - IAS 12 ‘Income taxes’ – a company accounts for all income tax consequences of dividend payments in the same way. - IAS 23 ‘Borrowing costs’ – a company treats as part of general borrowings any borrowings originally made to develop an asset when the asset is ready for its intended use or sale. • Amendments to IAS 28 ‘Investments in associates’ on long term interests in associates and joint ventures. These amendments clarify that long-term interests in an associate or joint venture to which the equity method is not applied should be accounted for using IFRS 9. This includes the impairment requirements in IFRS 9. Estimates and assumptions have been used to achieve conformity with generally accepted accounting principles in the preparation of these financial statements. These assumptions and estimates affect balances of assets and liabilities, contingent liabilities and commitments at the end of the reporting period, and amounts of revenues and expenses during the reporting period. Whilst the estimates are based on management’s best knowledge of current events and conditions, actual results may ultimately differ from those estimates. • Amendments to IAS 19, ‘Employee benefits’ on plan amendment, curtailment or settlement. These amendments require an entity to: - use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement, and - recognise in profit or loss as part of past service cost, or a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognised because of the impact of the asset ceiling. The financial statements are presented in Papua New Guinea Kina, expressed in thousands of Kina, as permitted by International Financial Reporting Standards. Standards, amendments and interpretations effective in the year ended 31 December 2019 The following standards, amendments and interpretations to existing standards became applicable for the first time during the accounting period beginning 1 January 2019. • IFRS 16, ‘Leases’ removes the previous IAS 17 distinction between finance leases and operating leases and now requires a lessee to recognise a lease liability representing future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. There is an optional exemption for certain short-term leases and leases of low-value assets. • Amendment to IFRS 9 on prepayment features with negative compensation. This amendment confirms that when a financial liability measured at amortised cost is modified without this resulting in de- recognition, a gain or loss should be recognised immediately in profit or loss. The gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. • IFRIC 23, ‘Uncertainty over income tax treatments’ clarifies how the recognition and measurement requirements of IAS 12 ‘Income Taxes’ are applied where there is uncertainty over income tax positions. The IFRS IC had clarified previously that IAS 12, not IAS 37 ‘Provisions, contingent liabilities and contingent assets’, applies to accounting for uncertain income tax treatments. IFRIC 23 explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. A subsequent IC agenda decision also provided guidance on the presentation of uncertain tax positions. • Annual improvements 2015 – 2017. These amendments include minor changes to: Standards, amendments and interpretations issued but not yet effective for the year ended 31 December 2019 or adopted early The following standards, amendments and interpretations to existing standards have been published and are mandatory for the entity’s accounting periods beginning on or after 1 January 2020 or later periods, but the entity has not early adopted them: • Amendments to IFRS 3 – definition of a business (effective 1 January 2020). This amendment revises the definition of a business. According to feedback received by the IASB, application of the current guidance is commonly thought to be too complex, and it results in too many transactions qualifying as business combinations. • Amendments to IAS 1 and IAS 8 on the definition of ‘material’ (effective 1 January 2020). These amendments to IAS 1, ‘Presentation of financial statements’, and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, and consequential amendments to other IFRSs: - use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting - clarify the explanation of the definition of material; and - incorporate some of the guidance in IAS 1 about immaterial information. • Amendments to IFRS 9, IAS 39 and IFRS 7 – interest rate benchmark reform (effective 1 January 2020). Following the financial crisis, the replacement of benchmark interest rates such as LIBOR and other inter-bank offered rates (‘IBORs’) has become a priority for global regulators. These amendments relate to hedge accounting and have the effect that IBOR reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement under both IAS 39 and IFRS 9. Furthermore, the amendments set out triggers for when the reliefs will end, which include the uncertainty arising from interest rate benchmark reform no longer being present. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 53 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 • IFRS 17 ‘Insurance contracts' (effective 1 January 2022) replaces IFRS 4. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features. IFRS 16 are only applied after that date. The re-measurements to the lease liabilities were recognised as adjustments to the related right-of-use assets immediately after the date of initial application. It requires a current measurement model where estimates are re- measured at each reporting period. Contracts are measured using the building blocks of: o Discounted probability-weighted cash flows o An explicit risk adjustment; and o A contractual service margin (“CSM”) representing the unearned profit of the contract which is recognised as revenue over the coverage period. The standard allows a choice between recognising changes in discount rates either in the statement of profit or loss or directly in other comprehensive income. The choice is likely to reflect how insurers account for their financial assets under IFRS 9. An optional, simplified premium allocation approach is permitted for the liability for the remaining coverage for short duration contracts, which are often written by non-life insurers. There is a modification of the general measurement model called the ‘variable fee approach’ for certain contracts written by life insurers where policyholders share in the returns from underlying items. When applying the variable fee approach the entity’s share of the fair value changes of the underlying items is included in the contractual services margin. The results of insurers using this model are therefore likely to be less volatile than under the general model. The new rules will affect the financial statements and key performance indicators of all entities that issue insurance contracts or investments contracts with discretionary participation features. The group is in the process of assessing the impact of IFRS 17 to its insurance entities: BSP Life (Fiji) Limited and BSP Life PNG Limited. A (ii) IFRS 16 Transitional Impact effective 1st January 2019 The Group adopted IFRS 16 Leases as issued by the IASB with a date of transition of 1 January 2019, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. The Group did not early adopt IFRS 16 in previous periods. As permitted by the transition provisions of IFRS 16, the Group elected not to restate comparative figures. On the initial application of IFRS 16, no adjustments had to be made to the opening retained earnings as at 1 January 2019 as the right of use assets were recognised at the amount equal to the corresponding lease liabilities. Consequently, for note disclosures, the consequential amendments have only been applied to the current period. The comparative period note disclosures repeat those disclosures made in the prior year. Adjustments recognised on adoption of IFRS 16 On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 January 2019. The average lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 2.25%. For leases previously classified as finance leases the entity recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right of use asset and the lease liability at the date of initial application. The measurement principles of 54 All amounts are expressed in K’000 2019 Operating lease commitments disclosed as at 31 December 2018 Discounted using the lessee’s incremental borrowing rate of at the date of initial application (Less): short-term leases recognised on a straight-line basis as expense Add/(less): adjustments as a result of a different treatment of extension and termination options Lease liability recognised as at 1 January 2019 Of which are: Current lease liabilities Non-current lease liabilities 117,370 107,048 (2,381) 93,207 197,874 24,435 173,439 197,874 The associated right-of-use assets for property leases were measured on a modified retrospective basis as if the new rules had always been applied. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. The recognised right-of-use assets relate to the commercial and residential properties, and also considered dataline leases totaling K200,325. The change in accounting policy affected the following items in the balance sheet on 1 January 2019: • • right-of-use assets – increase to K197,874. lease liabilities – increase to K197,874. The net impact on retained earnings on 1 January 2019 was nil. Practical expedients applied In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: • • • • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. B. Consolidation The Financial Statements incorporate the assets and liabilities of all controlled entities of the Group as at 31 December 2019, and their results for the year then ended. Controlled entities are those over which the Group has the power to govern financial and operating policies, generally accompanied by a shareholding that commands the majority of voting rights, and are commonly referred to as subsidiaries. Subsidiaries are accounted for at acquisition under the acquisition cost method of accounting, where: GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 • acquisition cost is measured at fair value of assets transferred, equity issued, liabilities assumed and any directly attributable costs of the transaction; identifiable net assets are recorded initially at acquisition, at their fair values; • • any excess of the acquisition cost over the relevant share of identifiable net assets acquired is treated as goodwill, and any deficiency is recognised directly in the Statement of Comprehensive Income. methodology). Services used to determine profit recognition include the cost of expected insurance claims and the allocation of future bonuses. The liability is generally determined as the present value of all future expected payments, expenses, taxes and profit margins reduced by the present value of all future expected premiums and take into consideration projected future bonuses. The liabilities are recalculated at each balance date using best estimate assumptions. These assumptions are revisited regularly and adjusted for actual experiences on claims, expense, mortality and investment returns. The policy liability also includes policy owner retained earnings. All intercompany transactions and balances are eliminated. C. Investment in Associates and Joint Arrangements Investments in Associates Associates are entities over which the Group has significant, but not controlling influence, generally accompanied by a shareholding conferring between 20% - 50% of voting rights. In the Financial Statements, these investments are accounted for under the equity method. Interests In Joint Arrangements The Group applies IFRS 11 to all joint ventures. Under IFRS 11 investments in joint arrangements are classified as either joint ventures or joint operations depending on the contractual rights and obligations of each investor. Joint ventures are accounted for using the equity method in the Financial Statements. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group’s share of losses in a joint venture equals or exceeds its interests in the entity (which includes any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. Interests in joint ventures classified as held for sale are accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. D. Revenue income and expense are recognised Interest income and expense Interest in the Statement of Comprehensive Income on an accrual basis using the effective interest rate (“EIR”) method. The income arising from the various forms of instalment credit has been determined using the effective interest method. Interest income includes coupons earned on inscribed stock, accrued discount and premium on Treasury and Central Bank bills. income and interest expense for all financial Interest instruments measured at amortised cost is recognised using the effective interest rate method. Interest income is recognised for Stage 1 and Stage 2 financial assets measured at amortised cost by applying the EIR to gross carrying amounts of the financial instruments. For Stage 3 financial instruments, interest income is recognised by applying EIR on the net carrying value of the financial instrument. The liability for long term insurance contracts (principally Life Insurance) has been determined in accordance with LPS 1.04 Valuation of Policy Liabilities, issued by the Australian Prudential Regulation Authority. The policy liability is calculated in a way that allows for the systematic release of planned profit margins as services are provided to policy owners and the revenues relating to those services are received (Margin on Services Insurance policy liabilities are further detailed in Note 40. Short term insurance contracts These contracts are the Term Life, Medical and Travel policies sold and underwritten by BSP Health Care (Fiji) Limited and BSP Life PNG Limited. These contracts protect the Group’s customers from the consequences of events such as death, medical emergency or loss on travel. Guaranteed benefits paid on occurrence of the specified insurance event are either fixed or linked to the extent of the economic loss suffered by the policyholder. There are no maturity or surrender benefits. For all these contracts, premiums are recognised as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the Statement of Financial Position date is reported as the unearned premium liability. Premiums are shown before deduction of commission. Claims and loss adjustment expenses are charged to income as incurred based on the estimated liability for compensation owed to contract holders or beneficiaries. They include direct and indirect claims settlement costs and arise from events that have occurred up to the Statement of Financial Position date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analyses for the claims incurred but not reported, and to estimate the expected ultimate cost of more complex claims that may be affected by external factors (such as court decisions). Foreign exchange income or losses Realised and unrealised gains or losses from foreign currency trading, or from changes in the fair value of the trading assets and liabilities are recognised as income in the Statement of Comprehensive Income in the period in which they arise. E. Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. All other risk related fees that constitute cost recovery are taken to income when levied. Loan origination fees are deferred over the expected term of the financial instrument according to the effective interest method. The effective interest method uses the rate that exactly discounts estimated future payments and receipts through the expected life of the instrument or when appropriate, a shorter period to the net carrying amount of the financial asset. F. Borrowing expenses Expenses associated with the borrowing of funds are charged to the Statement of Comprehensive Income in the period in which they are incurred. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 55 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 G. Provision for loan impairment method. Costs associated with maintaining computer software programs are recognised as an expense when incurred. Loans are originated by providing funds directly to the borrower and are recognised when cash is advanced to borrowers. J. Property, plant and equipment All loans, advances and other receivables from customers are subject to continuous management review. A specific provision for loan impairment is established if there is objective evidence that the Group will not be able to collect all amounts due under the terms of loans. The amount of the provision approximates the difference between the carrying amount and the recoverable amount, which is the current best estimate of the present value of expected future cash flows arising from the asset. All bad debts are written off against the specific provision for loan impairment in the period in which they are classified as irrecoverable. Subsequent recoveries are credited to the provision for loan losses in the Statement of Comprehensive Income. General provisions for impairment are maintained to cover incurred losses unidentified at balance date in the overall portfolio of loans, advances and other receivables from customers. The provisions are determined having regard to the level of risk weighted assets, economic conditions, the general risk profile of the credit portfolio, past loss experience and a range of other criteria. The amount necessary to bring the provisions to their assessed levels, after write-offs, is charged to the Statement of Comprehensive Income. Impairment The Group assesses on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument assets carried at amortised cost and with the exposure arising from loan commitments and financial guarantee contracts. The Group recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects: • An unbiased and probability-weighted amount that determined by evaluating a range of possible outcomes; is • The time value of money; and • Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Note 34 provides more detail of how the expected credit loss allowance is measured. H. Goodwill Goodwill represents the excess of the cost of any acquisition over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired as at the exchange transaction. Goodwill is reported in the Statement of Financial Position as an intangible asset. In determining goodwill, management considers various factors including net selling price of the acquired business, existing market share, potential growth opportunities, and other factors inherent in the acquired business. This assessment is reviewed at each balance date, so that any indication of impairment with implications for the recoverability of goodwill can be tested, and adjustments to the carrying value of goodwill made if necessary. I. Computer systems development costs Costs incurred to develop and enhance the Group’s computer systems are capitalised to the extent that benefits do not relate solely to revenue that has already been brought to account and will contribute to the future earning capacity of the economic entity. These costs are amortised over the estimated economic life of four to eight years using the straight-line Land and buildings are carried at revalued amounts, being their fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Fair value is determined on the basis of regular independent valuations prepared by external valuation experts, based on discounted cash flows or capitalisation of net income (as appropriate). The fair values are recognised in the financial statements and are reviewed at the end of each reporting period to ensure that the carrying value of land and buildings are not materially different from their fair values. Any revaluation increase arising on the revaluation of land and buildings is credited to the asset revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense in profit or loss, in which case the increase is credited to the Statement of Comprehensive Income to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of land and buildings is charged as an expense in the Statement of Comprehensive Income to the extent that it exceeds the balance, if any, held in the asset revaluation reserve relating to a previous revaluation of that asset. Buildings under constructions are referred to as work in progress and are accounted for at cost and subsequently reclassified to buildings (premises) upon completion. Depreciation is provided on property, plant and equipment, including buildings but excluding land. Depreciation is calculated on a straight line basis so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful life, residual value and depreciation method is reviewed at the end of each annual reporting period. The following basis and method of depreciation is used: Class of asset Method Property (excluding land) Straight line basis Plant and equipment Equipment under operating lease Straight line basis Straight line basis Rate 2 - 3% pa 10 - 25% pa 3 - 20% pa Gains or losses on disposals (being the difference between the carrying value at the time of sale or disposal and the proceeds received) are taken into account in determining operating profit for the year. Where the carrying value of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Repairs and maintenance are taken into account in determining operating profit when the expenditure is incurred. K. Leases Bank is lessee (i) The Group’s leasing activities and how these are accounted for The Group leases various offices and branches for its retail operations. Rental contracts are typically made for fixed periods of 3 to 5 years but may have extension options as described in (iii) below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. 