Kina Securities Ltd
Annual Report 2020

Plain-text annual report

Annual Report 2020 Kina Securities Limited | ARBN: 606 168 594 Table of Contents 3 5 6 9 11 12 13 15 16 19 24 28 44 45 47 48 53 54 55 56 57 Performance Highlights Chairmans’s Message Managing Director’s Report Strategic Report Banking Wealth Strategic Direction Total Societal Impact Economic Outlook Board of Direcors Senior Executive Team Remuneration Report Directors’ Report Remuneration Report Directors’ Declaration Independent Auditors Report Statements of Comprehensive Income Statements of Financial Position Statements of Changes in Equity Statements of Cash Flows Notes of the Financial Statements 131 133 Shareholder Information Corporate Directory In this Annual Report, a reference to ‘Kina Group’, ‘The Group’, ‘Kina’, ‘the Company’, ‘Kina Bank’, ‘the Bank’, ‘we’, ‘us’ and ‘our’ is to Kina Securities Limited ARBN: 606 168 594 and its subsidiaries unless it clearly means just Kina Securities Limited. Kina’s Corporate Governance Statement is available on the company’s website: https://investors.kinabank.com.pg/investors/?page=corporate-governance Kina Securities Limited Annual Report 2020 1 Performance Highlights Successfully transitioned the ANZ acquisition Successfully completed equity raising for future growth Announced acquisition of Westpac PNG and Fiji Net Interest Income UP 48% to PGK 169.7 m Revenue UP 53% to PGK 314.8 m FX income UP 32% to PGK 55.2 m NPAT UP 25% to PGK 76.0 m Total loans UP 16% to PGK 1.7 bn Funds Admin Profit UP 9% to PGK 8.3 m Total deposits UP 5% to PGK 2.6 bn 2 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 3 Chairman’s Message I am pleased to introduce Kina’s 2020 Annual Report. Our strong financial performance during a challenging year reflects the continued successful execution of our growth strategy. As a result, we were able to deliver a full year dividend of AUD 10.0 cents / PGK26.9 toea per share. Our results demonstrate the strength of the leadership team, led by Chief Executive Officer and Managing Director Greg Pawson, and the success of the Kina Bank business model that has contributed to our growth agenda. Like many businesses, the year offered up a number of challenges as the uncertainties of Covid-19 developed. Leadership and culture have never been more important and I am delighted that the Bank’s executive team were able to respond quickly and effectively. Our teams have done an exceptional job to meet the needs of clients, whilst protecting the health and safety of our people, customers and communities. Building the bank of the future During the year, we continued to deliver on our strategic priorities to drive the growth of the business. A primary focus was to successfully transition the ANZ PNG portfolio into business as usual operations. With an emphasis on providing the best banking experience for customers, and ongoing investment in market-leading digital products and services, Kina achieved this transition effectively. In June we divested the Esiloans portfolio to Nationwide Microbank Limited (MiBank). The divestment supports the strategic partnership between our two institutions to support greater financial inclusion, increased micro-finance and improved services for small and medium sized businesses. We also simplified the corporate legal structure and successfully conducted a Non-Renounceable 1:2 Rights Issue, strengthening the capital adequacy of the Bank. This will position the company for future growth and create the capacity to take advantage of acquisition opportunities. Obtaining investor support for this during the pandemic and the market volatility that followed, shows confidence in our business proposition and it is a credit to the Bank’s management. Finally, in December we announced the proposed acquisition of Westpac PNG and Westpac Fiji. Our view is that there is a great story here, promoting a stronger publicly listed regional bank. The additional scale, customers and footprint will increase Kina’s ability to drive innovation, introduce more choice for customers, and deliver more value for shareholders. Business growth Kina delivered planned business growth across all of the existing businesses and in particular achieved the integration benefits critical to the ANZ PNG Acquisition. Net Profit After Tax increased by 25% to PGK 76.0m compared with the prior corresponding period and in line with market expectations. It was achieved through growth in the existing loan book, incorporating the ANZ PNG loans and deposit portfolio and lower interest expense against total deposits compared to the previous year. Foreign exchange income increased by 32% and was underpinned by an increase in overall market share, including new business generated from larger export clients. Kina’s Funds Administration business continued to record growth in revenue, consistent with increased funds under management and growth in member numbers. Leadership in uncertain times As an essential service, banking has never been more important for PNG. Throughout the year our teams worked to support our staff, customers and communities by continuing to operate and show strong financial leadership. We prioritised the health of our colleagues, ensuring our branches and offices were safe and we supported an extensive health and wellbeing program. I would like to thank all of my fellow directors for their contribution, rigour and governance. The