56 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Until the 2018 financial year, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable • variable lease payment that are based on an index or a rate • amounts expected to be payable by the lessee under residual • value guarantees the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: the amount of the initial measurement of lease liability • • any lease payments made at or before the commencement date less any lease incentives received any initial direct costs, and restoration costs. • Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short- term leases are leases with a lease term of 12 months or less. (ii) Variable lease payments The Group does not have any property leases that contain variable payment terms that are linked to sales generated from a branch. (iii) Extension and termination options Extension and termination options are included in a number of property leases across the group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. (iv) Critical judgements in determining the lease term In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. During the current financial year, the financial effect of revising lease terms to reflect the effect of exercising extension and NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 termination options did not have an impact on recognised lease liabilities and right-of-use assets. (v) Residual value guarantees The Group does not provide residual value guarantees in relation to its leases. L. Cash and cash equivalents For the purpose of the cash flow statement, Cash and cash equivalents comprise notes and coins, and balances due to and from other banks with original maturities of less than three months. M. Financial assets & Liabilities M(1) Financial Assets Classification and subsequent measurement The Group classifies its financial assets in the following measurement categories: Fair value through profit or loss (FVPL); or • • Amortised cost. The classification requirements for debt and equity instruments are described below: a) Debt instruments Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as loans, government and corporate bonds and trade receivables purchased from clients in factoring arrangements without recourse. Classification and subsequent measurement of debt instruments depend on: (i) (ii) the Group’s business model for managing the asset; and the cash flow characteristics of the asset. Based on these factors, the Group classifies its debt instruments into one of the following measurement categories: • Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest (‘SPPI’), and that are not designated at FVPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured as described in note 34.1.2. Interest income from these financial assets is included in ‘Interest income’ using the effective interest rate method. • Fair value through profit or loss: Assets that do not meet the criteria for amortised cost are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented in the profit or loss statement within ‘Net trading income’ in the period in which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for trading, in which case they are presented separately in ‘Net investment income’. Interest income from these financial assets is included in ‘Interest income’ using the effective interest rate method. Business model: the business model reflects how the Group manages the assets in order to generate cash flows. That is, whether the Group’s BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 57 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of ‘other’ business model and measured at FVPL. Factors considered by the Group in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management personnel, how risks are assessed and managed and how managers are compensated. For example, the Group’s business model for the mortgage loan book is to hold to collect contractual cash flows, for this portfolio there has been no history of prior period sales and no intention of future sales, hence the classification is amortised cost. Another example is debt securities held within the insurance entities of the bank which are held at FVPL to prevent an accounting mismatch with the associated insurance contract liabilities which are held at fair value through income statement. SPPI: Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Group assesses whether the financial instruments’ cash flows represent solely payments of principal and interest (the ‘SPPI test’). In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss. The Group reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period. b) Equity instruments Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares. The Group subsequently measures all equity investments at fair value through profit or loss. Gains and losses on equity investments at FVPL are included in the ‘Investment revenue’ line in the statement of profit or loss. Measurement methods Amortised cost and effective interest rate The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. When the Group revises the estimates of future cash flows, the carrying amount of the respective financial assets or financial liability is adjusted 58 to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in profit or loss. Interest income Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets. Initial recognition and measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. At initial recognition, the Group measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability, such as fees and commissions. Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are expensed in profit or loss. Immediately after initial recognition, an expected credit loss allowance (ECL) is recognised for financial assets measured at amortised cost, as described in note 34.1.2, which results in an accounting loss being recognised in profit or loss when an asset is newly originated. When the fair value of financial assets and liabilities differs from the transaction price on initial recognition, the entity recognises the difference as follows: (a) When the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised as a gain or loss. In all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the instrument, deferred until the instrument’s fair value can be determined using market observable inputs, or realised through settlement. Modification of loans The Group sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors: • If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay. • • Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan. Significant extension of the loan term when the borrower is not in financial difficulty. Significant change in the interest rate. • • Change in the currency the loan is denominated in. • Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan. If the terms are substantially different, the Group derecognises the original financial asset and recognises a ‘new’ asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. However, the Group also assesses whether the new financial asset recognised is deemed GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amount are also recognised in profit or loss as a gain or loss on derecognition. If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in profit or loss. The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). De-recognition other than on a modification Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control. The Group enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Group: (i) Has no obligation to make payments unless it collects equivalent amounts from the assets; (ii) Is prohibited from selling or pledging the assets; and (iii Has an obligation to remit any cash it collects from the assets without material delay. Collateral (shares and bonds) furnished by the Group under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met. This also applies to certain securitisation transactions in which the Group retains a subordinated residual interest. M(2) Financial Liabilities Classification and subsequent measurement Financial liabilities are classified as subsequently measured at amortised cost, except for: • • Financial liabilities arising from the transfer of financial assets which did not qualify for de-recognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Group recognises any expense incurred on the financial liability; and Financial guarantee contracts and loan commitments. is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Financial guarantee contracts and loan commitments Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of: • The amount of the loss allowance (calculated as described in note 34.1.2); • The premium received on initial recognition less income recognised in accordance with the principles of IFRS 15. Expected credit loss on loan commitments provided by the Group are measured as the amount of the loss allowance (calculated as described in note 34.1.2). The Group has not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument. For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. N. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. O. Employee benefits De-recognition Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, and long service leave when it is probable that settlement will be recognised and they are capable of being measured reliably. The exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument Liabilities recognised in respect of employee benefits are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Post-employment benefits - defined contribution plans A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate fund, and there is no recourse to the Group for employees if the fund has insufficient assets to pay employee benefits relating to service up to the balance sheet date. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 59 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 The Group pays contributions to publicly or privately administered superannuation plans on a mandatory, contractual or voluntary basis in respect of services rendered up to balance sheet date by all staff members other than non-citizen contract staff for whom there is no legal obligation to do so. The contributions are at the current rate of employees’ gross salary. Once the contributions have been paid, the Group has no further payment obligations for post-employment benefits from the date an employee ceases employment with the Group. P. Income tax Current Tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the balance sheet liability method. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the Statement of Financial Position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities which affects neither taxable income nor accounting profit. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the Statement of Comprehensive Income, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity. Q. Foreign currency The Financial Statements of the Group are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of these Financial Statements, the results and financial position of the Bank are expressed in Papua New Guinea kina, which is the Bank’s functional and presentation currency. In preparing the Financial Statements, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies 60 are retranslated at the rates prevailing at the balance sheet date. Non- monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Foreign operations On consolidation, the assets and liabilities of the consolidated entity’s overseas operations are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are recognised in the foreign currency translation reserve, and recognised in profit or loss on disposal of the foreign operation. R. Share capital Share issue costs External costs directly attributable to the issue of new shares are deducted from equity net of any related income taxes. Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are declared. Dividends for the year, declared after the balance sheet date, are dealt with in the subsequent events note. S. Asset impairment At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed. Recoverable amount is the higher of fair value less cost of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash- generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD T. Non-current assets held for sale X. Earnings per share Non-current assets (and disposal groups) classified as held for sale are measured, with certain exceptions, at the lower of carrying amount and fair value less costs to sell. Earnings per share is determined by dividing the profit or loss attributable to owners of the Bank by the weighted average number of participating shares outstanding during the reporting year. NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for such a sale and the sale is highly probable. The sale of the asset (or disposal group) must be expected to be completed within one year from the date of classification, except in the circumstances where sale is delayed by events or circumstances outside the Group’s control and the Group remains committed to a sale. U. Investment Property Property held for long-term rental yields is classified as investment property. Investment property comprises freehold land and buildings. It is carried at fair value. The fair values have been arrived at on the basis of the valuations carried out by Rolle and Associates and Pacific Valuations Limited, independent valuers not related to the group. The valuers have appropriate qualifications and recent experience in the valuation of properties in Fiji. The valuations were arrived at by reference to current net rental income and capital expenditure and external factors in the Fiji commercial and residential environment such as current supply and demand and expected growth. Changes in fair values are recorded in profit or loss. Property located on land that is held under an operating lease is classified as investment property as long as it is held for long-term rental yields and is not occupied by more than 50% by the companies in the Group. The initial cost of the property is the lower of the fair value of the property and the present value of the minimum lease payments. The property is carried at fair value after initial recognition. V. Derivative financial instruments and acceptances Forward foreign exchange contracts entered into for trading purposes are initially recognised at fair value and subsequently re-measured at fair value based upon the forward rate. Gains and losses on such contracts are taken to the Statement of Comprehensive Income. Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group expects most acceptances to be settled simultaneously with the reimbursement from the customers. Customer acceptances are accounted for as off-balance sheet transactions and are disclosed as contingent liabilities and commitments. The Group does not actively enter into or trade in complex forms of derivative financial instruments such as currency and interest rate swaps and options. W. Segment reporting Segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker. Y. Comparatives Comparative figures have been adjusted to conform to changes in presentation in the current year. Z. Critical accounting estimates and judgments The application of the Group’s accounting policies requires the use of estimates and assumptions. If different assumptions or estimates were applied, the resulting values would change, impacting the net assets and income of the Group. This note provides an overview of the areas that involve a higher degree of judgement or complexity, and major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment within the next financial year. Detailed information about each of these estimates and judgements is included in the related notes together with information about the basis of calculation for each affected line item in the financial statements. The areas involving significant estimates of judgments are: • Estimated impairment of financial or non-financial assets – note 1(g) and 1(s) • Estimated goodwill impairment – note 1(h) and 7(a) • Estimated insurance liability – note 1(d), note 22 and note 40 • Estimation of fair value of financial assets and liabilities – note 1(m) and note 39 • Estimation of fair value of non-financial assets - note 39 Measurement of credit loss allowance for financial assets measured at amortised cost in line with IFRS 9 is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses). Explanation of the inputs, assumptions and estimation techniques used in measuring ECL is further detailed in note 34.1.2.3, which also sets out key sensitivities of the ECL to changes in these elements. A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as: • Determining criteria for significant increase in credit risk; • Choosing appropriate models and assumptions for the measurement of ECL; • Establishing the number and relative weightings of forward- looking scenarios for each type of product/market and the associated ECL; and • Establishing groups of similar financial assets for the purposes of measuring ECL. Detailed information about the judgements and estimates made by the Group in the above areas are set out in note 34. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 61 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 2. NET INTEREST INCOME Net interest income All amounts are expressed in K’000 Interest income Consolidated Bank 2019 2018 2019 2018 Loans, advances and other receivables from customers1 1,238,453 1,156,426 1,125,395 1,053,335 Other financial assets - inscribed stock Treasury and Central Bank bills Cash and balances with Central Bank Other Less: Interest expense Customer deposits Other banks Subordinated debt securities 198,484 141,573 6,189 1,074 205,333 194,816 4,042 1,074 198,164 140,086 9,714 3,876 205,051 193,322 5,664 3,112 1,585,773 1,561,691 1,477,235 1,460,484 178,053 12,396 3,540 193,989 152,008 20,330 8,557 180,895 162,912 14,012 3,540 180,464 135,167 22,366 8,557 166,090 1,391,784 1,380,796 1,296,771 1,294,394 1Group interest income includes K13.079m (Bank K12.957m) recognised on impaired loans (Stage 3) to customers. The Group takes up required provisions on such interest income as detailed in the accounting policy in note 1D. 3. FEE AND COMMISSION INCOME Fee and commission income Product related Trade and international related Electronic banking related Other Less: Fee and commission expenses Agencies International Finance Corporation fees 4. OTHER INCOME Foreign exchange related1 Operating lease rentals Other2 182,220 21,259 143,801 37,797 385,077 181 135 316 384,761 198,017 18,900 129,829 37,098 383,844 687 649 1,336 382,508 169,131 20,366 132,861 24,904 347,262 176 135 311 346,951 185,188 18,073 118,927 27,004 349,192 651 649 1,300 347,892 327,705 7,503 28,922 364,130 313,785 8,473 41,230 363,488 291,308 7,503 74,555 373,366 281,205 8,473 63,850 353,528 1Foreign exchange related income includes gains and losses from spot and forward contracts and translated foreign currency assets. 22018 other income includes K19m insurance recovery for an aircraft destroyed by fire. 62 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD5. (A) OPERATING EXPENSES All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Administration Computing Depreciation Amortisation of computer development Non-executive directors costs Non-lending losses1 Fixed asset impairment expenses Premises and equipment Staff costs Defined contribution plans Statutory benefit contributions Wages and salaries Other staff benefits 95,246 125,412 107,906 28,173 3,639 2,318 1,975 60,993 425,662 15,531 10,929 312,239 54,887 393,586 118,334 136,973 81,000 27,399 5,044 33,226 13,888 88,924 504,788 15,262 12,168 296,885 57,994 382,309 90,694 111,245 90,352 22,577 3,044 1,654 1,975 56,495 378,036 14,133 10,320 286,004 52,236 362,693 114,897 119,599 64,572 22,546 4,559 33,094 13,888 80,795 453,950 14,021 11,216 272,331 55,315 352,883 819,248 887,097 740,729 806,833 1Non-Lending losses for 2018 included K13.5m loss on aircraft destroyed by fire, offset by insurance recovery. (B) IMPAIRMENT ON FINANCIAL ASSETS Loans and advances (note 13) Treasury and Central Bank Bills (note 11) Other Financial Assets (note 17) 6. INCOME TAX Income tax expense Current tax Deferred tax Current year Adjustment to prior year estimates Tax calculated at 30% of profit before tax (2018:30%) Tax calculated at respective subsidiary tax rates Expenses not deductible for tax Tax loss not recognised Income not recognized for tax purposes1 Adjustment to prior year estimates 101,882 (1,865) (834) 99,183 368,467 (8,675) 359,792 2,764 362,556 344,898 22,341 6,072 5,548 82,380 40 20 82,440 365,551 (12,443) 353,108 (1,012) 352,096 341,712 14,798 4,453 5,379 90,861 (1,865) (904) 88,092 348,760 (9,510) 339,250 3,189 342,439 71,599 40 - 71,639 347,673 (20,623) 327,050 2,043 329,093 356,480 334,961 - 995 - - 5 - (7,916) 2,043 (19,067) (13,234) (18,225) 2,764 (1,012) 3,189 1Income not recognised for tax purpose for the Bank includes dividends received from Subsidiaries which are eliminated upon consolidation whilst the Group number represents actuarial liabilities deductions allowable for BSP Life Fiji Limited. 362,556 352,096 342,439 329,093 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 63 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 6. INCOME TAX (continued) All amounts are expressed in K’000 Tax receivable At 1 January Income tax provision Adjustment to prior year estimates Other tax related items Tax payments made At 31 December Deferred taxes Consolidated Bank 2019 2018 2019 2018 12,753 (31,708) 17,020 (25,231) (368,467) (365,551) (348,760) (347,256) 579 (564) 383,287 27,588 (10,418) - 420,430 12,753 1,004 (2,826) 363,837 30,275 (12,706) - 402,213 17,020 Specific allowance for losses on loans, advances and other receivables from customers General allowance for losses on loans, advances and other receivables from customers 56,215 48,186 53,558 45,011 137,768 132,757 131,960 127,518 26,721 (1,349) 47,422 23,983 (1,361) 46,690 (70,969) (70,128) (1,876) 25,372 219,304 250,846 (31,542) 219,304 208,444 8,675 2,185 - 659 27,658 208,444 239,607 (31,163) 208,444 181,934 12,443 9,823 4,244 25,944 (1,323) 45,396 (30,223) (1,876) 22,650 246,086 23,103 (1,337) 45,017 (30,338) 659 24,758 234,391 246,086 234,391 - - 246,086 234,391 234,391 9,510 2,185 - 200,021 20,623 9,367 4,380 219,304 208,444 246,086 234,391 Employee related provisions Prepaid expenses Other provisions Property, plant and equipment Unrealised foreign exchange gains Accruals At 31 December Represented by: Deferred tax asset Deferred tax liability At 31 December Deferred taxes movement: At 1 January Current year movement Adjustment to prior year estimates Other movements At 31 December 64 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 7. INTANGIBLE ASSETS All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank 7(a) Goodwill At 1 January Net movement Gross carrying amount 45,307 45,307 41,051 41,051 - - - - 45,307 45,307 41,051 41,051 To assess whether goodwill is impaired, the carrying amount of a cash-generating unit is compared to the recoverable amount. The recoverable amount is determined based on fair value less cost to sell, primarily using an earnings multiple applicable to that cash-generating unit. The category of this fair value is Level 3 as defined in Note 39. Earnings multiples used in the impairment assessment for Non PNG Banks are sourced from publicly available data associated with operations displaying similar characteristics to the Non PNG Banks plus a control premium, and are applied to the current forecast earnings. The key assumption is the Price-Earnings (P/E) multiple observed, which for the Non PNG Banks were in the range of 8.3x – 13.6x (2018: 8.3x – 13.6x). The goodwill allocated to the Non Bank Entities is not significant. 7(b) Computer development cost At 1 January Additions Disposals Amortisation expense At 31 December Computer development cost Accumulated amortisation At 31 December Total intangible assets 129,316 52,108 (2,352) (28,173) 62,511 95,326 (1,122) (27,399) 111,500 49,978 (2,351) (22,577) 150,899 129,316 136,550 59,699 75,469 (1,122) (22,546) 111,500 291,324 245,186 256,417 212,614 (140,425) (115,870) (119,867) (101,114) 150,899 196,206 129,316 174,623 136,550 177,601 111,500 152,551 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 65 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 8. INVESTMENTS IN SUBSIDIARIES Principal activity Fund Management/ Investment Banking Life Insurance Life Insurance Capital Raising Credit Institution Bank Bank Bank Name of Subsidiary BSP Capital Limited BSP Life (Fiji) Limited BSP Life (PNG) Limited BSP Convertible Notes Limited BSP Finance Limited Bank of South Pacific Tonga Ltd Bank South Pacific (Samoa) Ltd Bank South Pacific Vanuatu Ltd At 31 December Represented by: All amounts are expressed in K’000 At 1 January Additional capital Provision for impairment of BSP Capital Limited At 31 December 9. INVESTMENT IN JOINT VENTURES Place of Incorporation and Operation Ownership % Balance of Investment 2019 2018 PNG Fiji PNG Fiji PNG Tonga Samoa Vanuatu 100% 100% 100% 100% 100% 100% 98.7% 100% 2,448 87,599 25,000 371 82,503 71,610 70,712 38,020 2,448 87,599 15,000 371 61,837 71,610 70,712 38,020 378,263 347,597 2019 2018 347,597 30,666 - 338,400 10,000 (803) 378,263 347,597 Entity Suva Central Ltd Richmond Ltd Joint Venture/ Associate Principal activity Place of incorporation and operation Joint Venture Property rental Joint Venture Hotel operation Fiji Fiji Proportion of ownership and voting power held 2019 50%* 2018 50%* 61.3%**,50%*** 61.3%**,50%*** BSP Finance Cambodia Plc Joint Venture Finance Cambodia 50%* 50%* The investments above are accounted for using the equity method in the Financial Statements. *Both ownership and voting power held, **ownership, ***voting power held. 66 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD9. INVESTMENT IN JOINT VENTURES (continued) All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Joint ventures Investment in joint ventures Investments during the year Translation movement Share of profit for the year Net investment at 31 December Summarised financial information of joint ventures: Total assets Total liabilities Net assets Share of profits Group fair value alignment Share of profit in Group 10. CASH AND BALANCES WITH CENTRAL BANK 175,579 154,135 20,038 19,157 14,458 1,812 10,191 202,040 - 137 21,307 175,579 - 219 530 - (40) 921 20,787 20,038 444,720 340,266 (212,455) (159,450) 232,265 10,449 (258) 10,191 180,816 14,354 6,953 21,307 85,039 (43,464) 41,575 530 - 530 81,740 (43,426) 38,314 921 - 921 Notes, coins and cash at bank 513,241 509,588 496,694 500,332 Balances with Central Bank other than statutory deposit Total cash and balances with Central Bank 1,303,323 1,816,564 743,861 1,253,449 1,013,712 1,510,406 466,375 966,707 11. TREASURY AND CENTRAL BANK BILLS Treasury and Central Bank bills – face value 2,517,999 2,553,051 2,478,589 2,538,706 Discount for interest receivable Less allowance for impairment At 31 December Allowance for impairment At 1 January Provision/(release) for impairment At 31 December (50,788) (7,714) (48,772) (9,579) (50,787) (7,714) (48,771) (9,579) 2,459,497 2,494,700 2,420,088 2,480,356 9,579 (1,865) 7,714 9,539 40 9,579 9,579 (1,865) 7,714 9,539 40 9,579 Treasury and Central Bank bills are debt securities issued by Central Banks. These bills are classified as assets held for trading and carried at fair value by the Insurance business and as assets held to maturity and carried at amortised cost by the Banking businesses. 