appointment of Dr Ila Temu in December as Non-Executive Director reflects Kina’s growing strength in the large corporate sector. On behalf of the board I would like to thank our staff for their continued dedication and commitment. Their pride in our brand has enabled us to deliver solid results in a challenging year. I am also immensely grateful to our shareholders for the support we have received as we look to become a scale regional business. Isikeli Taureka Chairman 4 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 5 We also launched a major brand campaign featuring three brand ambassadors, Chef Julz Henao, Designer Tabu Warupi and Events Entrepreneur Jelena Tamate - all SME business owners who are home grown success stories. The campaign was unlike anything seen before in PNG with exceptionally high production values. It showcased our support for SME customers and boosted Kina’s brand awareness. Strengthening our culture We invested significantly in strengthening our culture after the acquisition of ANZ PNG when we brought two very different teams together. As a values-led business, we enhanced our definition of everyday behaviours and embedded them across the company through a series of workshops, and embedded them in our learning and development assessment process. We also completed an employee engagement survey that provided extremely positive feedback about the underlying pride and engagement in the organisation. We continued to invest in our Occupational Health, Safety and Wellbeing program, which we benchmark against international standards. We also took steps forward in diversity and inclusion objectives with the appointment of two female PNG nationals to the executive team, and also promoted local PNG talent into senior leadership roles. We made great progress on our Total Societal Impact strategy with a series of partnerships and initiatives that delivered value for our communities. From funding the build of a new learning centre, to supporting digital development and literacy, we’re providing new avenues for people to access education, government services and financial inclusion products and services. The outbreak of Covid-19 presented challenges that we met swiftly and efficiently. To support our staff, we introduced a number of initiatives including private transport to and from work; flexible working arrangements; additional leave options; and the regular conventions of advanced hygiene and social distancing. Combined, these measures ensured we were able to protect the health and safety of everyone, whilst continuing business as usual as an essential service provider. The requirements remain in place and will continue throughout 2021. Our 2025 Strategy concentrates on five key areas that we have made significant progress on throughout 2020: Core banking Our focus is on the experience our customers have when they interact with us every day; and growth in our lending products. We introduced digital concierges and kiosks to our branches to help customers bank with us digitally. We also launched a flagship and unique new customer offering, Prime, that comes with fee free Visa cards, the lowest fixed rate home loan in PNG history, and associated advisory services. Digital channels We have invested in world-class merchant POS terminals, online and mobile banking, and more recently a best-in-market internet payment gateway that allows eCommerce and online purchases for scheme and non-scheme cards. Our new digital channels delivered planned revenue of PGK 18.8m. Digital partnerships We implemented some innovative partnerships in 2020 with more to come in 2021. We have developed PNG’s first foreign exchange app with biometrics recognition and electronic verification capability. An important extension of this technology is the ability to digitally originate customers and allow existing customers to acquire new products and services online. We also launched the xero bank feed API – a first for the Pacific and the first phase of a broader business advisory services capability. Bank as a service We provide infrastructure and services that are leveraged by other financial institutions. For our partner, MiBank, we built cards issuing and operations capability and provided POS services, ATM interchange and central bank clearance. Diversified investment bank As the largest wealth management business, funds administrator and leading stockbroking company in PNG, our strategy builds on these strengths. We successfully renewed the key strategic funds management and administration contracts for a further term. Delivering financial performance Our strong results come from a full year of operations of the business acquired from ANZ PNG, while maintaining strong growth in the organic business across loans and the development of new digital channels. We continued our focus on home lending with the launch of Prime, our flagship customer offering, and as a result of the build out of our channel network, fees and commissions increased by 60%. Total loans grew by 16% to PGK 1.7bn and total deposits grew by 5% to PGK 2.6bn. Greg Pawson Managing Director and Chief Executive Officer Managing Director’s Report It was another extremely successful year for Kina where we delivered a solid financial performance and finalised a number of strategic priorities. We also announced the proposed acquisition of Westpac’s businesses in Fiji and PNG. The