12. AMOUNTS DUE FROM OTHER BANKS Items in the course of collection Placements with other banks At 31 December 29,692 992,777 1,022,469 35,426 818,593 854,019 29,693 968,123 997,816 35,426 760,754 796,180 The Group undertakes thorough compliance and due diligence reviews before entering into any correspondent banking relationships. Amounts due from other banks includes deposits of K31.275 million held with counter-party Banks that are not available for use by the Group. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 67 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 13. LOANS, ADVANCES AND OTHER RECEIVABLES FROM CUSTOMERS All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank Overdrafts Lease financing Term loans Mortgages Policy loans Gross loans, advance and other receivables due from customers net of reserved interest Less allowance for losses on loans, advances and other receivables from customers At 31 December 1,008,876 295,381 912,057 252,293 933,819 258,659 848,196 205,744 9,903,563 9,510,991 9,114,411 8,767,253 2,605,311 2,403,278 2,159,668 2,000,770 88,280 85,597 - - 13,901,411 13,164,216 12,466,557 11,821,963 (700,604) (633,567) (646,587) (589,238) 13,200,807 12,530,649 11,819,970 11,232,725 The spread of the loans are detailed in the maturity analysis table on Note 34. The loans are well-diversified across various sectors and are further analysed in Note 34. Allowance for losses includes K29.976m (Bank K28.192m) provision taken up for interest recognized on stage 3 loans. Lease financing The Group and the bank provide lease financing to a broad range of clients to support financing needs in acquiring movable assets such as motor vehicles and plant and equipment. Finance lease receivables are included within loans, advances and other receivables from customers and are analysed as follows: Gross investment in finance lease receivable Not later than 1 year Later than 1 year and not later than 5 years Unearned future finance income Not later than 1 year Later than 1 year and not later than 5 years Present value of minimum lease payments receivable Present value of minimum lease payments receivable is analysed as follows: Not later than 1 year Later than 1 year and not later than 5 years At 31 December 23,152 309,154 332,306 (1,319) (35,606) (36,925) 295,381 21,833 273,548 295,381 34,358 252,531 286,889 (1,961) (32,635) (34,596) 252,293 32,397 219,896 252,293 19,241 269,514 288,755 (1,116) (28,980) (30,096) 258,659 18,125 240,534 258,659 29,746 200,775 230,521 (1,713) (23,064) (24,777) 205,744 28,033 177,711 205,744 68 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD13. LOANS, ADVANCES AND OTHER RECEIVABLES FROM CUSTOMERS (continued) NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 All amounts are expressed in K’000 Provision for impairment Movement in allowance for losses on loans, advances and other receivables from customers: Balance at 1 January Net new and increased provisioning Loans written off against provisions / (Write back of provisions no longer required) At 31 December Provision for impairment is represented by Collective provision Individually assessed or specific provision At 31 December Loan impairment expense Net collective provision funding Net new and increased individually assessed provisioning Total new and increased provisioning Recoveries during the year Net (write back/write off) At 31 December 14. PROPERTY, PLANT AND EQUIPMENT Carrying value Capital Work in Progress Premises Accumulated depreciation Equipment Accumulated depreciation Right of Use Assets Accumulated depreciation At 31 December Consolidated Bank 2019 2018 2019 2018 633,567 79,064 (12,027) 700,604 477,305 223,299 700,604 17,552 61,512 79,064 (64,042) 86,860 101,882 577,186 66,073 (9,692) 633,567 454,345 179,222 633,567 15,034 51,039 66,073 589,238 65,049 (7,700) 646,587 439,866 206,721 646,587 13,478 51,571 65,049 538,949 57,277 (6,988) 589,238 423,965 165,273 589,238 11,526 45,751 57,277 (58,936) (58,178) (57,508) 75,243 82,380 83,990 90,861 71,830 71,599 51,290 635,068 39,295 646,574 (109,191) (108,905) 525,877 397,817 537,669 366,593 45,930 498,827 (94,309) 404,518 296,823 32,540 523,923 (96,809) 427,114 266,170 (277,449) (250,280) (207,875) (187,643) 120,368 209,354 (26,947) 182,407 116,313 - - - 88,948 184,608 (25,249) 159,359 78,527 - - - 879,942 693,277 698,755 538,181 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 69 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 14. PROPERTY, PLANT AND EQUIPMENT (continued) All amounts are expressed in K’000 Reconciliation is as follows: Capital Work in Progress At 1 January Additions Transfers At 31 December Premises At 1 January Additions Disposals Revaluation gains/ (losses) Depreciation expense At 31 December Equipment At 1 January Additions Disposals Depreciation expense At 31 December Right of Use Assets At 1 January Additions Depreciation expense At 31 December Assets subject to operating lease Carrying value Aircraft Accumulated depreciation At 31 December Reconciliation of carrying value of aircraft is set out below: Aircraft At 1 January Depreciation Disposal of aircraft At 31 December 70 Consolidated Bank 2019 2018 2019 2018 39,295 70,711 32,540 51,065 129,033 (117,038) 118,851 (150,267) 120,758 (107,368) 108,347 (126,872) 51,290 39,295 45,930 32,540 537,669 26,067 (4,720) (5,416) (27,723) 525,877 116,313 53,562 (571) (48,936) 120,368 - 209,354 (26,947) 182,407 560,019 20,492 (12,049) (488) (30,305) 537,669 107,940 55,789 (1,465) (45,951) 116,313 - - - - 427,114 13,479 (4,478) (6,419) (25,178) 404,518 78,527 46,465 (419) (35,625) 88,948 - 184,608 (25,249) 159,359 451,281 14,355 (12,049) - (26,473) 427,114 71,959 41,258 (1,335) (33,355) 78,527 - - - - 59,600 (11,467) 48,133 59,600 (7,167) 52,433 59,600 (11,467) 48,133 59,600 (7,167) 52,433 52,433 (4,300) - 48,133 70,689 (4,743) (13,513) 52,433 52,433 (4,300) - 48,133 70,689 (4,743) (13,513) 52,433 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD14. PROPERTY, PLANT AND EQUIPMENT (continued) All amounts are expressed in K’000 Future minimum lease receipts Not later than 1 year Later than 1 year and not later than 5 years At 31 December NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Consolidated Bank 2019 2018 2019 2018 8,253 2,751 11,004 8,253 11,004 19,257 8,253 2,751 11,004 20,319 140,871 9,274 170,464 8,253 11,004 19,257 20,312 146,989 11,165 178,466 The carrying amount of land, buildings and aircraft had they been recognised under the cost model are as follows: Land Buildings Aircraft At 31 December 21,695 148,514 9,274 179,483 20,865 155,727 11,165 187,757 Land and buildings carried at fair value Independent valuations of the Bank’s land and buildings were performed by The Professional Valuers of PNG Limited to determine the fair value of the land and buildings. The valuations, which conform to International Valuation Standards, were determined by reference to capitalization of the notional income stream approach on the Market Value basis. The recent valuation was dated 30 November 2017 for all properties except for PNG Bank residential properties which were revalued at 30 November 2019. Assets subject to operating lease – aircraft An independent valuation of the Bank’s aircrafts was performed by Charles Taylor Aviation Asset Management to determine the current realistic fair value for each of the aircraft. The valuation, which conforms to International Valuation Standards, takes into consideration the current global market variations for the specific types of aircrafts. The effective date of the valuation was 31 May 2017. 15. LEASES i) Amounts recognised in the balance sheet Right of use assets1 Properties Equipment At 31 December 1Included in the line item ‘Property, plant and equipment’ in the balance sheet. Lease liabilities2 Current Non-Current At 31 December 178,290 4,117 182,407 30,493 159,671 190,164 - - - - - - 155,979 3,380 159,359 24,099 139,163 163,262 - - - - - - 2Included in the line item ‘other liabilities’ in the balance sheet. In the previous year, the group only recognized lease liabilities in relation to leases that were classified as ‘finance leases’ under IAS 17 Leases. These were presented as part of the group’s borrowings. For adjustments recognized on adoption of IFRS 16 on 1 January 2019, please refer to note 1. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 71 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 15. LEASES (continued) All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank Additions to the right of use assets during the 2019 financial year 11,026 ii) Amounts recognised in the statement of profit or loss The statement of profit or loss shows the following amounts relating to leases: Depreciation charge of right of use assets Properties and equipment Interest expense (included in finance cost) 28,239 4,572 Expense relating to short-term leases(included in administrative expenses) 22,225 Expense relating to leases of low value assets that are not short term leases (included in administrative expenses) 35 Total cash outflow for leases in 2019 48,432 - - - - - - 16. INVESTMENT PROPERTIES Opening net book value Additions Translation movement Gain on revaluation At 31 December Investment properties have been accounted for in accordance with Note 1 (u). 153,665 6,619 1,632 6,444 134,020 13,930 (299) 6,014 168,360 153,665 10,143 25,359 3,943 21,717 - 45,173 - - - - - - - - - - - - - - - - - 72 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD17. OTHER FINANCIAL ASSETS All amounts are expressed in K’000 Inscribed stock – issued by Central Bank Less allowance for impairment Financial assets carried at fair value through profit and loss: Equity securities At 31 December Allowance for impairment At 1 January Provision/(release) for impairment At 31 December 18. OTHER ASSETS Funds in transit and other assets Accrued interest income Intercompany account Outstanding premiums Inventory Prepayments Accounts receivable At 31 December 19. AMOUNTS DUE TO OTHER BANKS Vostro account balances Other borrowings At 31 December 20. CUSTOMER DEPOSITS On demand and short term deposits Term deposits At 31 December NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Consolidated Bank 2019 2018 2019 2018 1,870,869 2,373,104 1,577,701 2,079,723 (5,170) (6,004) (4,946) (5,850) 1,865,699 2,367,100 1,572,755 2,073,873 255,372 188,343 - - 2,121,071 2,555,443 1,572,755 2,073,873 6,004 (834) 5,170 194,315 101,066 - 17,681 17,837 32,524 3,571 5,984 20 6,004 48,466 99,785 - 14,954 12,263 25,656 4,358 5,850 (904) 4,946 146,054 93,535 6,960 - - 27,815 2,254 5,850 - 5,850 41,863 92,532 3,067 - - 22,201 2,630 366,994 205,482 276,618 162,293 47,083 36,848 83,931 29,375 22,164 51,539 66,786 95,359 62,465 53,554 162,145 116,019 15,322,280 13,903,428 14,605,182 13,168,693 4,016,776 4,329,338 3,376,574 3,790,477 19,339,056 18,232,766 17,981,756 16,959,170 The majority of the amounts are due to be settled within 12 months of the balance sheet date as shown in the maturity analysis table on note 35. The deposits are diversified across industries and region. 21. SUBORDINATED DEBT SECURITIES Outstanding debt securities of K75.525m were settled in May 2019. The notes were issued during 2009, with a maturity date in May 2019, and interest payable semi-annually at 11% per annum. They were valued at amortised cost. There were no defaults of interest or other breaches with respect to these debt securities since issue. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 73 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 22. OTHER LIABILITIES All amounts are expressed in K’000 Policy liability Items in transit and all other liabilities Borrowings Creditors and accruals Premiums received in advance Outstanding claims Claims incurred but not reported (IBNR) Note 40(b) Consolidated Bank 2019 2018 2019 2018 890,147 532,684 116,817 184,941 6,329 18,679 2,297 818,198 431,950 144,300 202,789 5,895 18,429 2,431 - 520,720 116,817 122,218 - - - - 447,460 144,300 175,221 - - - At 31 December 1,751,894 1,623,992 759,755 766,981 Reconciliation of changes in liabilities arising from financing activities A loan amounting to K253.969 million (USD80 million) was obtained in 2016 with principal repayment to commence in 2018. During 2019, the Bank paid K69.493 million and an additional loan of K33.670 million was received. Foreign currency gain of K8.340 million was recognised arising from translation, offset by depreciation of the counter party loan. 23. OTHER PROVISIONS Staff related Provision for non-lending loss Provisions – other At 31 December Staff related provisions: At 1 January Provisions charge Payouts At 31 December 24. ORDINARY SHARES 99,629 57,726 46,307 89,674 65,217 39,212 84,934 57,726 43,914 76,543 65,215 36,041 203,662 194,103 186,574 177,799 89,674 76,227 (66,272) 99,629 88,071 74,525 (72,922) 89,674 76,543 71,812 (63,421) 84,934 75,233 69,787 (68,477) 76,543 Number of shares in '000s, Book value in K'000 At 31 December 2017/1 January 2018 Share buyback At 31 December 2018 / 1 January 2019 Share buyback At 31 December 2019 Number of shares Book value 467,312 (66) 467,246 (6) 373,001 (637) 372,364 (54) 467,240 372,310 In May 2014, the Directors introduced a share-buyback scheme of up to K15 million. The share-buyback commenced in July 2014 and was extended to such time when the allocated K15 million buyback was utilised, or if the Board wishes, anytime before that. As at 31 December 2019, a total of K9.192m has been bought back under this scheme. 74 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD24. ORDINARY SHARES (continued) All amounts are expressed in K’000 Earnings per ordinary share Net profit attributable to shareholders (K’000) Weighted average number of ordinary shares in use (‘000) Basic and diluted earnings per share (expressed in toea) NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Consolidated Bank 2019 2018 2019 2018 890,363 467,242 190.6 844,072 467,279 180.6 845,828 467,242 181.0 787,446 467,279 168.5 Basic earnings per ordinary share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. Bank of South Pacific Limited has no dilutive potential ordinary shares. Consequently, basic earnings per ordinary share equals diluted earnings per share. Dividends paid on ordinary shares Interim ordinary dividend (2019: 38 toea; 2018:36 toea) Final ordinary dividend (2018:101 toea; 2017:91 toea) 25. RETAINED EARNINGS AND OTHER RESERVES Retained earnings At 1 January IFRS 9 transition provisions Tax impact on IFRS 9 transition provisions Restated balance as at 1 January 2019 Net profit for the year Dividends paid Interim Dividends paid Disposal of assets – Asset revaluation BSP Life policy reserve (Gain)/loss in minority interest At 31 December Other reserves comprise Revaluation reserve Capital reserve Equity component of Fiji Class Shares General reserve Exchange reserve At 31 December 177,551 476,389 653,940 169,341 428,023 597,364 177,551 471,915 649,466 168,210 425,204 593,414 2,156,873 1,904,462 1,976,138 1,777,627 - - (14,147) 4,244 - - (14,601) 4,380 2,156,873 1,894,559 1,976,138 1,767,406 890,363 (476,389) (177,551) 4,933 (3,597) (250) 844,072 845,828 (428,023) (471,915) (169,341) (177,551) 18,116 (3,416) 906 4,933 (3,597) - 787,446 (425,204) (168,210) 18,116 (3,416) - 2,394,382 2,156,873 2,173,836 1,976,138 142,819 149,829 130,725 137,708 635 21,578 44,503 136,978 346,513 635 21,578 40,920 126,358 339,320 635 - 44,503 78,614 635 - 40,920 73,121 254,477 252,384 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 75 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 25. RETAINED EARNINGS AND OTHER RESERVES (continued) All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank Movement in reserves for the year: Revaluation reserve At 1 January Asset revaluation increment/(decrement) Transfer asset revaluation reserve to retained earnings Deferred tax on disposal of properties At 31 December Capital reserve At 1 January At 31 December General reserve At 1 January BSP Life policy reserve Fiji Government green bond revaluation At 31 December Exchange reserve At 1 January Movement during the year At 31 December Equity component of convertible notes 149,829 161,373 137,708 150,389 (5,719) (4,933) 3,642 1,624 (18,116) 4,948 (5,714) (4,933) 3,664 - (18,116) 5,435 142,819 149,829 130,725 137,708 635 635 635 635 635 635 635 635 40,920 3,597 (14) 44,503 126,358 10,620 136,978 37,496 3,416 8 40,920 125,306 1,052 126,358 40,920 3,597 (14) 44,503 73,121 5,493 78,614 37,496 3,416 8 40,920 71,854 1,267 73,121 On 20 April 2010, the Group issued 3,064,967 Fiji Dollars (FJD) denominated mandatory convertible notes through its wholly owned subsidiary BSP Convertible Notes Limited (BSP CN) at an issue price of FJD5.25 (K7.30) per note. The notes mandatorily converted to Fiji Class Shares on 20 April 2013 based on a conversion ratio of 1:1. Key rights of Fiji Class Shareholders are as follows: (i) (ii) (iii) The right to receive dividend equal to the amount of dividend to be paid on BSP Ordinary Share. The same voting rights as a BSP Ordinary Share and effected through a special voting share held by the Chairman of BSP. The Fiji Class Share may be exchanged on a one for one basis into BSP Ordinary Shares at a subsequent date and at the option of BSP on the occurrence of certain prescribed events. 26. CONTINGENT LIABILITIES AND COMMITMENTS Off balance sheet financial instruments Letters of credit Guarantees and indemnities issued Commitments to extend credit At 31 December 121,600 366,170 135,219 473,748 117,057 341,373 133,560 433,978 2,088,924 1,626,879 2,003,881 1,497,722 2,576,694 2,235,846 2,462,311 2,065,260 76 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 26. CONTINGENT LIABILITIES AND COMMITMENTS (continued) Legal Proceedings A number of legal proceedings against the Group were outstanding as at 31 December 2019. Based on information available at 31 December 2019, the Group estimates a contingent liability of K15.8 million (2018: K21.1 million) in respect of these proceedings. All amounts are expressed in K’000 Commitments for capital expenditure Consolidated Bank 2019 2018 2019 2018 Amounts with firm commitments not reflected in the accounts 55,829 21,017 51,313 19,702 Operating lease commitments (premises) Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years At 31 December 27. FIDUCIARY ACTIVITIES 34,603 105,573 115,811 255,987 38,848 56,210 22,312 28,238 89,486 78,861 36,341 52,491 20,226 117,370 196,585 109,058 The Group especially through BSP Capital Limited conducts investment fund management and other fiduciary activities as responsible entity, trustee, custodian or manager for investment funds and trusts, including superannuation. These funds are not consolidated as the Group does not have direct or indirect control. Where the funds incur liabilities in respect of these activities, and the primary obligation is incurred in an agency capacity for the fund or clients rather than its own account, a right of indemnity exists against the assets of the applicable fund or trust. As these assets are sufficient to cover the liabilities and it is therefore not probable that the Group will be required to settle the liabilities, the investments in the assets and liabilities of these activities are not included in the Financial Statements. 28. DIRECTORS AND EXECUTIVE REMUNERATION Directors remuneration Directors of the company received remuneration including benefits during 2019 as detailed below: All amounts in Kina Name of Director Sir K. Constantinou, OBE** R. Fleming, CSM* G. Robb, OAM** F. Talao E. B Gangloff A. Mano** A. Sam Dr. F Lua’iufi S. Davis R. Bradshaw Meetings attended /total held Appointed/ (Resigned) 8/8 8/8 7/8 8/8 8/8 6/8 8/8 8/8 8/8 8/8 - - - (Dec 2019) - - - - - - Total remuneration 2019 Bank Subsidiaries Total 2018 Total 561,304 360,000 921,304 1,311,304 - 343,152 318,152 343,152 280,652 330,652 305,652 330,652 305,652 - - 120,000 463,152 60,000 60,000 60,000 - - - - 378,152 403,152 340,652 330,652 305,652 330,652 305,652 - 613,152 378,152 403,152 490,652 330,652 305,652 330,652 305,652 3,119,020 660,000 3,779,020 4,469,020 Shareholder Approved Cap 4,500,000 4,500,000 * Managing Director/Chief Executive Officer receives no fees for his services as Director during the year. Other members of BSP executive management who serve as directors of subsidiaries of BSP Group receive no fees for their services as Director. ** The 2018 remuneration included backdated allowances from 2015 to 2017 paid to directors for BSP Subsidiary boards as follows: Constantinou - K390,000, Robb - K150,000 and Mano K150,000. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 77 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 28. DIRECTORS AND EXECUTIVE REMUNERATION (continued) Executive remuneration The number of employees or former employees whose income from the Bank was equal to or greater than K100,000 during the year, are classified in income bands of K10,000 as follows: 2019 No. 53 61 47 31 29 17 20 23 16 11 15 14 9 8 16 4 4 5 - 5 4 5 - 2 1 2 2 5 - 1 2 1 11 2 3 1 4 3 2 4 2018 Remuneration No. 72 53 41 22 30 21 21 14 20 10 10 11 11 9 6 2 1 2 4 2 2 1 3 3 2 7 - 4 3 4 1 7 3 4 1 4 2 4 2 1 K’000 500 – 510 510 – 520 520 – 530 530 – 540 540 – 550 550 – 560 560 – 570 570 – 580 580 – 590 590 – 600 600 – 610 610 – 620 620 – 630 630 – 640 640 – 650 650 – 660 660 – 670 670 – 680 680 – 690 690 – 700 700 – 710 720 – 730 730 – 740 740 – 750 750 – 760 770 – 780 780 – 790 790 – 800 810 – 820 820 – 830 840 – 850 860 – 870 870 – 880 880 – 890 890 – 900 900 – 910 910 – 920 920 – 930 930 – 940 950 – 960 2019 No. 3 2 4 2 - 1 - 2 1 2 1 3 1 - 1 2 2 - 1 - 1 1 1 1 1 2 3 3 - 1 1 1 2 1 1 1 - - 2 - 2018 Remuneration No. 2 - - 1 1 - 2 2 2 3 - 2 2 1 - - 1 1 - 1 - 2 - - - - 2 1 1 1 1 2 - - 1 1 2 1 - 1 K’000 960 – 970 980 – 990 990 – 1000 1000 – 1010 1010 – 1020 1020 – 1030 1040 – 1050 1050 – 1060 1060 – 1070 1070 – 1080 1090 – 1100 1110 – 1120 1120 – 1130 1130 – 1140 1140 – 1150 1150 – 1160 1180 – 1190 1220 – 1230 1260 – 1270 1280 – 1290 1290 – 1300 1300 – 1310 1400 – 1410 1430 – 1440 1470 – 1480 1480 – 1490 1490 – 1500 1550 – 1560 1740 – 1750 1750 – 1760 1760 – 1770 1770 – 1780 1850 – 1860 1870 – 1880 2150 – 2160 2190 – 2200 2500 – 2510 2580 – 2590 5960 – 5970 6280 – 6290 2019 No. 2018 No. 1 1 - 1 - 1 - - 2 1 - 1 1 1 1 - 1 1 1 1 - 2 1 1 - 1 1 1 1 1 1 - 1 - 1 - 1 - - 1 1 - 1 1 2 2 1 1 2 1 1 1 1 1 - 1 1 - - 1 1 - 1 1 1 - - - - 1 1 1 - 1 - 1 - 1 1 - Total 523 487 Remuneration K’000 100 – 110 110 – 120 120 – 130 130 – 140 140 – 150 150 – 160 160 – 170 170 – 180 180 – 190 190 – 200 200 – 210 210 – 220 220 – 230 230 – 240 240 – 250 250 – 260 260 – 270 270 – 280 280 – 290 290 – 300 300 – 310 310 – 320 320 – 330 330 – 340 340 – 350 350 – 360 360 – 370 370 – 380 380 – 390 390 – 400 400 – 410 410 – 420 420 – 430 430 – 440 440 – 450 450 – 460 460 – 470 470 – 480 480 – 490 490 – 500 78 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD28. DIRECTORS AND EXECUTIVE REMUNERATION (continued) The specified executives during the year received these remuneration: 2019 Short Term Incentive Non - monetary Super- annuation Officer R Fleming CSM R Loggia E Ruha P Beswick R George M Hallinan P Thornton D Faunt C Michaud N Kulu H Rabura A M Fenech Total Officer R Fleming CSM R Loggia E Ruha P Beswick R George P Thornton M Hallinan C Michaud H Rabura D Faunt N Kulu A Baliki Total Salary 4,148 1,501 1,321 1,095 1,080 1,095 1,095 887 901 739 747 255 929 267 323 268 264 247 262 168 217 208 139 - 14,864 3,292 Salary 3,823 1,513 1,332 1,104 1,088 1,104 984 908 752 871 507 335 Short Term Incentive 1,053 356 365 296 282 283 246 205 180 - - - 43 113 67 68 68 66 30 67 66 153 111 4 856 21 102 57 57 57 21 57 57 75 57 21 10 14,321 3,266 592 - - - - - - - 75 - 62 63 - - - - - - - - - 62 41 41 29 173 2018 Non - monetary Super- annuation NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 Long term incentive 1,112 439 387 320 316 320 320 260 264 219 219 - Benefits 49 188 54 103 37 30 40 40 39 28 22 15 Total 6,281 2,508 2,152 1,854 1,765 1,758 1,747 1,497 1,487 1,409 1,301 274 200 4,176 645 24,033 Long term incentive 1,039 444 391 324 320 324 247 267 210 - 70 - Benefits 27 174 48 96 23 36 18 36 9 27 15 20 Total 5,963 2,589 2,193 1,877 1,770 1,768 1,552 1,473 1,288 996 654 394 3,636 529 22,517 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 79 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 29. RECONCILIATION OF OPERATING CASH FLOW All amounts are expressed in K’000 2019 2018 2019 2018 Reconciliation of operating profit after tax to operating cash flow before changes in operating assets Consolidated Bank Operating profit after tax Add: Tax expense Operating profit before income tax Major non cash amounts Depreciation Amortisation of deferred acquisition and computer development costs Net (Gain)/loss on sale of fixed assets Movement in forex income accrual Impairment on financial assets Movement in payroll provisions Impairment of subsidiary Impairment of fixed assets Net effect of other accruals 890,363 362,556 844,072 352,096 845,828 342,439 787,446 329,093 1,252,919 1,196,168 1,188,267 1,116,539 107,906 28,173 (2,088) 10,620 99,183 9,956 - 1,975 (68,417) 81,000 27,399 1,879 1,052 82,440 1,603 - 13,888 18,753 90,352 22,577 33 5,493 88,092 8,391 - 1,975 (5,074) 64,572 22,546 1,879 1,267 71,639 1,310 803 13,888 30,398 Operating cash flow before changes in operating assets & liabilities 1,440,227 1,424,182 1,400,106 1,324,841 Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than 90 days maturity. Cash and balances with Central Banks (note 10) 1,816,564 1,253,449 1,510,406 Amounts due from other banks (note 12)1 Amounts due to other banks (note 19) At 31 December 1,022,469 (83,931) 854,019 (51,539) 997,816 966,707 796,180 (162,145) (116,019) 2,755,102 2,055,929 2,346,077 1,646,868 1The Group undertakes thorough compliance and due diligence reviews before entering into any correspondent banking relationships. There is also a cash and cash equivalent of K31.275 million held with counter-party Banks that are not available for use by the Group. 80 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 30. SEGMENT INFORMATION The Bank and the Group comprise various segments, these being the provision of banking services and products, stock broking and insurance services and asset financing. For management purposes, segment information determination is based on the risks involved with the provision of core banking services and products and the Bank and Group’s management reporting system. The main business lines for management purposes are core banking services in Papua New Guinea, Banking Services in other jurisdictions outside Papua New Guinea, insurance operations, stock broking, fund management and asset financing activities. The Bank and Group’s business segments operate in Papua New Guinea, Fiji, Solomon Islands, Cook Islands, Tonga, Samoa, Vanuatu and Cambodia. Inter segment adjustments reflect elimination entries in respect of inter segment income and expense allocations included funds transfer pricing. Consolidated All amounts are in K’000 Analysis by segments Year ended 31 December 2019 Net interest income Other income Net insurance income Total operating income Operating expenses Impairment expenses Profit before income tax Income tax Net profit after income tax Year ended 31 December 2018 Net interest income Other income Net insurance income Total operating income Operating expenses Impairment expenses Profit before income tax Income tax Net profit after income tax PNG Bank Non PNG Bank Non Bank Entities Adjust Inter Segments Total 1,115,454 542,027 - 1,657,481 (582,740) (58,555) 1,016,186 (297,480) 718,706 1,118,342 532,234 - 1,650,576 (632,386) (56,190) 962,000 (287,802) 674,198 241,808 243,347 - 485,155 (220,439) (36,244) 228,472 (58,085) 170,387 232,513 228,731 - 461,244 (236,598) (22,227) 202,419 (51,409) 151,010 30,772 18,496 34,999 84,267 (20,393) (4,384) 59,490 (6,991) 52,499 27,707 11,735 40,512 79,954 (18,624) (4,023) 57,307 (12,885) 44,422 3,750 1,391,784 (54,979) (4,324) (55,553) 4,324 - (51,229) - (51,229) 2,234 (26,704) (1,599) (26,069) 511 - (25,558) - (25,558) 748,891 30,675 2,171,350 (819,248) (99,183) 1,252,919 (362,556) 890,363 1,380,796 745,996 38,913 2,165,705 (887,097) (82,440) 1,196,168 (352,096) 844,072 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 81 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 31. RELATED PARTY TRANSACTIONS Related parties are considered to be enterprises or individuals with whom the Group is especially related because either they or the Bank are in a position to significantly influence the outcome of transactions entered into with the Group, by virtue of being able to control, dominate or participate in a fiducia- ry capacity, in decision-making functions or processes. The Group conducted transactions with the following classes of related parties during the year: • Directors and/or parties in which the director has significant influence • Key management personnel and other staff and/or parties in which the individual officer has significant influence A number of banking transactions are entered into with these related parties in the normal course of business, and include loans, deposits, property rentals, share transfers and foreign currency transactions. These transactions are carried out on commercial terms and market rates. For the year ended 31 December 2019, balances and transactions of accounts for Directors, including companies in which directorships were held by BSP directors, were as follows: All amounts are expressed in K’000 Customer Deposits Opening balances Net movement Closing balance Interest paid Loans, advances and other receivables from customers Opening balances Loans issued1 Interest Charges Loan repayments Closing balance Consolidated 2019 2018 30,925 14,295 45,220 17 899,451 61,750 66,032 3,869 17,731 13,194 30,925 24 631,650 458,213 44,390 3,376 (116,634) (238,178) 914,468 899,451 12018 included Air Niugini Limited loan following Director Constantinou’s appointment to the Board of Air Niugini Limited during 2018. Air Niugini Limited has been a customer of BSP since inception and had pre-existing facilities with BSP prior to 2018. Subsidised transactions are provided for staff. Such transactions include marginal discounts on interest rates, and specific fee concessions. These benefits are mainly percentage-based on market rates and fees, and as such, staff accounts are always subject to underlying market trends in interest rates and fees. As at 31 December 2019, staff account balances were as follows: Housing loans Other loans At 31 December Cheque accounts Savings accounts At 31 December 192,749 68,197 260,946 6,643 20,824 27,467 169,858 43,826 213,684 7,533 13,532 21,065 32. BANK OPERATIONS, RISKS AND STRATEGIES IN USING FINANCIAL INSTRUMENTS All business operations must deal with a variety of operational and financial risks. The business activities of a bank expose it to very critical and specific risks, which are principally related to the Group's primary financial intermediary role in the financial markets, including the use of financial instruments including derivatives. These risks (risk of an adverse event in the financial markets that may result in loss of earnings) include liquidity risk, foreign exchange risk, interest rate risk and credit risk. The Group accepts deposits from customers at both fixed and floating rates and for various periods and seeks to earn above average interest margins by investing these funds in high quality assets. These margins are achieved and increased by consolidating short-term funds and lending for longer 82 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 32. BANK OPERATIONS, RISKS AND STRATEGIES IN USING FINANCIAL INSTRUMENTS (continued) periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due. The Group also seeks to optimise its interest margins by obtaining above average returns, net of provisions, through lending to commercial and retail borrowers with a range of credit standing. In addition to directly advancing funds to borrowers, the Group also enters into guarantees and other commitments such as letters of credit, performance bonds, and other bonds. The Group also enters into transactions denominated in foreign currencies. This activity generally requires the Group to take foreign currency positions in order to exploit short term movements in the foreign currency market. The Board places limits on the size of these positions. The Group also has a policy of using offsetting commitments for foreign exchange contracts, effectively minimising the risk of loss due to adverse movements in foreign currencies. 33. CAPITAL ADEQUACY The Group is required to comply with various prudential standards issued by the Bank of Papua New Guinea (BPNG), the official authority for the prudential supervision of banks and similar financial institutions in Papua New Guinea. Additionally, subsidiaries and branches in Fiji, Solomon Islands, Cook Islands, Samoa, Tonga ,Vanuatu and Cambodia are required to adhere to prudential standards issued by the Reserve Bank of Fiji (RBF), Central Bank of Solomon Islands (CBSI), The Financial Supervisory Commission (FSC), Central Bank of Samoa (CBS), National Reserve Bank of Tonga (NRBT), Reserve Bank of Vanuatu (RBV)and the National Bank of Cambodia (NBC). One of the most critical prudential standards is the capital adequacy requirement. All banks are required to maintain at least the minimum acceptable measure of capital to risk-weighted assets to absorb potential losses. The BPNG follows the prudential guidelines set by the Bank of International Settlements under the terms of the Basel Accord. The BPNG revised prudential standard 1/2003, Capital Adequacy, prescribes ranges of overall capital ratios to measure whether a bank is under, adequately, or well capitalised, and also applies the leverage capital ratio. The Group complies with the prevailing prudential requirements for total capital and leverage capital. As at 31 December 2019, the Group’s total capital adequacy ratio and leverage capital ratio satisfied the capital adequacy criteria for a ‘well-capitalised’ bank. The minimum capital Risk in the Group is managed through a system of delegated limits. These limits set the maximum level of risk that can be assumed by each operational unit and the Group as a whole. The limits are delegated from the Board of Directors to executive management and hence to the respective operational managers. The risk management framework establishes roles, responsibilities and accountabilities of the Asset and Liability Committee, the Credit Committee, the Operational Risk Committee and the Executive Committee, the specific management committees charged with the responsibility for ensuring the Group has appropriate systems, policies and procedures to measure, monitor and report on risk management. The framework also includes policies and procedures which detail formal feedback processes to these management committees, to the Audit, Risk and Compliance Committee of the Board, and ultimately to the Board of Directors. adequacy requirements set out under the standard are: Tier 1 8%, total risk based capital ratio 12% and the leverage ratio 6%. The measure of capital used for the purposes of prudential supervision is referred to as base capital. Total base capital varies from the balance of capital shown on the Statement of Financial Position and is made up of tier 1 capital (core) and tier 2 capital (supplementary). Tier 1 capital is obtained by deducting from equity capital and audited retained earnings (or losses), intangible assets including deferred tax assets. Tier 2 capital cannot exceed the amount of tier 1 capital, and can include subordinated loan capital, specified asset revaluation reserves, un-audited profits (or losses) and a small percentage of general loan loss provisions. The leverage capital ratio is calculated as Tier 1 capital divided by total assets on the balance sheet. Risk weighted assets are derived from on-balance sheet and off-balance sheet assets. On balance sheet assets are weighted for credit risk by applying weightings (0, 20, 50 and 100 per cent) according to risk classification criteria set by the BPNG. Off-balance sheet exposures are risk weighted in the same way after converting them to on-balance sheet credit equivalents using BPNG specified credit conversion factors. All amounts are expressed in K’000 Balance sheet assets (net of provisions) Balance sheet / notional amount Risk-weighted amount 2019 2018 2019 2018 Currency 3,583,165 2,938,993 69,942 19,502 Loans, advances and other receivables from customers 13,230,783 12,530,649 10,539,279 9,813,150 Investments and short term securities All other assets Off-balance sheet items Total Capital Ratios a) Tier 1 capital Total capital b) Leverage capital ratio 4,580,568 3,132,602 2,576,694 5,050,143 2,530,275 2,235,846 224,510 1,839,673 286,666 188,343 1,444,738 322,716 27,103,812 25,285,906 12,960,070 11,788,449 Capital (K’000) Capital Adequacy Ratio (%) 2019 2018 2019 2018 2,526,509 2,848,723 2,338,587 2,694,901 19.5% 22.0% 10.5% 19.8% 22.9% 10.3% BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 83 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 34. CREDIT RISK AND ASSET QUALITY 34.1 Credit Risk The Group incurs risk with regard to loans, advances and other receivables due from customers and other monies or investments held with financial institutions. Credit risk is the likelihood of future financial loss resulting from the failure of clients or counter-parties to meet contractual obligations to the Group as they fall due. Credit risk is managed by analysing the risk spread across various sectors of the economy and by ensuring risk is diversely spread by personal and commercial customer. Individual exposures are measured using repayment performance, reviews and statistical techniques. Comprehensive credit standards and approval limits have been formulated and approved by the Credit Committee. The Credit Committee (which reports to the Board through the Executive and Chief Executive Officer) is responsible for the development and implementation of credit policy and loan portfolio review methodology. The Credit Committee is the final arbiter of risk management and loan risk concentration. The Group has in place processes that identify, assess and control credit risk in relation to the loan portfolio, to assist in determining the appropriateness of provisions for loan impairment. These processes also enable assessments to be made of other classes of assets that may carry an element of credit risk. The Group assigns quality indicators to its credit exposures to determine the asset quality profile. Group Internal Scale S&P Letter Grade Description 1 2 3 4 5 6 7 8 9 10 11 12 13 14 BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- D-I D-II Standard Monitoring Special Monitoring Substandard Doubtful Loss 34.1.1 Credit Risk Measurement 34.1.2 Expected Credit Loss Management Loans and advances (incl. loan commitments and guarantees) The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). Credit risk grading The Group uses an internal credit risk grading system that reflects its assessment of the probability of default of individual counterparties. Borrower and loan specific information collected at the time of application (such as disposable income, and level of collateral for retail exposures; and turnover and industry type for wholesale exposures) is fed into this rating model. This is supplemented with external data such as credit bureau scoring information on individual borrowers. In addition, the models enable expert judgement from the Chief Risk Officer to be fed into the final internal credit rating for each exposure. This allows for considerations which may not be captured as part of the other data inputs into the model. The Group’s rating method comprises 11 rating levels for instruments not in default (1 to 11) and three default classes (12 to 14). The master scale assigns each rating category a specified range of probabilities of default, which is stable over time. The rating methods are subject to an annual validation and recalibration so that they reflect the latest projections in the light of all actually observed defaults. IIFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition, as summarised below: • • • A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Group. If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired. Please refer to note 34.1.2.1 for a description of how the Group determines when a significant increase in credit risk has occurred. If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’. Please refer to note 34.1.2.2 for a description of how the Group defines credit-impaired and default. Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis. Please refer to note 34.1.2.3 for a description of inputs, assumptions and estimation techniques used in measuring the ECL. • A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward- looking information. Note 34.1.2.4 includes an explanation of how the Group has incorporated this in its ECL models. 84 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 34. CREDIT RISK AND ASSET QUALITY (continued) The following diagram summarises the impairment requirements under IFRS 9. Change in credit quality since initial recognition Stage 1 (Initial recognition) Stage 2 Stage 3 (Significant increase in credit risk since initial recognition) (Credit-impaired assets) 12-month expected credit losses Lifetime expected credit losses Lifetime expected credit losses The key judgements and assumptions adopted by the Group in addressing the requirements of the standard are discussed below: 34.1.2.1 Significant Increase in Credit Risk (SICR) The Group considers a financial instrument to have experienced a significant increase in credit risk when one or more of the following quantitative, qualitative or backstop criteria have been met: • • It is becoming probable that the borrower will enter bankruptcy Financial assets are purchased or originated at a deep discount that reflects the incurred credit losses. • Qualitative Criteria - if the instrument meets one or more of the following criteria: - Significant adverse changes in business, financial and/or economic conditions in which the borrower operates - Actual or expected forbearance or restructuring - Actual or expected significant adverse change in operating The criteria above have been applied to all financial instruments held by the Group and are consistent with the definition of default used for internal credit risk management purposes. The default definition has been applied consistently to model the Probability of Default (PD), Exposure at Default (EAD) and Loss given Default (LGD) throughout the Group’s expected loss calculations. results of the borrower - Significant change in collateral value (secured facilities only) which is expected to increase risk of default - Early signs of cash flow/liquidity problems such as delay in servicing of trade creditors/loans • • Quantitative criteria - applies to performing loans risk graded at 10 or 11 as per BSPs credit rating system which are ‘watch list’ categories. By definition, these have experienced a SICR event since inception hence needs to be classified as Stage 2, with lifetime PDs applicable. This criteria applies regardless of whether loans in these two RGs are in arrears or not. Backstop - A backstop is applied and the financial instrument considered to have experienced a significant increase in credit risk if the borrower is more than 30 days past due on its contractual payments. The Group has not used the low credit risk exemption for any financial instrument in the year ending 31 December 2019. 34.1.2.2 Definition of default and credit-impaired assets The Group defines a financial instrument as in default, which is fully aligned with the definition of credit- impaired, when it meets one or more of the following criteria: Quantitative criteria The borrower is more than 90 days past due on its contractual payments. Qualitative criteria The borrower meets unlikeliness to pay criteria, which indicates the borrower is in significant financial difficulty. These are instances where: • • • • • • The borrower is in long-term forbearance The borrower is deceased The borrower is insolvent The borrower is in breach of financial covenant(s) An active market for that financial asset has disappeared because of financial difficulties Concessions have been made by the lender relating to the borrower’s financial difficulty An instrument is considered to no longer be in default (i.e. to have cured) when it no longer meets any of the default criteria for a consecutive period of six months. This period of six months has been determined based on an analysis which considers the likelihood of a financial instrument returning to default status after cure using different possible cure definitions. 