acquisition is a strong strategic fit for us. The expansion into a new market, additional scale, customers and footprint will enable Kina to be better positioned to drive innovation and introduce more choice for customers. It will provide additional growth opportunities, pave the way for further investment, and provide a bigger Bank and stronger financial services sector for both PNG and Fiji. 6 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 7 Strategic Report We have made significant progress on a series of initiatives that have delivered growth for the business. We have a commitment to being ‘Always First’ and as a truly effective competitor we have actively transformed the PNG banking sector with a series of market firsts. By innovating in the design of products, services and digital partnerships, we have provided new forms of value for customers and delivered diversified revenues for the group. Always First We were the first bank in PNG to launch a locally hosted Internet Payment Gateway, with the capability to accept multiple payment types including scheme, local cards and other forms of digital payments. It also has the flexibility to integrate with partnership platforms and for direct connections to businesses of all sizes. Extremely popular with our business customers, it has also been implemented by two major government departments, the Lands Department and Immigration and Citizenship Authority - via our partnership with local fintech company NiuPay. We see this as an important step towards transforming the way payments are made across the public sector, both for efficiency and transparency. We were the first bank in the Pacific to implement the xero accounting software bank-feed API. Business customers have the ability to trigger an automatic transaction sweep from corporate and retail internet banking into the xero platform, meaning finance management is simpler and more efficient. With the pilot phase completed in 2020, the solution will be available at scale in 2021, delivering an improved customer service and new business. We were also the first bank in PNG to pilot 100% digital onboarding using biometric recognition and electronic document verification, via our partnership with Everest. This work is complemented by our investment in the YuTru platform – a private sector led open scheme for the digital identification of people and businesses. In 2021, following regulatory approval from the central bank, we will launch the Everest app, a 100% digital banking product that enables customers to transfer money overseas and trade in foreign exchange. This project was also a great example of risk and regulation being front and centre to disruptive innovation. We became the first commercial bank in the Pacific to implement Visa transaction controls online, giving customers greater choice on how their cards are used. With online transaction controls, transaction alerts via SMS and WhatsApp, 3D Secure and the technology delivery for Visa fraud monitoring, we significantly enhanced cards performance and risk management. In addition to doubling the number of merchant POS terminals in market, we implemented a fully integrated solution between Pronto terminals and Kina POS machines. Kina’s POS terminals are unquestionably the best for in-market for performance and reliability, supported by a comprehensive merchant team model. With continued investment in POS terminal growth, we saw an uplift of more than 50% from the ANZ fleet we replaced. As part of our strategic partnership with MiBank, we completed the technology build to provide MiBank with POS services, ATM interchange, central bank clearance and debit card production. As our first ‘bank as a service’ business model innovation project, it forms a central part of our financial inclusion efforts and paves the way for potential banking infrastructure deployment in the future. 8 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 9 Banking Covid-19 made 2020 a unique year for the Bank. With the PNG Government classifying banking and financial services as essential, we took significant socially responsible actions to ensure 100% of our branch network remained open; our contact centre continued to operate daily and our digital services were available 24/7. At an operations level, the Bank increased its security support to ensure regular cash operations. To protect the health and safety of our staff and customers, we introduced a comprehensive safe work-place program in line with international standards. We also introduced door-to-door Covid safe transport for staff to and from work. With these measures in place we were able to continue to grow. Loan book growth increased by 16% (our business loan book by 20%) and total deposits increased to PGK 2.6bn. Our FX income grew by 32% to a market share of circa 16%. The Bank of PNG released its policy response in April and lowered the cost of funds, reducing the Kina Facility Rate by 2%. We reduced all local currency overdraft interest rates by 2% p.a. for new and existing customers to support business cash flows. We also re-priced our home loans to ensure that new and existing owner-occupiers benefited from our historically low home loan rate, and we provided tailored support to individuals and businesses who experienced stress. We lent over PGK 550 million to support the SME and commercial sectors. Despite the current environmental