34.1.2.3 Measuring ECL – Explanation of inputs, assumptions and estimation techniques The Expected Credit Loss (ECL) is measured on either a 12-month (12M) or Lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. Expected credit losses is the product of the Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD), defined as follows: • • • The PD represents the likelihood of a borrower defaulting on its financial obligation (as per “Definition of default and credit- impaired” above), either over the next 12 months (12M PD), or over the remaining lifetime (Lifetime PD) of the obligation. EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur. Loss Given Default (LGD) represents the Group’s expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). Forward-looking economic information is also included in determining the 12-month and lifetime PD, EAD and LGD. These assumptions vary by BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 85 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 34. CREDIT RISK AND ASSET QUALITY (continued) product type. Refer to note 34.1.2.4 for an explanation of forward- looking information and its inclusion in ECL calculations. Model adjustments are also included within the ECL allowance. Model adjustments are used in circumstances where it is judged that the existing inputs, assumptions and model techniques do not capture all relevant risk factors. The emergence of new macroeconomic, microeconomic factors, changes to parameters or credit risk data not incorporated current parameters are examples of such circumstance. The Group used statistical models to convert historical PDs into forward looking lifetime PDs. The conversion process looks at the historical relationship between long-term PDs for a particular year and the observed (annual) default rate for the same year (called the ‘Z-factor’) and a set of systematic factors for the year. The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses which are as follows: • • GDP Growth (%) Change in Unemployment (%) • • • • Change in Equity Index (%) Change in Energy Index (%) Change in Non-Energy Index (%) Change in the Proportion of Downgrades (%) These are then compared to the expected systematic factors and long- term PDs for a future year to estimate the PiT PDs for that future year. Forecasts of these economic variables (the “base economic scenario”) are provided by the Group’s Strategy team and provide the best estimate view of the economy over the next five years. Z-factors are estimated for five years based on forecast systematic data and all future years from year 6 are adjusted using Z- factors which diminish in magnitude from the one estimated for year 5. Economic variable assumptions The period-end assumptions used for the ECL estimate as at 31 December 2019 are set out below. The scenarios “base”, “upside” and “downside” were used for all portfolios. Economic Variable GDP Growth (%) Change in Unemployment (% total lab force) (%) Change in Equity Index (%) Change in Energy Index (%) Change in Non-Energy Index (%) Change in the Proportion of Downgrades (%) Scenario Base Upside Downside Base Upside Downside Base Upside Downside Base Upside Downside Base Upside Downside Base Upside 2020 2.70% 3.20% 2.20% 0.00% 2021 2.80% 3.50% 2.30% 0.00% -1.00% -1.00% 5.00% 5.00% -2.90% -1.04% -2.40% -0.54% -3.40% -1.54% -0.25% -0.37% 0.25% 0.13% -0.75% -0.87% 2019 2.60% 3.60% 2.10% 0.40% -1.00% 5.00% -6.69% -5.69% -7.69% -7.26% -6.76% -7.76% -4.06% -3.56% -4.56% 0.45% -1.00% The weightings assigned to each economic scenario at 31 December 2019 were as follows: Downside 10.00% 2023 2.80% 3.50% 2.30% 0.00% -1.00% 5.00% -1.06% -0.56% -1.56% -0.38% 0.12% -0.88% 2022 2.80% 3.50% 2.30% 0.00% -1.00% 5.00% -1.05% -0.55% -1.55% -0.38% 0.12% -0.88% Downside 30.00% Upside 10.00% follows: Scenario Weight Base 60.00% Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on an annual basis. Sensitivity Analysis The most significant assumptions affecting the ECL allowance are as 86 i) GDP given the significant impact on business performance and collateral valuations; and ii) Change in proportion of downgrades given that it is “BSP specific” and addresses potential signs of stress both within credit markets in general and in client specific portfolios. GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 34. CREDIT RISK AND ASSET QUALITY (continued) Set out below are the changes to the ECL as at 31 December 2019 that would result from reasonably possible changes in these parameters from the actual assumptions used in the Group’s economic variable assumptions: All amounts are expressed in K’000 GDP Growth Rate 2019 [-20%] 42,060 (GDP growth rate assumptions tested at 80% and 110% for all 3 scenarios) All amounts are expressed in K’000 Change in proportion of downgrades 2019 [-7%] (1,088) [+10%] (19,342) [+20%] 5,662 (Upside scenario increased from -1% to-7% (2018:-5%), downside scenario increased from 10% to 20% ) 2018 2018 [-20%] 48,446 [-5%] (1,451) [+10%] (17,586) [+20%] 4,391 All amounts are expressed in K’000 2019 2018 Change in Scenario weighting (32,714) (30,002) (Upside scenario increased from 10% to 30%, downside scenario decreased from 30% to 10%). 34.1.2.4 Grouping of instruments for losses measured on a collective basis For expected credit loss provisions modelled on a collective basis, a grouping of exposures is performed on the basis of shared risk characteristics, such that risk exposures within a group are homogeneous. In performing this grouping, there must be sufficient information for the group to be statistically credible. Where sufficient information is not available internally, the Group has considered benchmarking internal/external supplementary data to use for modelling purposes. The characteristics and any supplementary data used to determine groupings are outlined below: Retail – Groupings for collective measurement Loan to value ratio band • • Risk Grade • Product type (e.g. Residential/Buy to Let mortgage, Overdraft, Credit Card) • Repayment type (e.g. Repayment/Interest only) • Utilisation band Notwithstanding the grouping detailed above, all stage 3 loans are individually assessed. The appropriateness of groupings is monitored and reviewed on a periodic basis by the Credit Risk team. 34.1.3 Credit Risk Exposure 34.1.3.1 Maximum exposure to credit risk – Financial instruments subject to impairment The following table contains an analysis of the credit risk exposure of financial instruments for which an ECL allowance is recognised. The gross carrying amount of financial assets below also represents the Group’s maximum exposure to credit risk on these assets. ECL staging (PGK’000) Credit grade Standard monitoring Special monitoring Default 2019 2018 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total Total 15,423,086 160,322 - 15,583,408 14,457,564 - 503,009 - 503,009 588,756 - - 391,688 391,688 Gross carrying amount 15,423,086 663,331 391,688 16,478,105 Loss allowance Carrying amount (277,795) (199,510) (223,299) (700,604) 15,145,291 463,821 168,389 15,777,501 350,285 15,396,605 (633,567) 14,763,038 Information on how the Expected Credit Loss (ECL) is measured and how the three stages above are determined is included in note 34.1.2 ‘Expected credit loss measurement’. The gross carrying amount includes off balance sheet items which are in scope for impairment. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 87 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 34. CREDIT RISK AND ASSET QUALITY (continued) 34.1.3.2 Maximum exposure to credit risk – Financial instruments not subject to impairment The following table contains an analysis of the maximum credit risk exposure from financial assets not subject to impairment (i.e. FVPL): Maximum exposure to credit risk (PGK000's) 2019 2018 Trading assets Equity Securities 34.1.3.3 Collateral and other credit enhancements 255,372 188,343 The Group employs a range of policies and practices to mitigate credit risk. The most common of these is accepting collateral for funds advanced. The Group has internal policies on the acceptability of specific classes of collateral or credit risk mitigation. depends on the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset- backed securities and similar instruments, which are secured by portfolios of financial instruments. The Group prepares a valuation of the collateral obtained as part of the loan origination process. This assessment is reviewed periodically. The principal collateral types for loans and advances are: • Mortgages over residential properties; • Charges over business assets such as premises, inventory and accounts receivable; and Charges over financial instruments such as debt securities and equities. • The Group’s policies regarding obtaining collateral have not significantly changed during the reporting period and there has been no significant change in the overall quality of the collateral held by the Group since the prior period. The Group closely monitors collateral held for financial assets considered to be credit-impaired, as it becomes more likely that the Group will take possession of collateral to mitigate potential credit losses. Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. Financial assets that are credit-impaired and related collateral held in order to mitigate potential losses are shown below: Collateral held as security for financial assets other than loans and advances 31 December 2019 Gross exposure Impairment allowance Carrying amount Fair value of collateral held Credit-impaired assets Loans to individuals: • Overdrafts • Credit cards • Term loans • Mortgages Loans to corporate entities: • Large corporate customers PGK’000 PGK’000 PGK’000 PGK’000 6,588 1,437 5,151 11,739 - - - - 18,112 3,263 14,849 23,739 99,008 40,295 58,713 165,415 197,754 142,074 55,680 127,761 • Small and medium-sized enterprises (SMEs) 67,172 33,771 33,401 79,439 • Others 3,054 2,459 595 5,745 Total credit-impaired assets 391,688 223,299 168,389 413,838 31 December 2018 Total credit-impaired assets 350,285 179,222 171,063 301,488 88 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD34. CREDIT RISK AND ASSET QUALITY (continued) 34.1.4 Loss allowance NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 The loss allowance recognised in the period is impacted by a variety of factors, as described below: • Transfers between Stage 1 and Stages 2 or 3 due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent “step up” (or “step down”) between 12-month and Lifetime ECL; Additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments de-recognised in the period; Impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from regular refreshing of inputs to models; Foreign exchange retranslations for assets denominated in foreign currencies and other movements; and Financial assets derecognised during the period and write-offs of allowances related to assets that were written off during the period. • • • • The following tables explain the changes in the loss allowance between the beginning and the end of the annual period due to these factors: 31 December 2019 Expected Credit Loss Movements with P&L impact Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 Transfer from Stage 3 to Stage 1 New financial assets originated or purchased Changes in PDs/LGDs/EADs/others Total net P&L charge during the period 31 December 2018 Stage 1 12-month ECL PGK’000 Stage 2 Lifetime ECL PGK’000 Stage 3 Lifetime ECL PGK’000 (3,790) (857) 4,316 - - 7 118,207 (81,067) 36,816 25,930 - (22,327) (3,993) 76 - 14,232 (33,183) (19,265) - 18,171 - 12,451 (83) (100) 8,168 22,906 61,513 51,039 Total PGK’000 22,140 17,314 (18,011) 8,458 (7) (93) 140,607 (91,344) 79,064 66,073 Total net P&L charge during the period (19,446) 34,480 The movement in gross carrying amounts between the beginning and the end of the annual period are included in the table below: 31 December 2019 Gross Carrying Amount Stage 1 Stage 2 Stage 3 12-month Balance Lifetime Balance Lifetime Balance PGK’000 PGK’000 PGK’000 Total PGK’000 Movements in gross carrying amount with P&L impact Transfers: Transfer from Stage 1 to Stage 2 (146,559) 188,204 - 41,645 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 (66,009) - 61,607 (4,402) 128,598 (153,149) - (24,551) - (35,089) 32,205 (2,884) Transfer from Stage 3 to Stage 2 - 848 (1,238) (390) Transfer from Stage 3 to Stage 1 396 - (398) (2) New financial assets originated or purchased 4,774,634 82,056 5,606 4,862,296 Changes in PDs/LGDs/EADs/others (3,554,951) (176,397) (58,864) (3,790,212) Total movement in gross carrying amount with P&L impact 31 December 2018 Total movement in gross carrying amount with P&L impact 1,136,109 (93,527) 38,918 1,081,500 1,325,422 138,738 90,154 1,554,314 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 89 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 34. CREDIT RISK AND ASSET QUALITY (continued) 34.1.5 Write-off policy The Group writes off financial assets, in whole or in part, when it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii) where the Group’s recovery method is foreclosing on collateral and the value of the collateral is such that there is no reasonable expectation of recovering in full. The Group may write-off financial assets that are still subject to enforcement activity. The Group still seeks to recover amounts it is legally owed in full, but which have been partially written off due to no reasonable expectation of full recovery. 34.1.6 Credit Quality – Prudential Guidelines The Bank of Papua New Guinea has maintained a revised prudential standard for asset quality since October 2003. The revised standard specifies more detailed criteria for the classification of loans into various grades of default risk and corresponding loss provision levels as a consequence of those gradings. An analysis by credit quality of loans outstanding at 31 December 2019 is as follows: Consolidated (PGK’000) Overdrafts Term loans Mortgages Lease financing Policy loans Total Neither past due nor impaired 917,146 9,182,602 2,266,451 281,535 88,280 12,736,014 Past due but not impaired - Less than 30 days - 30 to 90 days Individually impaired loans - Less than 30 days - 30 to 90 days - 91 to 360 days - More than 360 days Total gross loans, advances and other receivables from customers Less impairment provisions Net Loans and Advances 34.1.7 Credit related commitments 78,078 2,703 80,781 3,183 169 1,504 6,093 10,949 315,403 259,078 574,481 4,160 9,173 31,535 101,612 146,480 135,827 73,368 209,195 3,641 10,711 28,139 87,174 129,665 3,334 1,311 4,645 328 2,064 1,339 5,470 9,201 - - - - - - - - 532,642 336,460 869,102 11,312 22,117 62,517 200,349 296,295 1,008,876 9,903,563 2,605,311 295,381 88,280 13,901,411 (700,604) 13,200,807 These instruments are used to ensure that funds are available to a customer as required. The Group deals principally in the credit related commitments set out below. They are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a conventional loan. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same risk as loans. Documentary and trade letters of credit are written undertakings by the Group on behalf of a customer, authorising a third party to draw drafts on the Group for specified amounts under specified terms and conditions. Commitments to extend credit represent undrawn portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. Whilst the potential exposure to loss equates to the total undrawn commitments, the likely amount of loss is less than the total commitment since the commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of these commitments because longer term commitments generally carry a greater degree of credit risk than shorter term commitments. 90 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD 34. CREDIT RISK AND ASSET QUALITY (continued) 34.1.8 Economic sector risk concentrations Economic sector risk concentrations within the customer loan portfolio are as follows: Consolidated as at 31 December All amounts are expressed in K’000 Commerce, finance and other business Private households Government and public authorities Agriculture Transport and communication Manufacturing Construction Net loan portfolio balance 34.1.9 Ownership risk concentrations Ownership risk concentrations within the customer loan portfolio are as follows: Corporate / Commercial Government Retail Net loan portfolio balance 35. LIQUIDITY RISK NOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 2019 7,159,863 2,987,459 252,134 327,151 1,311,306 332,344 830,550 % 54 23 2 2 10 3 6 2018 6,824,314 2,569,986 356,166 277,228 % 54 21 3 2 1,393,929 11 231,717 877,309 2 7 13,200,807 100 12,530,649 100 7,703,341 2,510,817 2,986,649 58 19 23 7,206,355 2,661,688 2,662,606 58 21 21 13,200,807 100 12,530,649 100 Liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Board, through the Asset and Liability Committee, sets liquidity policy to ensure that the Group has sufficient funds available to meet all its known and potential obligations. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of banking activities. An unmatched position potentially enhances profitability, but can also increase the risk of losses. Short-term mismatch of asset and liability maturity at 31 December 2019 The maturity profile of material Assets and Liabilities as at 31 December 2019 is shown in the following schedule. The mismatching of maturity of assets and liabilities indicates an apparent negative net “current” asset position. However, as stated in the preceding paragraph, mismatched positions are established and managed to achieve profit opportunities that arise from them, particularly in a normal yield curve environment. Accordingly, this mismatched maturity position is considered manageable by the Group, and does not impair the ability of the Group to meet its financial obligations as they fall due. The Directors are also of the view that the Group is able to meet its financial obligations as they fall due for the following additional reasons: • The Bank and the Group complies with the Cash Reserve Requirement (“CRR”) set by the regulatory authorities of the jurisdictions that the Bank operates in. The CRR specifies that a bank must hold an amount equal to a percentage of its total customer deposits in the form of cash in an account maintained by the respective Central Bank. The Bank and Group complies with this daily requirement on an ongoing basis. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 91 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 35. LIQUIDITY RISK (continued) Maturity of assets and liabilities Consolidated All amounts are expressed in K'000 As at 31 December 2019 Up to 1 month 1 - 3 months 3 - 12 months 1 - 5 years Over 5 years Total Assets Cash and balances with Central Bank Treasury and Central Bank bills Amounts due from other banks Loans, advances and other receivables from customers Other financial assets Total assets Liabilities 3,171,384 380,142 745,062 1,648,820 2,163,885 - - - 411,781 688,229 1,429,812 14,760 229,336 48,071 - - - 3,583,165 2,512,943 1,022,469 1,057,253 3,022,749 95,236 663,474 5,510,377 1,160,027 5,077,068 16,316,267 772,329 4,854,951 8,109,293 2,070,054 5,164,106 6,685,164 6,261,178 28,289,795 Amounts due to other banks - 81,468 2,463 - - 83,931 Customer Deposits Other liabilities Other provisions Total liabilities Net liquidity gap As at 31 December 2018 Total assets Total liabilities Net liquidity gap 36. OPERATIONAL RISK 14,019,851 1,109,765 1,794,963 719,301 1,912,151 19,556,031 1,761,480 258,809 2,750 159 5,048 35 472 188 105,141 1,874,891 4,153 263,344 16,040,140 1,194,142 1,802,509 719,961 2,021,445 21,778,197 (7,930,847) 875,912 3,361,597 5,965,203 4,239,733 6,511,598 8,381,534 1,336,540 5,201,238 6,137,115 6,076,958 27,133,385 15,069,532 1,013,223 2,073,361 274,900 1,969,331 20,400,347 (6,687,998) 323,317 3,127,877 5,862,215 4,107,627 6,733,038 Operational risk is the potential exposure to unexpected financial or non-financial losses arising from the way in which the Group conducts its business. Examples of operational risks include employee errors, systems failures, fire, floods, or similar losses to physical assets, fraud, or criminal activity. Opera- tional risk is managed through formal policies, documented procedures, business practices and compliance monitoring. An operational risk management function is responsible for the maintenance of these policies, procedures, practices and monitoring the organization’s compliance with them. The Operational Risk Committee coordinates the management process across the organisation. An independent internal audit function also conducts regular reviews to monitor compliance with approved BPNG standards and examines the general standard of control. The Operational Risk Committee and the internal audit function mandatorily report to the Board Risk and Compliance Committee. 92 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 37. FOREIGN EXCHANGE RISK Foreign exchange risk is the risk to earnings caused by a change in foreign exchange rates on open currency positions. The objective of foreign exchange risk management within the Group is to minimise the impact on earnings of any such movement. The Group accepts foreign currency denominated transactions and therefore has exposure to movements in foreign currency. The Group has a policy to offset these transactions to minimise daily exposure. As foreign exchange contracts generally consist of offsetting commitments, they involve only limited foreign exchange risk to the Group and material loss is not envisaged. Currency concentration of assets, liabilities and off-balance sheet items Consolidated All amounts are expressed in K'000 As at 31 December 2019 PGK FJD SBD USD Other Total Assets Cash and balances with Central Bank Treasury & Central Bank bills Amounts due from other banks Loans, advances and other receivables from customers Other financial assets Other assets Total assets Liabilities 2,211,457 2,252,907 146,354 478,799 15,702 110,404 7,740,010 3,161,274 1,578,722 1,277,703 507,057 667,813 439,403 157,886 8,788 526,566 258 60,500 6,488 - 234,437 499,203 447,018 33,002 3,583,165 2,459,497 522,486 1,022,469 1,273,754 13,200,807 - 352 35,034 2,121,071 133,741 2,140,109 15,207,153 4,941,049 1,193,401 740,480 2,445,035 24,527,118 Amounts due to other banks (22,119) (59,412) (2,400) - - (83,931) Customer Deposits Other liabilities Total liabilities (12,739,985) (3,180,962) (907,317) (538,226) (1,972,566) (19,339,056) (564,135) (1,183,690) (37,080) (117,512) (84,681) (1,987,098) (13,326,239) (4,424,064) (946,797) (655,738) (2,057,247) (21,410,085) Net on - balance sheet position 1,880,914 516,985 246,604 84,742 Off - balance sheet net notional position 798 - - (139,868) 387,788 140,009 3,117,033 939 Credit commitments 1,873,731 512,960 60,433 - 118,418 2,565,542 As at 31 December 2018 Total Assets Total Liabilities 14,553,848 4,576,805 1,213,537 614,523 2,122,510 23,081,223 (12,839,667) (4,043,203) (940,514) (534,160) (1,851,544) (20,209,088) Net on - balance sheet position 1,714,181 533,602 273,023 80,363 Off - balance sheet net notional position (3,263) - - (171,679) Credit commitments 1,274,345 522,309 76,059 - 270,966 174,006 176,890 2,872,135 (936) 2,049,603 The following table presents sensitivities of profit or loss and equity to possible changes in exchange rates applied at the end of the reporting period, relative to the functional currency of the respective Group entities, with all other variables held constant: All amounts are expressed in K'000 At 31 December 2019 At 31 December 2018 Impact on profit or loss Impact on equity Impact on profit or loss Impact on equity USD strengthening by 1% (2018 – 1%) USD dollar weakening by 1% (2018 – 1%) AUD strengthening by 1% (2018 – 1%) AUD dollar weakening by 1% (2018 – 1%) 356 (349) (36) 35 356 (349) (36) 35 613 (601) (37) 36 613 (601) (37) 36 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 93 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 38. INTEREST RATE RISK Interest rate risk in the balance sheet arises from the potential for a change in interest rate to have an adverse effect on the revenue earnings in the current reporting period and future years. As interest rates and yield curves change over time the Group may be exposed to a loss in earnings due to the effects of interest rates on the structure of the balance sheet. Sensitivity to interest rates arises from mismatches in the re-pricing dates, cash flows and other characteristics of the assets and their corresponding liability funding. These mismatches are actively managed as part of the overall interest rate risk management process governed by the Assets and Liabilities Committee (ALCO), which meets regularly to review the effects of fluctuations in the prevailing levels of market interest rates on the financial position and cash flows of the Group. The objective of interest rate risk control is to minimise these fluctuations in value and net interest income over time, providing secure and stable sustainable net interest earnings in the long term. The table below illustrates the interest sensitivity of assets and liabilities at the balance date. Given the profile of assets and liabilities as at 31 December 2019 and prevailing rates of interest, a 1% increase in markets rates will result in a K45 million increase in net interest income, whilst a 1% decrease in rates will result in a K52.2 million decrease in net interest income. Interest sensitivity of assets, liabilities and off balance sheet items re-pricing analysis Consolidated All amounts are expressed in K'000 As at 31 December 2019 Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Assets Cash and Central Bank assets Treasury and Central Bank bills Amounts due from other banks Statutory deposits - Central Bank Loans, advances and other receivables from customers Other financial assets Other assets Total assets Liabilities - 347,001 867,654 - 11,355,031 437,339 - - 705,379 46,543 - 211,132 151,520 - - 1,401,412 6,016 - 813,765 559,890 - - 5,081 - - 656,055 800,520 - - 624 - - 164,824 211,415 - 13,007,025 1,114,574 2,781,083 1,461,656 376,863 Amounts due to other banks 16,678 7,612 - - Customer deposits Other liabilities Other provisions Total liabilities 8,678,235 1,071,740 1,628,037 299,468 8,248 6,193 2,720 - - - - - 8,709,354 1,082,072 1,628,037 299,468 Interest sensitivity gap 4,297,671 32,502 1,153,046 1,162,188 As at 31 December 2018 Assets Cash and Central Bank assets Treasury and Central Bank Bills Amounts due from other banks Statutory deposits - Central Bank Loans, advances and other receivables from customers Other financial assets Other assets Total assets Liabilities - 501,889 451,160 - - - 617,953 1,344,620 - - - 30,238 1,560 - 10,754,609 192,658 435,077 51,591 - - 557,100 1,265,005 - 219,639 267,621 - 12,142,735 862,202 2,695,847 1,853,903 487,260 8,435 - 806,643 536,149 - Amounts due to other banks 17,338 16,885 - - Customer deposits Other liabilities Other Provisions Total liabilities Interest sensitivity gap 94 8,058,906 925,624 1,761,696 156,585 - 5,637 - - - - - - 8,081,881 4,060,854 942,509 (80,307) 1,761,696 156,585 934,151 1,697,318 - 4 105,525 - 105,529 381,731 - 10 73,009 - 73,019 303,844 - - - - Non-interest bearing 1,816,564 - 102,256 1,766,601 - 162,427 1,938,069 5,785,917 59,641 7,661,566 1,699,459 197,469 9,618,135 (3,832,218) 1,253,449 - 392,864 1,685,544 - 175,579 1,531,840 5,039,276 17,316 7,329,951 1,625,155 188,466 9,160,888 (4,121,612) GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 39. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES There is no material difference between the fair values and carrying values of the financial assets and liabilities of the Group. The table below analyses the Group’s financial instruments carried at fair value, by levels in the fair value hierarchy. The different levels have been defined as follows: • • • Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). Consolidated All amounts are expressed in K'000 At 31 December 2019 (a) Financial assets Equity securities Non-financial assets Land & buildings Assets subject to operating lease Total Assets (b) Financial liabilities Policy liabilities Total liabilities At 31 December 2018 (a) Financial assets Equity securities Non - financial assets Land & buildings Assets subject to operating lease Total Assets (b) Financial liabilities Policy liabilities Total liabilities Financial asset at fair value through profit & loss Opening balance Total gains and losses recognized in: - Profit & loss - Other comprehensive income Closing balance Level 1 Level 2 Level 3 Total - - - - - - - - - - - - 177,313 3,095 180,408 708,284 - 885,597 - 48,133 51,228 - - 890,147 890,147 708,284 48,133 936,825 890,147 890,147 118,831 2,696 121,527 537,669 - 656,500 - - - 52,433 55,129 818,198 818,198 537,669 52,433 711,629 818,198 818,198 2019 2018 54,570 72,825 (3,342) - 51,228 (18,255) - 54,570 There were no changes in valuation technique for Level 3 recurring fair value measurements during the year ended 31 December 2019. Property, plant and equipment represents commercial land and buildings owned by the Group based on valuations provided by independent valuers. The valuation is based on the capitalisation method with an assessment of the property based on its potential earning capacity. Disposal cost for properties classified as held for sale is not expected to be material. In the normal course of trading, the Group enters into forward exchange contracts. The Group does not actively enter into or trade in, complex forms of derivative financial instruments such as currency and interest rate swaps and options. Exposures in foreign currencies arise where the Group transacts in foreign currencies. This price risk is minimised by entering into counterbalancing positions for material exposures as they arise. Forward and spot foreign exchange contracts are used. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 95 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 39. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (continued) Forward exchange contracts outstanding at 31 December 2019 stated at the face value of the respective contracts are: All amounts are expressed in respective FCY'000 AND K’000 As at 31 December 2019 USD AUD EURO GBP JPY Other Total Selling Buying As at 31 December 2018 Selling Buying FCY Kina FCY Kina FCY Kina FCY Kina (49,183) (15,371) 8,132 16,169 (55,913) (8,793) 4,924 5,530 (2,529) (900) (21) (181,179) (2,110) - - 14,800 - (958) - 55,700 - - 20 - - - - - - - - (15,371) 1,200 137,500 34,444 - - - - - - - - 16,169 (149,380) (1,000) - - - (8,793) 5,000 15,353 - - - 5,530 40. INSURANCE (a) Net insurance operating income All amounts are expressed in K’000 Net insurance income (b) Policy liabilities Consolidated Bank 2019 2018 2019 2018 30,675 38,913 - - Key assumptions used in determining this liability are as follows: Discount rates For contracts in Statutory Fund 1 which have a Discretionary Patricipating Feature (DPF), the discount rate used is linked to the assets which back those contracts. For 31st December 2019 this was 6.097% per annum (31st December 2018: 6.005% per annum), based on current 10 year government bond yields and expected earnings from the investment portfolio. For contracts without DPF and Accident Business, a rate of 4.80% per annum was used at 31st December 2019 (31st December 2018: 4.80% per annum). These rates were based on the 10 year government bond rate as published by the Reserve Bank of Fiji. Investment and maintenance expenses Future maintenance and investment expenses are based on the budgeted expenses. Future inflation has been assumed to be 3.5% per annum (31st December 2018: 3.5% per annum) for determining future expenses. Taxation The rates of taxation enacted or substantially enacted at the date of the valuation (20%) are assumed to continue into the future. Mortality and morbidity Projected future rates of mortality for insured lives are based on the Fiji Mortality Statistics table FJ90-94 Male. These are then adjusted for the Group’s own experience. The mortality rates used was 65% (31st December 2018: 65%) of the FJ90-94 Male table for participating business in Statutory Fund 1. Rates of discontinuance Best estimate assumptions for the incidence of withdrawal and discontinuance vary by product and duration and are based on the Group’s experience which is reviewed regularly. Rates used were the same as last year. Whole of Life and Endowment Insurance Term Insurance Accident Insurance 96 2019 2018 14% 16% 17% 14% 16% 17% GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDNOTES TO THE FINANCIAL STATEMENTS for the Year Ended 31 December 2019 40. INSURANCE (continued) Basis of calculation of surrender values Surrender values are based on the provisions specified in the policy contracts. There have been no changes to surrender bases during the period (or the prior periods) which have materially affected the valuation result. future bonus rates included in the liability for the long term insurance contracts were set such that the present value of the liabilities equates to the present value of assets supporting the business together with assumed future investment returns, allowing for the shareholder's right to participate in distributions. Discretionary Participating Business For most participating business, bonus rates are set such that, over long periods, the returns to contract holders are commensurate with the investment returns achieved on the pool of assets which provide security for the contract, together with other sources of profit arising from this business. Profits from these policies are split between contract holders and shareholders in accordance with the policy conditions which allow for shareholders to share in allocations at a maximum rate of 20%. For business written between 1995 and 1998 the shareholder receives 11% of profits. Reinsurance Contracts entered into by the Group with Reinsurers under which the Group is compensated for losses on one or more contracts issued by the Group, are classified as reinsurance contracts. As the reinsurance agreements provide for indemnification by the Reinsurers against loss or liability, reinsurance income and expenses are recognised separately in profit or loss when they become due and payable in accordance with the reinsurance agreements. In applying the contract holders' share of profits to provide bonuses, consideration is given to equity between generations of policyholders and equity between the various classes and sizes of contracts in force. Assumed Reinsurance recoveries are recognised as claim recoveries under profit or loss. This is netted off against the claim expenses. Reinsurance premiums are recognised as Reinsurance Expenses. All amounts are expressed in K’000 Policy Liabilities Opening balance Translation movement Increase in policy liabilities Increase in policy liabilities on revaluation of land Total policy liabilities 2019 2018 818,198 11,221 59,746 982 890,147 749,876 (3,227) 71,616 (67) 818,198 41. EVENTS OCCURRING AFTER BALANCE SHEET DATE On February 7, 2020, the Bank acquired 50% shares in Devco Lao Leasing Company Limited for a consideration of USD2 million. The acquired entity will be renamed BSP Lao Leasing Company, an asset finance business which will be treated as a joint venture in the Group accounts. 42. REMUNERATION OF AUDITOR All amounts are expressed in K’000 2019 2018 2019 2018 Consolidated Bank Financial statement audits Other services 4,347 514 4,861 3,326 1,031 4,357 3,126 463 3,589 2,363 818 3,181 The external auditor PricewaterhouseCoopers is also engaged in providing other services to the Bank and Group as required and as permitted by prudential standards. The provision of other services included taxation and general training. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 97 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsIndependent auditor’s report To the shareholders of Bank of South Pacific Limited Report on the audit of the financial statements of the Bank and the Group Our opinion We have audited the financial statements of Bank of South Pacific Limited (the Bank), which comprise the statements of financial position as at 31 December 2019, and the statements of comprehensive income, statements of changes in shareholders’ equity and statements of cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory information for both the Bank and the Group. The Group comprises the Bank and the entities it controlled at 31 December 2019 or from time to time during the financial year. In our opinion the accompanying financial statements: • • comply with International Financial Reporting Standards and other generally accepted accounting practice in Papua New Guinea; and give a true and fair view of the financial position of the Bank and the Group as at 31 December 2019, and their financial performance and cash flows for the year then ended. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Bank and Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our firm carries out other services for the Group in the areas of audit-related and tax advice services. The provision of these other services has not impaired our independence as auditor of the Bank and the Group. Our audit approach An audit is designed to provide reasonable assurance about whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the management structure of the Bank and the Group, their accounting processes and controls and the industries in which they operate. PricewaterhouseCoopers, PWC Haus, Level 6, Harbour City, Konedobu, Port Moresby. PO Box 484, Port Moresby, Papua New Guinea T: (675) 321 1500 / (675) 305 3100, F: (675) 321 1428, www.pwc.com/pg 98 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams Materiality Audit Scope Key Audit Matters • For the purpose of our audit of the Group we used overall group materiality of K60.8 million which represents approximately 5% of the Group’s profit before taxes. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial statements as a whole. • We chose Group profit before taxes as, in our view, it is the metric against which the performance of the Group is most commonly measured and is a generally accepted benchmark. • We (PwC Papua New Guinea) conducted the audit over all of the Group’s operations in Papua New Guinea (PNG) and Solomon Islands, which are the most significant to the Group, and directed the scope of the audit of other subsidiaries included in the Group financial statements sufficient to express an opinion on the financial statements as a whole. • For the Group’s activities in Fiji, Samoa, Tonga, Cambodia, Cook Islands, and Vanuatu the audit work was performed by other PwC network firms or other firms operating under our instructions. In addition we visit significant overseas operations and this year we met with management in the Solomon Islands. • We selected 5% based on our professional judgement noting that it is also within the range of commonly acceptable related thresholds. • Our audit focused on where the directors made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • Amongst other relevant topics, we communicated following key the audit matters to the Board Audit Committee: • Loan loss provisioning • IT systems and controls • These matters are further described in the Key audit matters section of our report. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 99 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsKey audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements for the current period. The key audit matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be key matters to be communicated in our report. Further, commentary on the outcomes of the particular audit procedures is made in that context. Key audit matter How our audit addressed the key matter Loan loss provisioning - Refer to Note 1G & M of the financial statements for a description of the accounting policies and to Note 34 for an analysis of credit risk Due to the magnitude of the loans and advances balances and the extent of management judgement inherent in the impairment calculations, impairment of loans and advances is an area of significance in the current year audit of the Bank and its subsidiaries. The procedures we performed to support our audit conclusions, included: • Consideration of the appropriateness of accounting policies and assessment of the loan impairment methodology applied, compared to the requirements of IFRS 9. This included obtaining an understanding and assessment of the reasonableness of the key outputs of the model, as well as key judgements and assumptions used by management in implementation of the model. IFRS 9 Financial Instruments (IFRS 9) is a complex accounting standard which has required considerable judgement and interpretation in its application. • Reviewing the design and operating effectiveness of key controls around the credit origination processes, the credit monitoring processes and the credit inspection unit’s customer loan file reviews. The key areas of judgement included: • Review of the impairment methodology to establish the critical • The determination of the impairment in applying IFRS 9, which is reflected in the allowance for losses on loans, advances and other receivables (refer to Note 13 and Note 34) • The identification of exposure for which there has been a significant increase in credit risk • Assumptions used in the expected credit loss model such as valuation of collateral and assumptions made on future values, financial condition of counterparties, expected future cash flows and forward looking macroeconomic factors fields used in the computation of Stage 1 and Stage 2 provisions. On a sample basis tested the critical fields identified to have an impact on the expected credit loss provision by agreeing this back to source documentation. • For loans and advances in Stage 1 and Stage 2, critically examining the model methodology for consistency and appropriateness. This included evaluation of the appropriateness of the estimates made on the Probability of Default, Loss Given Default and Exposure at Default. This also included assessing the appropriateness of probability-weighted and staging criteria. • The need to apply additional model adjustments to reflect current or future external factors that are not appropriately captured by the expected credit loss model • For Stage 3 loans and advances, audit procedures were carried out over the completeness of the credit watch list and delinquencies, assumptions made in the valuation of collateral and recovery cash flows and mathematical accuracy of the IFRS 9 provisioning model. • For model adjustments, we considered the basis for and data used to determine the adjustments. This included making an independent assessment of both the credit environment and the macro- environment in which the Group operates. • For IFRS 9 related disclosures in the financial statements, we reviewed the accuracy and completeness in line with BSP accounting policies and IFRS 9 requirements. 100 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsKey audit matter IT systems and controls We focused on this area because the Group is heavily dependent on complex IT systems for the capture, processing, storage and extraction of significant volumes of transactions. There are some areas of the audit where we seek to place reliance on system functionality including certain automated controls, system calculations and reports. Our reliance on these is dependent on the Group’s IT General Control (ITGC) environment, in particular, user access mainte- nance and changes to IT systems being authorised and made in an appropriate manner. How our audit addressed the key matter For significant financial statement line items, we gained an understanding of the business processes, key controls and IT systems used to generate and support those line items. Where relevant to our planned audit approach, we assessed the design and tested the operating effectiveness of the key ITGCs which support the con- tinued integrity of the in-scope IT systems. Our procedures over ITGCs focused on user access and change management and we also carried out tests, on a sample basis, of system functionality that was key to our audit approach. Where we identified design or operating effectiveness matters relating to IT- GCs and system functionality relevant to our audit, we performed alternative or additional audit procedures. Information other than the financial statements and auditor’s report The directors are responsible for the other information. The other information comprises the Directors’ Report (but does not include the financial statements and the auditors’ report thereon), which we obtained prior to the date of this auditor’s report, and the annual report, which is expected to be made available after that date. Our opinion on the financial statements does not cover the other information and we do not, and will not, express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of the directors for the financial statements The directors are responsible, on behalf of the Bank for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and other generally accepted accounting practice in Papua New Guinea and the Companies Act 1997 and for such internal control as the directors determine is necessary to enable the preparation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Bank or the Group or to cease operations or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 101 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsReasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements of the Group. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements for the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulations preclude public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 102 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsReport on other legal and regulatory requirements The Companies Act 1997 requires that in carrying out our audit we consider and report on the following matters. We confirm in relation to our audit of the financial statements for the year ended 31 December 2019: • We have obtained all the information and explanations that we have required; • In our opinion, proper accounting records have been kept by the Bank as far as appears from an examination of those records. Who we report to This report is made solely to the Bank’s shareholders, as a body, in accordance with the Companies Act 1997. Our audit work has been undertaken so that we might state to the Bank’s shareholders those matters which we are required to state to them in an auditor’s report and for no other purpose. We do not accept or assume responsibility to anyone other than the Bank and the Bank’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. PricewaterhouseCoopers Peter Buchholz Engagement Leader Christopher Hansor Partner Registered under the Accountants Act 1996 Port Moresby 26 February 2020 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 103 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Shareholder Information QUALITY We are committ ed to excellence whilst striving for conti nuous improvement in products and services. 104 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD SHAREHOLDER INFORMATION The following is a summary of pertinent issues relating to shareholding in the Group. The Constitution of BSP may be inspected during normal business hour at the Registered Office. RIGHTS ATTACHING TO ORDINARY SHARES The rights attaching to shares are set out in Bank of South Pacific Limited’s Constitution and in certain circumstances, are regulated by the Companies Act 1997, the PNGX Listing Rules and general law. There is only one class of share. All shares have equal rights. Other rights attached to ordinary shares include: General meeting and notices Each member is entitled to receive notice of, and to attend and vote at, general meetings of BSP and to receive all notices, accounts and other documents required to be sent to members under BSP’s constitution, the Companies Act or the Listing Rules. Voting rights At a general meeting of shareholders, every holder of fully paid ordinary shares present in person or by an attorney, representative or proxy has one vote on a show of hands (unless a member has appointed two proxies) and one vote per share on a poll. A person who holds a share which is not fully paid is entitled, on a poll, to a fraction of a vote equal to the proportion which the amount paid bears to the total issue price of the share. Where there are two or more joint holders of a share and more than one of them is present at a meeting and tenders a vote in respect of the share, the Company will count only the vote cast by the member whose name appears first in BSP’s register of members. The Directors may decline to register a transfer of shares (other than a proper transfer in accordance with the PNGX Business Rules) where permitted to do so under the PNGX Listing Rules or the transfer would be in contravention of the law. If the Directors decline to register a transfer, BSP must give notice in accordance with the Companies Act and the PNGX Listing rules, give the party lodging the transfer written notice of the refusal and the reason for refusal. The Directors must decline to register a transfer of shares when required by law, by the PNGX Listing Rules or by the PNGX Business Rules. Partly paid shares The Directors may, subject to compliance with BSP’s constitution, the Companies Act and the PNGX Listing Rules, issue partly paid shares upon which there are outstanding amounts payable. These shares will have limited rights to vote and to receive dividends. Dividends The Directors may from time to time determine dividends to be distributed to members according to their rights and interests. The Directors may fix the time for distribution and the methods of distribution. Subject to the terms of issue of shares, each share in a class of shares in respect of which a dividend has been declared will be equally divided. Each share carries the right to participate in the dividend in the same proportion that the amount for the time being paid on the share (excluding any amount paid in advance of calls) bears to the total issue price of the share. Dividend payouts over the last six years are disclosed in the schedule of Historical Financial Performance elsewhere in this Annual Report. Issues of further shares Liquidation The Directors may, on behalf of BSP, issue, grant options over, or otherwise dispose of unissued shares to any person on the terms, with the rights, and at the times that the Directors decide. However, the Directors must act in accordance with the restrictions imposed by BSP’s constitution, the PNGX Listing Rules, the Companies Act and any rights for the time being attached to the shares in any special class of those shares. Subject to the terms of issue of shares, upon liquidation assets will be distributed such that the amount distributed to a shareholder in respect of each share is equal. If there are insufficient assets to repay the paid-up capital, the amount distributed is to be proportional to the amount paid- up. Variation of rights Directors Unless otherwise provided by BSP’s constitution or by the terms of issue of a class of shares, the rights attached to the shares in any class of shares may be varied or cancelled only with the written consent of the holders of at least three-quarters of the issued shares of that class, or by special resolution passed at a separate meeting of the holders of the issued shares of the affected class. Transfer of shares Subject to BSP’s constitution, the Companies Act and the PNGX Listing Rules, ordinary shares are freely transferable. The shares may be transferred by a proper transfer effected in accordance with the PNGX Business Rules, by any other method of transferring or dealing with shares introduced by PNGX and as otherwise permitted by the Companies Act or by a written instrument of transfer in any usual form or in any other form approved by either the Directors or PNGX that is permitted by the Companies Act. BSP’s Constitution states that the minimum number of directors is three and the maximum is ten. Appointment of directors Directors are elected by the shareholders in general meeting for a term of three years. At each general meeting, one third of the number of directors (or if that number is not a whole number, the next lowest whole number) retire by rotation. The Board has the power to fill casual vacancies on the Board, but a director so appointed must retire at the next annual meeting. Powers of the Board Except otherwise required by the Companies Act, any other law, the PNGX Listing Rules or BSP’s constitution, the Directors have the power to manage the business of BSP and may exercise every right, power or capacity of BSP to the exclusion of the members. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 105 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsShareholder Information (Continues) Share buy backs Subject to the provisions of the Companies Act and the PNGX Listing Rules, BSP may buy back shares by itself on terms and at times determined by the Directors. Officers’ indemnities BSP, to the extent permitted by law, indemnifies every officer of BSP (and may indemnify any auditor of BSP) against any liability incurred by the person, in the relevant capacity, to another person unless the liability arises out of conduct involving lack of good faith. BSP may also make a payment in relation to legal costs incurred by these persons in defending an action for a liability, or resisting or responding to actions taken by a government agency or a liquidator. Twenty largest registered fully paid ordinary shareholders. As at 31 December 2019, the twenty largest registered fully paid shareholders of the Company were: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Kumul Consolidated Holdings Limited Nambawan Super Limited Petroleum Resources Kutubu Limited NASFUND Credit Corporation (PNG) Limited Motor Vehicles Insurance Limited Fiji National Provident Fund PNG Sustainable Development Program Limited Teachers Savings and Loans Society Comrade Trustee Services Limited IFC Capitalization (Equity) Fund LP International Finance Corporation Lamin Trust Fund Capital Nominees Limited Mineral Resources OK Tedi No. 2 Limited Solomon Islands National Provident Fund Nominees Niugini Limited Catholic Diocese of Kundiawa Southern Highlands Provincial Government Mineral Resources Star Mountains Ltd Other Shareholders Distribution of shareholding As at 31 December 2019, the Company had 5,580 shareholders. The distribution of shareholdings is as follows: Range (number) 1 to 1000 1001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and above 106 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Share Held 84,811,597 57,592,261 46,153,840 45,318,417 36,294,081 31,243,736 30,461,552 29,202,767 15,317,366 12,456,052 7,440,464 7,440,464 3,518,132 3,054,729 2,890,000 2,500,001 2,369,495 2,217,798 2,000,000 1,975,799 42,981,083 467,239,634 % 18.15% 12.33% 9.88% 9.70% 7.77% 6.69% 6.52% 6.25% 3.28% 2.67% 1.59% 1.59% 0.75% 0.65% 0.62% 0.54% 0.51% 0.47% 0.43% 0.42% 9.20% 100% Number of Shareholders Number of Shares 4,621 581 99 186 93 5,580 38,027 2,356,469 747,752 6,965,871 457,131,515 467,239,634 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsUnmarketable Parcels: As at 31 December 2019, the BSP Share Price was K11.78. There were 621 shareholders (0.1% of total shareholders) who held less than a marketable parcel of BSP shares, being holdings of K1,000 or less in market value. Interest in shares in the Bank Directors hold the following shares in the Bank: Director R Fleming Shares Held 93,000 % 0.00 Registered Office Section 34, Allotment 6 & 7, Klinki Street, Waigani Drive, Port Moresby. National Capital District, PAPUA NEW GUINEA Telephone: +675 322 9700 Home Exchange for BSP Shares PNG Exchange Markets (PNGX) PO Box 1531 PORT MORESBY National Capital District, PAPUA NEW GUINEA Telephone: +675 320 1980 Share Registry PNG Registries Ltd PO Box 1265, PORT MORESBY National Capital District, PAPUA NEW GUINEA Telephone: +675 321 6377 Australian Registered Office Level 26 181 William Street, Melbourne VIC 3000 Home Exchange for BSP Convertible Notes South Pacific Stock Exchange GPO Box 11689 SUVA, FIJI Telephone: +679 330 4130 Australian Share Registry Link Market Services Ltd Level 12, 680 George Street, Sydney NSW 2000 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 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 107 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeams DIRECTORS’ INFORMATION Name Nature of Interest Sir K. Constantinou, OBE Director Shareholder Patron Member R. Fleming, CSM, MBA, MMGT Director Bank of South Pacific Ltd, BSP Capital Ltd, BSP Finance Ltd, Bank South Pacific (Tonga) Ltd, Bank South Pacific (Samoa) Ltd, Bank South Pacific (Vanuatu) Ltd, Airways Hotel & Apartment Ltd, Lamana Hotel Ltd, Lamana Development Ltd, Heritage Park Hotel Ltd, Gazelle International Hotel Ltd, Oil Search Ltd, Alotau International Hotel Ltd, Coastwatchers Court Ltd, Waigani Assets Ltd, Southern Seas Investments Ltd, Texas Chicken South Pacific Ltd, Loloata Island Resort, OPH Ltd, Rangeview Heights Ltd in Papua New Guinea, Taumeasina Island Resort in Samoa, Good Taste Company in New Zealand, K G Property Ltd, Air Niugini and Anglicare Foundation Airways Hotel & Apartment Ltd, Lamana Hotel Ltd, Lamana Development Ltd, Texas Chicken South Pacific Ltd and K G Property Ltd Burnet Institute and Kokoda Track Foundation Australian Institute of Company Directors, PNG Institute of Directors, Anglicare Foundation Bank of South Pacific Ltd, BSP Capital Ltd, BSP Convertible Notes Ltd, BSP PNG Holding Ltd, BSP Life (Fiji) Ltd, BSP Saleco Ltd, Capital Nominees Ltd, BSP Nominees Ltd, BSP Finance Ltd, BSP Finance (PNG) Ltd, BSP Finance (Fiji) Ltd, BSP Services (Fiji) Ltd, BSP Health Care (Fiji) Ltd, Bank South Pacific (Tonga) Ltd, Bank South Pacific (Samoa) Ltd, Bank South Pacific (Vanuatu) Ltd, 3 Kundu Pte Ltd, BSP Finance (Solomon) Ltd, BSP Life PNG Ltd, BSP Finance (Cambodia) Plc Shareholder Bank of South Pacific Ltd, BSP Saleco Ltd Member/Trustee Australian Institute of Company Directors, PNG Institute of Directors, Anglicare Foundation A. Sam, BComm, CPA, MAICD, GAICD Director Bank of South Pacific Ltd, Sam Kiak Tubangliu Certified Practising Accountants, Silver Dawn Holdings Ltd Shareholder Sam Kiak Tubangliu Certified Practising Accountants, Silver Dawn Holdings Ltd Member/Graduate CPA PNG, PNG Institute of Directors, Australian Institute of Company Directors S. Davis, LLB Director Bank of South Pacific Ltd, Next DC Ltd, PayPal Australia Ltd, NextDC Ltd, Asia Society of Australia, Australia India Business Council Graduate/Member Australian Institute of Company Directors, Avondale Golf Club Ltd R. Bradshaw, LLB Director Member Bank of South Pacific Ltd, Kumul Agriculture Ltd Papua New Guinea Law Society 108 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsName Nature of Interest G. Robb, BA, MBA, OAM, MAICD, GAICD Director Bank of South Pacific Ltd, BSP Capital Ltd, Bank of South Pacific Tonga Ltd Member/Graduate Australian Institute of Company Directors F. Talao, LLB, LLM, MPHIL, MAICD (Resigned December, 2019) Director Bank of South Pacific Ltd, Director Partnership Pacifica, Chayil Investment ltd, Human Rights PNG E. B. Gangloff, CPA, MAICD, MIIA, PNGID Member Director Member A. Mano, BEcon, MSc. Director Faamausili Dr. M. Lua’iufi, BA, MSc, PhD Shareholder Employee Director Shareholder Member Papua New Guinea Law Society, Australian Institute of Company Directors Bank of South Pacific Ltd, Gangloff Consulting Ltd, New Britain Palm Oil Ltd, Sir Theophilus Constantinou Foundation, BSP Finance (Fiji) Ltd, Pacific Training Consortium Ltd, Highlands Pacific Ltd Institute of National Affairs (President), MSME Council Inc. (Vice President), Australian Institute of Company Directors, Papua New Guinea Institute of Directors (Founding member), CPA PNG, Institute of Internal Auditors, School of Business and Public Administration, University of Papua New Guinea (Adjunct Professor). Bank of South Pacific Ltd, Mineral Resources Development Company Ltd, Pearl Resort (Fiji) Ltd, Speedy Hero Ltd, Insurance Pacific Ltd, Civpac Ltd, Handy Group Ltd, SMA Investments Ltd, Hevi Lift Group Ltd, PNG Air Ltd, Gobe Freight Ltd, Mineral Resource Ok Tedi Ltd, Mineral Resources Star Mountain Ltd, Petroleum Resources Kutubu Ltd, Petroleum Resources Moran Ltd, Petroleum Resources Gobe Ltd, Mineral Petroleum Resources Madang Ltd, Mineral Resources Ramu Ltd, Gas Resources Hides Ltd, Gas Resources Hides 4 Ltd, Gas Resource Angore Ltd, Gas Resource Juha Ltd, Bank South Pacific (Samoa) Ltd, Star Mountain Plaza, Taumeasima Island Resort in Samoa, Davara Estate, Bogasi Investments Ltd, Terra Resources Ltd SMA Investments Ltd, INSPAC Ltd Mineral Resources Development Company Ltd Bank of South Pacific Ltd, Paradise Consulting, National University of Samoa Paradise Consulting Executive Committee of the National University of Samoa, Samoa Institute of Directors, British Institute of Consulting, Technical Advisor to the newly establsihed Samoa Human Resources Institute (November 2018), Australian Institute of Company Directors BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 109 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityStrategicReportManagementTeamsStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Management Teams PROFESSIONALISM We inspire, we change, and we live our values, and lead by example. 110 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Corporate Management Social Teams Responsibility BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 111 Management Team Executive Management Robin Fleming, CSM Group Chief Executive Officer Roberto Loggia Group Chief Operating Officer Eddie Ruha Group Chief Financial Officer Robin Fleming was appointed CEO of Bank of South Pacific Ltd in April 2013. Before his appointment as CEO, he had been Deputy CEO and Chief Risk Officer since 2009. Prior to that, Mr Fleming held senior executive roles as Chief Risk Officer, General Manager Corporate & International, and Head of Risk Management with BSP. Prior to the merger of BSP and PNGBC, Mr Fleming held senior management roles with PNGBC. He has worked in PNG for over 35 years and holds an MBA and a Master of Management from Charles Sturt University. Mr Fleming was made a Companion of the Star of Melanesia (CSM) in 2015 by the PNG Government for services to banking and the community. Roberto Loggia joined BSP in April 2011 after having been CEO of State Bank, Mongolia in its initial stages of development wherein the sound assets of two failed institutions were consolidated into a new viable state sponsored bank with the support of EBRD, London. After having obtained his Bachelor of Commerce degree in Finance from McGill University, Montreal and initiation into banking at Toronto Dominion Bank, he eventually became a career banker with more than thirty years’ experience working mostly throughout Asia but also in emerging markets in Central Europe, South America and Africa. In terms of scope of responsibility, most of his assignments have been as Chief Operating Officer responsible for middle and back office functions supporting businesses in Retail Banking, Corporate & Investment Banking and Private Banking. Mr Loggia has also participated as a key Manager in Greenfield Banks in Japan, Indonesia, Laos and Angola. Lastly, he has held senior line management responsibility within Retail Banking in Nigeria as well as consulting assignments within Retail Banking in China and Risk Management in Thailand. Eddie Ruha was appointed to Group Chief Financial Officer on the 3rd April 2017, after the resignation of Mr Johnson Kalo. Prior to that Mr Ruha joined BSP on the 1st of November 2012, as the Chief Financial Officer – PNG. Previously he worked for Steamships Trading Company here in PNG for 22 years, commencing there in 1990, working in the Steamships Merchandising Division for eight years, before transferring to Head Office as Group Systems Accountant and then Group Accountant, General Manager Finance and then from 2008 to 2012 as Finance In New Director and Company Secretary. Zealand Mr Ruha initially worked for KPMG Auckland office as an Auditor. Mr Ruha is a commerce graduate from Auckland University in New Zealand (1984) and has a Master of Business Administration from Charles Sturt University (2000) and is a member of CPA Papua New Guinea and a member of the Chartered Accountants Australia and New Zealand as well as a graduate of the Australia Institute of Company Directors. 112 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDPaul Thornton Group General Manager Retail Banking Paul Thornton was appointed General Manager Retail in August 2013 and brings to the position 44 years of retail banking experience, 36 years of which have been in Papua New Guinea. Mr Thornton was previously the Executive Manager Strategic Planning with the PNG Banking Corporation and was the founding Managing Director of PNG Microfinance Limited. Since returning to BSP in 2010, he has held the positions of Head of BSP Rural, Deputy General Manager Retail and General Manager Network before being appointed to this current position. Peter Beswick Group General Manager Corporate Banking Peter Beswick was appointed General Manager of BSP Corporate Banking in June 2011. He has over 25 years Banking and Finance experience, covering Australia and South East Asia with Commonwealth Bank of Australia, National Australia Bank and Bank of New Zealand; holding senior executive positions in Risk Management and Business Development. Mr Beswick’s most recent appointment has been CEO of a national wholesale, import and retail business in Australia. He has extensive experience in the Finance, Government, Retail, Wholesale, sectors, Telecommunications and Property with extensive knowledge in foreign exchange, risk management and governance. Mr Beswick qualified as a Chartered Accountant with PWC and most recently completed an MBA with Macquarie University in Australia. Mike Hallinan Group Chief Risk Officer Mike Hallinan, was appointed Group Chief Risk Officer, following Haroon Ali’s move to Fiji as Country Head in 2018. Mr Hallinan, commenced employment with BSP in 2013, as Chief Credit Officer. His professional career expands over 40 years in Banking and Finance holding various senior positions in Risk Management and Senior Relationship Executive roles with Commonwealth Bank of Australia, specifically managing corporate and including government departments, both domestically and internationally. Recent experience prior to joining BSP included the financial industry group and infrastructure project financing. Mike is familiar with PNG having previously worked for the former Papua New Guinea Banking Corporation holding the position of Executive Manager Lending Division. Mike is a qualified CPA and is a Fellow of the Australian Bankers Institute. relationships institutional BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 113 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportManagement Team Executive Management (continued) Rohan George General Manager Treasury structured Rohan George was appointed General Manager Treasury in February 2015. Mr George has extensive knowledge in developed and emerging financial markets. His experience spans over 30 years, covering fixed income, foreign exchange, and commodities derivatives markets. He is passionate about financial markets, managing market risk, liquidity risk and providing value add solutions for clients. Prior to joining BSP, Mr George worked at ANZ as Head of Global Markets, Cambodia & Laos (5 years), at Westpac as Treasurer PNG & Pins (8 years), and at BNP Paribas Investment Management in Sydney, as Head of Fixed Income. Mr George holds a Master of Applied Finance degree from Macquarie University and is accredited by both the Australian Financial Markets Association and the Sydney Futures Exchange. Christophe Michaud General Manager and Director BSP Finance Ltd Christophe Michaud was appointed General Manager and Director of BSP Finance Ltd in May 2015. Prior to this appointment, he spent 4 years with BSP in corporate banking as Senior Relationship Manager then Deputy General Manager. Prior to joining BSP, Mr Michaud held various positions in the banking industry in corporate banking, project finance, private banking with BNPParibas, Banque Indosuez and Crédit Agricole in France, India, Pakistan, Turkey, Indonesia, Singapore. He brings with him more than 35 years of banking experience. Christophe holds a Master of Business Administration from Neoma Business School in France. Hari Rabura General Manager Human Resources Hari Rabura was appointed General Manager Human Resource in April 2016. She first joined BSP as a graduate trainee in 2001 and worked in various positions within HR in BSP and various private firms. Ms Rabura is the first female employee to reach executive management level as a General Manager in one of the key Strategic Business Unit (SBU) within the organisation. She is experienced in implementing and delivering HR strategies, policies, and services that create, support and sustain a high performance culture in BSP. As a former member of the Leadership and Management Development Program (LMDP) in BSP, she has undergone General Management training in INSEAD Business School in France and Melbourne Business School in Australia. 114 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDDaniel Faunt General Manager Offshore Branches and Director BSP Finance Ltd Daniel was appointed to General Manager Offshore Branches in 2018 with responsibility over banking operations in Fiji, Solomon Islands, Tonga, Samoa, Vanuatu and the Cook Islands. Faunt has 20 years of banking experience in PNG, Australia and the Pacific and has held senior management roles in Corporate and Commercial Banking, Retail Banking and Operations. Mr Faunt holds a Masters of Business Administration in Economics from Deakin University and Bachelor of Business in Banking from the Queensland University of Technology. Nuni Kulu General Manager Digital Adam Fenech Group General Manager Compliance Nuni Kulu was appointed as General Manager Digital effective as of 1st January, 2019. Her appointment makes her the second female to be appointed to the Executive of BSP as she joins Hari Rabura, General Manager Human Resources. Nuni joined the former PNG Banking Corporate (PNGBC) as a graduate and has undertaken numerous roles in Treasury and Retail Banking during the course of her career. She was a member of the BSP's Leadership Development Program and has benefited from leadership and management training at Melbourne Business School and Insead College in France. Nuni hails from Manus Province and holds a Bachelor of Commerce attained at the Australian National University with many years of experience with PNGBC / BSP. She is now the President of the Business Council of PNG. Adam Fenech was appointed to Group General Manager Compliance in October 2019. Mr Fenech oversees BSP’s Anti-Money Laundering & Compliance; Internal Audit; and Credit Inspection business units to ensure BSP continues to meet its ongoing regulatory requirements and advancements in industry standards. Mr Fenech has over 22 years’ diverse leadership experience in Australia and Papua New Guinea including senior roles at Bankers Trust, Commonwealth Bank of Australia, and more recently at PwC as Director of Advisory Services, and Kina Bank as General Manager Wealth and Chief Operating Officer. He holds a Bachelor of Commerce from the University of New England, an MBA and Master of Project Management from the University of Southern Queensland, and has attended leadership programs at the Harvard Business School and the National University of Singapore. He is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and both the Australian and PNG Institute of Company Directors. BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 115 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportManagement Teams Broader Group 116 COOK ISLANDS Middle [front] David Street – Country Head Left to Right [back] Henry Napa – Head of Operations Tokoa Harmon – Branch Manager Chris Doran – Head of Corporate Grace Tangata – Operational Risk and Compliance Manager Gabe Raymond – Head of Finance Achaal Narayan – Manager Digital Tutu Inamata – Business Manager FIJI Standing (L-R): Omid Saberi – Chief Information Officer Sunil Rohit – Head of Credit Ravindra Singh – General Manager Retail Bank Haroon Ali – Country Head Maikash Ali – General Manager Corporate Alvina Ali – General Manager Legal & Compliance Esala Halafi – Head of Operational Risk & Compliance Rajeshwar Singh – General Manager Corporate Services & Chief Financial Officer Not in photo: William Wakeham – Chief Operating Officer SAMOA Standing (L - R): Maiava Iaeli Tovia-Leota – Business Manager Shirley Greed – Head of Retail Banking Taitu’uga Maryann Lameko-Vaai – Country Manager Peti Leiataua – Manager Operational Risk and Compliance Jennifer Fruean – Head of Finance Seated (L - R): Epeli Racule – Operations Manager Bharat Chovan – Head of Financial Markets Edward Yee – Head of Business Banking Rodney Greed – Manager Projects and Premises GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDSOLOMON ISLANDS Left to Right [back] Christopher Robertson – Head of Relationship Banking Alphonse Taoti – Manager Retail Services Joan Ramo – Manager International Operations Dennis Suia – Manager Retail Operations Manager Giddings Qiqo – Manager Operations and International Business Sharneet Singh – Head of Finance David Anderson – Country Head Left to Right [front] Freda Fa’aitoa – Manager Human Resources Lucy Bonunga – Manager Operational Risk & Compliance Lynnette Taoti – Manager Credit Administration Genevieve Apusae – Senior Audit Officer TONGA Standing (L - R): Marcellina Wolfgramm Haapai – Country Head Viliami Vailea – Head of Finance Alvina Manu – Manager Operational Risk Emele Hia – Head of Corporate Meleana Fifita – Head of Operations Mele Ikahihifo Latu – Head of Treasury Mr Emilio Tapueluelu – Head of Retail VANUATU Left to Right [back] Ronal Prasad – Head of Finance Nik Regenvanu – Country Head Bethy Nafuki – Business Manager Left to Right [front] Moana Korikalo – Head of Retail Josiah Kalfabun – Manager Compliance Irene Tabi – Head of Treasury Edmond Williamson – Manager Operational Risk Teresa Jordan – Head of Operations BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 117 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReport Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Management Teams Subsidiaries BSP FINANCE HOLDING Standing (L - R): Pochon Sauriroa Lili – Financial Controller Susan Asi – Assistant Compliance & ORM Offi cer Anna Puri – Credit Manager Christophe Michaud – General Manager Bernadett e Name’a – Finance Offi cer Janet Seta – Quality Assurance Manager Remu Ruape – AML/CTF Compliance Offi cer BSP FINANCE - PAPUA NEW GUINEA Standing (2nd from Left ): Brett Tayler – Country Manager with Management and staff of BSP Finance PNG BSP FINANCE - FIJI Standing (L - R): Sanjeet Narsey – Finance Manager Vimal Raj – Senior Lending Offi cer Shelvina Sharon Lata – Accountant Shirraz Narayan – Collecti ons Supervisor Krishna Raju – Country Manager Shainesh Vikash Lal – Area Manager West Animul Sheryn Khan – Supervisor Lending Support Niranjan Singh – Compliance & Operati onal Risk Management Offi cer Sudeshwar Ram – Area Manager East BSP FINANCE - CAMBODIA Standing (L - R): Kou Polai – Senior Reovery Offi cer Heng Brosoer – Finance Manager Mom Sokhouch – Senior Admin Support Seng Sokha – Sale Lending Manager Khay Bunthoeun – Operati on Manager Sitti ng (L - R): Im Boramey – Senior Compliance Offi cer Buo Choeun – Country Manager Phum Sreyneang – Sale Lending Coordinator BSP CAPITAL LTD Standing (L - R): Willie Konga – Senior Manager (Funds Management) Marie Sourimant – Senior Portf olio Offi cer Theresa Kalivakoyo – Business Controller Michelle Koredong – Senior Dealer Fixed Asset Ruth Roandi – Research Analyst Gheno Minia – General Manager 118 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Directory Broader Group OVERSEAS DIRECTORY Cambodia Country Manager Cook Islands Country Head Head of Corporate Rarotonga Branch Aitutaki Branch Buo Choeun 855 (0) 2388 52064 David Street Chris Doran Tokoa Harmon Rosa Henry 682 22829 682 22014 682 22014 682 31714 Haroon Ali Sanjani Devi Shailendra Roy Pio Vatanitawake Ravikashni Prakash Fiji Country Head Damodar City Branch Thomson St Branch Nausori Branch Pacific Harbour Branch(OIC) Pacific House Sales & Bus.Centre Manjila Goundar Samabula Sales & Bus. Centre(OIC) Mereani Peters Suva Central Branch Ba Branch Westfield Branch Nadi Branch Namaka Branch Rakiraki Branch (OIC) Sigatoka Branch Tavua Branch (OIC) Labasa Branch Savusavu Branch (OIC) Taveuni Branch Shalit Kumar Reginald Kumar Devendran Pillay Ann Pesamino Razia Tahir Ronica Prakash Anupa Kumar Nacanieli Vadei Eka Takayawa Vineeta Prasad Anaseini Senivika 679 3214454 679 3342333 679 3314400 679 3478499 679 3452030 679 3314400 679 3387999 679 3314400 679 6674599 679 6661769 679 6700988 679 6627320 679 6694200 679 6500900 679 6681507 679 8811888 679 8850199 679 8880433 BSP LIFE - PNG Standing (L - R): Gynellevin Tanabi-Hemetsberger – Operations Manager Jennifer Manimua – Administration Accountant Nilson Singh – Country Manager Matthew Hasu – Business Development Manager BSP LIFE - FIJI Standing (L - R): Curtis Mar – General Manager Distribution & Marketing, Pramesh Sharma – Chief Investments Officer Michael Nacola – Managing Director Munendra Naidu – Chief Financial Officer Sitting (L - R): Shayne Sorby – General manager Legal & Compliance Atelina Muavono – Chief Operating Officer Samoa Country Head Retail Head Apia Branch Vaitele Branch Salelologa Branch Maryanne Lameko - Vaai Shirley Greed Siuli Aiono Folototo Leaumoana Leilani Kelemete 685 66115 685 66170 685 66172 685 23005/685 23057 685 51208/685 51066 Solomon Islands Country Head Auki Branch Gizo Branch Heritage Park Branch Honiara Central Munda Branch Noro Branch Point Cruz Branch Ranadi Branch David Anderson Lency Saeni Clotilda Londeka Joy Vave Jeremy Bosukuru Joseph Rabaua Richard Bero Saverio Votu Tricia Tura 677 21874 677 40484 677 60539 677 21814 677 21222 677 62177 677 61222 677 21874 677 39403 Tonga Country Head Nuku’alofa Branch Vava’u Branch Ha’apai Sub Branch ‘Eua Sub Branch Marcellina Wolfgramm Haapai Melaia Tu’ipulotu Sosefina Tangitau Selu Lausii Tokilupe Toe’api 676 20807 676 20879 676 71268 676 60933 676 50145 Vanuatu Country Head Head of Retail & Marketing Santo Branch Port Vila Branch Tanna Branch Freswota Branch Nik Regenvanu Moana Korikalo Edwige Wensi Danica Rapouel Dolores Charlie Lina Niatu 678 5580038 678 5580009 678 5580034 678 5580016 678 5580041 678 5580051 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 119 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReport Management Team PNG Branch Managers Cliff Yoka Aitape Martin Gilo Alotau Rose Paula Seeto Arawa Dora Raphael Bialla Ruby Patu Boroko Julie Warren Buka Roslyne P. Kanini Bulolo Reuben Attai Daru Livikonimo Koki Goroka Antonia Dru Gordons Rawalo Rawalo Harbour City Marco Hamen Kainantu Mathias Manawo Kavieng Betty Posangat Kimbe Ivy David Kiunga Joe Makinta Kokopo Rita Singut Kundiawa Bevilon Homuo Lae Top Town Gabriel Ak Lae Market Robinson Panako Lae Commercial Johnson Tetaga Lihir Ruth Kagl Lorengau Barry Namongo Madang Philip Solala Mendi Meck Kaum Moro David Ila Moro Theresa Pilamp Mt Hagen Samuel Okti Popondetta Mary Koi Porgera Stanley Bole Port Moresby Kalat Tiriman Rabaul Dianne Rali Tabubil John Tomba Tari Delilah Kanit Vanimo Susie Yapen Vision City Thomas Tembil Wabag Alex Kuna Waigani B/Centre Madeleine Leka Waigani Drive Nelson Kerua BSP First HC Richard La’a SME - Lae Samuel Mulina SME - Goroka Carol Nokop SME - Port Moresby Reuben Elijah Highlands Area Manager Dennis Lamus Momase Area Manager Jeffrey Singer NGI Area Manager Natasha Sirimai NCD Area Manager Billy Veveloga Southern Area Manager 120 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTDPAPUA NEW GUINEA BRANCH DIRECTORY Aitape Alotau Arawa Bialla Boroko Branch Premium Cliff Yoka Martin Gilo Rosemary Paula Seeto Dora Raphael Ruby Patu Sheila John Buka Julie Warren Bulolo Daru Goroka Gordons BSP First Premium Harbour City Branch Premium BSP First Kainantu Kavieng Kimbe Kiunga Kokopo Branch Premium Roselyn P. Kanini Ruben Attai Livikonimo Koki Antonia Dru Rawalo Rawalo Iru Tabe Nelson Kerua Marco Hamen Mathias Manowo Betty Posangat Ivy David Joe Makinta Kessie Guboro Kundiawa Rita Singut Lae Top Town Main Market Commercial BSP First Lihir Lorengau Madang Branch Premium Mendi Bevilon Homuo Gabriel Ak Robinson Panako Elizabeth Gavul Johnson Tetaga Ruth Kagl Barry Namongo Jennifer Passingan Philip Solala SUB BRANCH DIRECTORY AIYURA BANZ BUIN CHUAVE DAULO GEMBOGL GUSAP HENGANOFI HIGATURU HOSKINS IALIBU KABWUM KAMTAI KEREMA KEREVAT KEROWAGI KINIM KIKORI KOMO KONOS KUPIANO Gomah Benson Kessy Elly Rosemary Paula Seeto Shandah Bai Kurai Gunurei William Koima Lee Sinemaue Rachael Saime Stephanie Orovo Genevieve Sela Philemon Kumi Inna Buneng Josephine Kun Toru Levo Minamar Mathew Gariki Towa Malapun Bannick Leah Kimave Mark Tom Helen Warange Andrew Baine Jnr 457 2042 641 1284 276 9244 983 1095 303 4320 303 4354 973 9042 7202 9203 474 5331 645 9416 532 1633 302 5245 302 5202 305 7135 305 6190 305 7935 537 1251 9842082 983 5166 649 1313 982 9088 982 9068 535 1025 473 9876 473 9609 472 9088 478 4949 986 4062 970 9244 422 2477 422 2621 549 1070 7230 8313 7100 9078 7106 3610 7197 6001 7100 6763 7313 4177 7091 1396 7100 7859 7275 1365 7031 2627 7041 1624 7346 1426 7243 4695 7100 2889 7190 8231 7100 9077 7100 7861 7163 0597 7362 0760 7197 6006 7288 4140 Moro Meck Kaum David Ila Motukea Stanley Geno Mt Hagen Branch Theresa Pilamp Premium Maggie Wara Popondetta Porgera Samuel Okti Mary Koi Stanley Bole Imelda Konabe Jessie Toran Kalat Tiriman Dianne Rali John Tomba Delilah Kanit Carol Nokop Richard La’a Samuel Mulina Port Moresby Branch Premium BSP First Rabaul Tabubil Tari Vanimo SME Port Moresby Lae Goroka Vision City Branch Premium 276 1566 276 1569 3217701 542 1877 542 2022 542 1877 629 7443 547 6900 305 7104 305 7790 305 7724 982 1744 649 9179 276 1651 457 1025 305 6400 479 5676 532 1006 Susie Yapen 300 9103 Wabag Thomas Tembil 547 1237 Waigani Banking Centre Branch Premium Alex Kuna Pakar Tata Waigani Drive Wewak Madeleine Leka Robert Jomino REGIONAL AREA MANAGERS Highlands Region Momase Region NGI Region NCD Region Southern Region Reuben Elijah Dennis Lamus Jeffrey Singer Natasha Sirimai Billy Veveloga LABA LAKURUMAU LOSUIA MAPRIK MINJ MUTZING NAMATANAI NAVO NINGERUM OKAPA PADIPADI PALMALMAL PANGIA TAMBUL TELEFOMIN WAKUNAI WALIUM WAPENAMANDA YANGORU YONKI Auda Morea Lorraine Koma Lorna Solomon Christian Tatu James Mare Gordon Robert Mathew Tabakas Hennah Brunim Todin Kasi Arafat Tovari Lelly Mick Freda Nablup Debra Poria Willie Yapi Jobartan Bickie Melvin Kusa Brenda Igusam Feta Isin Brendon Iromo Usik Asino 305 6102 300 9131 302 5301 456 2344 542 2002 478 4998 982 9088 305 7195 305 7886 7197 6008 7197 6005 7031 2617 7168 7815 7100 9076 7100 2488 7197 6007 7090 4272 7916 5583 7055 0955 7090 4463 7323 9181 7197 6003 7100 7863 7255 8421 7100 7856 7031 2127 7100 7862 7127 0000 7185 5768 BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 121 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReport Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Corporate Social Responsibility COMMUNITY We respect, value and support the communiti es in which we operate. 122 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Strategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Corporate Management Social Teams Responsibility BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 123 Corporate Social Responsibility Investing in PNG and the Pacific BSP delivers more than just banking to the communities, customers and the countries that we operate in. We deliver balanced and sustainable outcomes for our customers, community, people and shareholders. We respect, value and support the communities in which we operate in. At the core of our business, we know that, our people belong to a bigger community. In 2019, BSP's Corporate Social Responsibility (CSR) contribution was over K5.5 million including sponsorships and donations as a group. Corporate Social Responsibility K5.5m Sponsorships and Donations Groupwide including BSP Subsidiary Corporate Social Responsibility Total amount invested in CSR in 2019. This includes Sponsorships, Donations and Community Projects in Corporate Social Responsibility BSP Groupwide K4.2m Sponsorships and Donations in Papua New Guinea Corporate Social Responsibility Total amount invested in CSR in 2019. This includes Sponsorships, Donations and Community Projects in Papua New Guinea 124 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportCorporate Social Responsibility across the Pacific K249k CSR Spend in Cook Is. K296k CSR Spend in Fiji K261k CSR Spend in Samoa K102k CSR Spend in Solomon Is. K178k CSR Spend in Tonga K237 CSR Spend in Vanuatu BSP takes pride in supporting professional groups, organisations, and worthy causes that are important to our customers, employees and people throughout PNG and the Pacific. BSP has built partnerships with various organising committees, events and charities who champion, cultural unity, professional development, environment sustainability, education, sports, health and well being. BSP TONGA SPONSORS STUDENTS TO MEXICO BSP TONGA SUPPORTS HAKULA SWIM CLUB BSP SI SUPPORTS PINKTOBER BSP SAMOA OFFERS SCHOLARSHIPS FOR STUDENTS BSP SAMOA SUPPORTS INTERNATIONAL WOMEN’S DAY BSP PNG SUPPORTS OPERATION OPEN HEART Donations K800k for Donations in Papua New Guinea Our Donations Support Charities, Hospitals, Orphanages and other worthy causes. CHARITY AND NGO Rotary Club of Port Moresby • Salvation Army Red shield Appe • Gateway Children’s Fund(PNG)Inc • Sir Buri Kidu Heart Foundation • City Mission PNG Ltd HEALTH Operation Open Heart Foundation • Karama Health Limited • Soroptomist International POM • PNG Cancer Foundation • Burnett Institute EDUCATION Buk Bilong Pikinini • Kokoda Track Foundation Limited COMMUNITY • Bel isi Campaign • Mt Ulevun Disaster • Digicel Foundation - Man of Honour Community Leadership Award Tsak Valley Landslide Disaster • • Life PNG Care Inc • Branch Hospital Donations (Lae, Rabaul, Kavieng, POM) BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 125 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportEveryday Donations BSP Fiji supports the Walk on Walk Strong campaign by shaving their heads to raise funds for Cancer Awareness and children living with Cancer. Each year, BSP staff volunteer to shave their heads for this worthy cause. Sponsorship SPORTS AND WELL BEING • BSP School Cricket Programme • WNB Rugby League Franchise Board • Papua New Guinea Swimming Inc. • PNG Volleyball Federation - Indoor • Surfing Association of PNG Inc. • Papua New Guniea Snooker Assoc • Port Moresby Golf Club • Port Moresby Tennis and Racquets Club • Lloyd Robson Oval Trustee Limited • Ramu Golf Club • Port Moresby Game Fishing Club • Bulolo Golf Club • PNG Squash Racquets Federation • Port Moresby Cricket Association • Private Companies Netball club • Port Moresby Corporate Touch • PNG Olympic Committee Fundraising • PNG Soccer Charity Trust Account • POM Women’s Softball Association • Sportz Events Limited • Rabaul Golf & Squash Club • Lae Golf Club Inc. CULTURAL FESTIVALS • Sepik River Crocodile Festival • Morobe Agriculture Show • Motu Koita Festivals • Goroka Show • Mount Hagen Cultural Show • 8th National Mask Festival • National Kenu and Kundu Festival • • Frangipani Festival • Karimui Conseration, Agriculture & Tufi Tapa & Tattoo Festival Cultural Show K2.1m for Sponsorship in Papua New Guinea K160k for Go Green in Papua New Guinea Our Sponsorships Investing in Sports, Environment, Corporate Events, Professional Development and Culture & Tourism. India Association of PNG COMMUNITY • Grass Skirt Project • Port Moresby Golf Club • Filipino Association of PNG Inc. • • Moresby Arts Theartre Inc. • National Capital District Comm • PNG Tumbuna Visual Arts • Business & Professional Women • Rotary Club of Boroko • Womens Leaders Network Inc. • Divine Word University • Quebri Media & Marketing PNG • Namatanai RFL • Transparency International • Provincial Celebration Account • Soroptimist International Lae • Strategic Communications CONFERENCES • Australia PNG Business Council • PNG Investment Week • Haus Ples Home Loan Expo • National Fisheries Authority • CPA 2019 Conference • CWC Group Limited • Lowy Institute_Australia-PNG Networking • 33rd Australia Papua New Guinea Business Forum • PNG HR Institute • POM Chamber Of Commerce • Business Council Of PNG • Demeter Resources - Security Congress • Business Advantage International • PNG Mining and Petroleum Conference • • PNG Investment Conference • PNG Institute of Directors • UPNG MBBA Pinnacle • Investment Promotion Authority • Business & Professional Women • Kokonas Indastri Koporesen • PNG Digital & Communications Institute of Internal Auditors Technology (ICT) Cluster • PNG Law Society • Kumul Petroleum Holdings Ltd BSP FIJI SUPPORTS THE SUVA MARATHON BSP PNG JOINS THE BEL ISI WALK TO SAY NO TO VIOLENCE BSP VANUATU PROVIDES SCHOLARSHIPS TO WOMEN 126 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportBuilding Communities Giving Back to the Community In celebrating the core value of community, staff visited the Mirigini Mustard Seed Early Childhood Learning Centre to donate books and sporting equipment. Part of the visit allowed staff to share the Go Green message and plant some trees. Through our respected and valuable partnerships, we are able to reach more communities, more children, enhancing the lives of many, and contributing positively, through Community Projects and delivering Financial Literacy. As part of our community, social responsibility, all staff are encouraged to lend a helping hand to deliver a community project. Community is one of the Bank’s core values in which we respect, value and support the communities in which we operate. Community Projects in Papua New Guinea 48 projects in total for PNG in 2019 K10.06m invested in community Projects since 2009 K1.1m invested in community Projects in 2019 39% 46% Education 22 Projects Community 22 Projects 15% Health 7 Projects GO GREEN - BSP TRASH TO TREASURE SUPPORTING WOMEN IN SPORTS - PNG WOMENS’ SOCCER TEAM CULTURE & TOURISM MOTU KOITA FESTIVALS SUPPORTING THE PORT MORESBY RACQUETS CLUB JUNIOR GOLF PROAM PINK BREAKFAST FUNDRAISER BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 127 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReport Lending a Helping Hand Labasa Branch staff in Fiji volunteered to help with the refurbishment of the walkway at Naseakula District School. As a part of the communities we live in, we would like to build these relationships and strengthen our community involvement. BSP's Community Projects initiative provided an avenue for each of our branch staff to contribute to make a difference. Since its inception in 2009, we’re proud that every Branch Manager, Head of Department and Senior Manager and their teams have made a personal commitment to this program, devoting their own time, backed by all the resources of BSP. Aitape Lumi Primary School - Completion of Double Classroom Alotau Alotau Inclusive Education Resource Centre - Renovation of the Centre Arawa Arawa township - Repainting of bus stops and installation of rubbish bins Bialla Bialla market - Renovation & Extension of the Market shelter Boroko 6 Mile Antenatel Clinic - Renovation & Extension of the Clinic Waiting Shelter BSP Capital Gordon Secondary School Library - Maintenance & Installation of Computers BSP Finance POM General Hospital - Renovation of the Children’s Playground BSP First Murray Barracks- Renovation of the Basketball Courts BSP Haus Hohola Demonstration Elementary School - Maintenance of the Library Buka Buka branch past project sites - Repainting of all past projects sites Bulolo Sambio - Renovation of the Basketball Court Lae Corporate & BSP Finance Lae Salvation Army - Renovation of Hauswin Corporate POM Red Cross Special Education Centre building renovation Daru Daru town - Renovation of Sports Field Grandstand F&P Vabokori Village clinic - Maintenance of the Clinic Gordons Gerehu Primary School - Renovation of School library Goroka Sir Danny Leahy - Renovation of Grand Stand HR Sabusa Primary School - Cementing of 5x Classroom Floors Kainantu Kainantu township - Renovation & Maintenance of the main town bus stop Kavieng Kavieng Police Station - Renovation of Police Station, Family Sexual Violence Unit Kimbe Ruango Primary School - Replenishment of desks RETAIL SBU AITAPE BRANCH KAINANTU BRANCH MT HAGEN BRANCH LAE TOP TOWN BRANCH BOROKO BRANCH 128 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportGiving Back to the Environment The BSP Go Green Campaign has continued to drive the message of awareness and education through schools and ensuring that our youngsters are more responsible in the communities that they live in. The BSP Annual Go Green School Clean-up day, aims to put a practical aspect to the program where children across PNG, Vanuatu, Samoa, Fiji, Tonga, Solomon Islands and the Cook Islands can participate. Kiunga Kiunga town - Renovation & Maintenance of the town basketball & volleyball courts Kokopo Callen Disable centre, Kabaleo - Renovation & Maintenance of the Callen Disable Centre Kundiawa Prenorkwa Primary School - Renovation & Maintenance of the water tank foundation Lae Commercial Taraka Primary School - Repair & Maintenance of the Basketball Court Lae Market Lae Botanical Garden - Renovation of the Kids Recreational Area Lae Top Town Buimo CIS - Repair & Maintenance of Buimo Correctional Services Clinic Lihir Londolovit Elementary School & Kul Bus stop - Repair & Maintenance of double classroom & Bus stop Lorengau Lorengau General Hospital - Renovation & Maintenance Madang Madang town - Repair & Maintenance of Laiwaden Basketball Courts Mendi Mendi town - Installation of Rubbish bins Moro Primega Health Centre - Installation of Solar Lights Mt Hagen Mt Hagen Secondary School - Upgrade of the Basketball Court Operations & IT Hagara Primary School - Maintenance of School Water Fountain Paramount & Risk Management Morata Clinic - Maintenance & Extension of the Clinic waiting area Port Moresby Konedobu Clinic - Renovation & Maintenance of the Clinic Popondetta Resurrection Primary School - Maintenance of double classrooms Porgera Paiam Elementary School - Maintenance & Replenishment of desks and chairs Rabaul Rabaul Police Station - Renovation & Maintenance of Police Station Retail Waigani Elementary School - Renovation of Ablution block Tabubil Wangbin Primary School - Renovation & Maintenance of Ablution Block Tari Tari Secondary School - Renovation of School Basketball Court & Donation of Sporting Gear Treasury Boreboa Primary School - Maintenance to Water Tank Vanimo Dasi Elementary School - Renovation of the Double Classroom Wabag Sakin Ipalya Village - Provision of Relief Assistance to Sakin Ipalya village, Sak Valley Waigani BC RPNGC Bomana Training College Clinic - Maintenance of the Clinic Waigani Dr Cheshire Home - Renovation of the Hauswin Wewak Brandi Secondary School - Renovation of Boys Ablution Block BSP FINANCE WAIGANI BANKING CENTRE RABAUL BRANCH BSP PARAMOUNT & GROUP RISK TEAM WAIGANI DRIVE BSP HAUS BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 129 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Community Projects in the Pacifi c 62 Community Projects Delivered across the group 15 Projects delivered through Offshore Branches in the Pacific Projects delivered through BSP Subsidiaries Projects delivered through SBUs 2 9 TONGA 2 Project in Tonga Renovation of the main netball court and Renovation of children’s playground Renovation of children’s playground COOK ISLANDS 2 Project in Cook Is. Installation of 6 x BBQ tables in Central Avarua Distribution of non-woven shopping bags for Market use 37 Projects delivered through PNG Branches Installation of 6 x BBQ tables in Central Avarua SAMOA 2 Project in Samoa Donation of tank by BSP Samoa to Lotofaga Primary School Samoa staff cleaning up the Monestry Carmelites 130 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD Extension of roofing to the Samoa Victim Support Group Centre (SVSG) to shelter dining area Donation of 2 x 5000L Water Tanks to Lotofaga Primary School VANUATU 3 Projects in Vanuatu VILA CENTRAL Hospital painting and donation PORT VILA Basketball court at No2 Lagoon SOLOMON ISLANDS 4 Projects in Solomon Islands DIGITAL & POINT CRUZ Installation of Solar Powered Water tank to Auriligo Primary School, Guadal Canal Province RANADI Lunga School Ablution Block renovation FIJI 4 Projects in Fiji SAVUSAVU BRANCH Maintenance and refurbishment of bridge walkway. WESTFIELD BRANCH General maintenance and installation of Solar lights for Golden Age Home Investing in the Pacific No2 Lagoon Basketball Court renovation Vila Central Hospital interior design and donation of furniture Freswota School Special Needs Classroom Project Auki Branch Auki CHS Concrete base for water tank Gizo Branch Kukundu SDA College Basket Ball Court facelift Ranadi Lunga School Ablution Block renovation Digital & Point Cruz Installation of Solar Powered Water tank to Auriligo Primary School, Guadal Canal Province. Labasa Branch Naseakula District School Savusavu Branch Bridge refurbishment Tauveni Branch Wainkeli District Primary School building repairs to Kindergaten Westfield Branch Maintenance and Solar Installation for Golden Age Home BANK OF SOUTH PACIFIC LTD ANNUAL REPORT 2 19 131 GroupHighlightsBroader GroupSubsidiariesCorporateGovernanceFinancialStatementsShareholderInformationCorporate SocialResponsibilityManagementTeamsStrategicReportStrategic Report Group Highlights Broader Group Subsidiaries Corporate Governance Financial Statements Shareholder Information Management Teams Corporate Social Responsibility Financial Literacy and Banking Educati on With growth, comes added responsibilities of ensuring that our people, shareholders and customers are empowered in fi nancial literacy and banking education. Our Education and Community reach to deliver fi nancial literacy goes hand in hand with our reach, from the corporate business houses, the schools and to the more remote areas in PNG and the Pacifi c. In 2019, our key focus areas are fi nancial education, contributing to the community and good business practices. Delivering Financial Literacy in PNG 18,775 Individuals participated in Financial Literacy in PNG. 47% are women. 140 We have 140 qualified Financial Literacy Trainers in branches in PNG. 230 Communities and organisations reached since 2014 BANKING EDUCATION AND FINANCIAL LITERACY Financial Literacy Training delivered to Tusbab Secondary School students in Madang Province. 132 ANNUAL REPORT 2 19 BANK OF SOUTH PACIFIC LTD BANK OF SOUTH PACIFIC LIMITED 2 19 ANNUAL REPO RT www.bsp.com.pg 

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