challenges, we continued our innovations in banking products and services. We took the first step towards fee free banking with our new customer relationship offering, Prime - a 3-year fee free Visa card with PNG’s lowest ever fixed rate home loan, and a dedicated relationship manager. Prime status has been extremely popular and, supported by a major marketing campaign, has reinforced our reputation as the ‘go-to’ bank for home lending. Another best in market solution, we completed the design and build of Kina Everyday. Our first transaction account with no monthly fees, it also comes with modest transaction fees compared with equivalent competitor products. It supports our drive to increase competition, give customers greater choice and lower the cost of banking. With an eye on social distancing and socially responsible branch banking, we piloted a concierge service and digital kiosks so that customers can bank digitally, but in the context of a branch. Designed for customers who have no, or limited, access to the internet, the ‘Wantok Experience’ has modernised banking in PNG and further drives our ambition to be PNG’s leading digital bank. We also took a market leading position in lowering fees and charges for POS and our digital banking channels. Our new digital channels delivered strong growth with merchant POS revenue being a stand-out capability. We rolled-out an additional 800 terminals across the country and saw the expected generation of income in fee revenue from cards, internet banking and Unstructured Supplementary Service Data (USSD) channels. 10 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 11 Wealth Our Wealth Management businesses continued to deliver stable and growing revenue and excellent service outcomes for the year, as we continued our strong relationships with the major PNG superannuation funds. Our focus going forward will be to enhance our technology and system capability to make access easier for trustees and their members to manage their retirement savings. A highlight was the renewal of large contracts in both our funds administration and wholesale funds management businesses. We continue to be the largest wealth management business in PNG, with over PGK 8 bn of funds under management; the largest fund administrator, administering accounts on behalf of more than 800,000 clients whose funds total K13.82 bn; and the leading stock broking company. Funds Management achieved growth in funds under management of 7% to PGK 8bn, a reflection of the positive returns as well as ongoing contributions. Although 2020 was a difficult local investment climate, clients achieved positive returns relative to competing funds. Funds Administration also recorded growth in profit by 46% on the back of stringent control of expenses, increased funds under administration and growth in member numbers. We maintain stringent measurement and tracking controls in place to ensure we reach our service level agreements and were delighted to achieve a 99.23% performance rating for 2020. This is well above industry standard results. Within our Retail Wealth business, our market share for share broking services remained above 50%. The various new wealth management services introduced in 2019 provided additional revenue in the reporting period. Throughout 2021 we’re expanding our product and service set to drive overall revenue growth. We’re also developing our segment strategy across the business, with high-touch relationship management a significant feature. This will provide a strong distribution platform for the Retail Wealth business. Nominee custodial services is an area of expected growth as we extend our offerings to large investor clients. We have been able to consider new types of lending where we can act in a custodial and non-discretionary security trustee capacity for loans secured by financial assets. The segment and distribution strategy, combined with the launch of new products, will allow us to grow the Retail Wealth business funds under management with little additional cost, thus driving margins. Strategic Direction The proposed acquisition of Westpac’s Pacific businesses in Fiji and PNG will provide a scale financial services organisation with a firm strategic commitment to banking in the region. A bigger business will enable us to support a stronger financial services sector and deliver more much-needed choice for customers. A multi-brand approach Our intention is to create a completely new brand for the acquired business and to maintain the independent commercial banking licences in both jurisdictions. The newly branded bank will be independent and separate from the existing Kina Bank brand, and it will have a specific focus on inclusion, MSME, SME and the commercial segments of both markets. This will be a great outcome for customers from a service and product perspective. Our proposal is to introduce fee free banking options, re-structure the business indicator lending rate and introduce a new platform for superannuation. The additional scale, customers and footprint will enable Kina to continue its drive in innovation and deliver a new suite of world-class digital products and services. We will ensure that the branch and Instore network continues to operate as it does today, with a commitment to jobs for all local employees. Kina and Westpac have developed a comprehensive implementation plan where there will be no complex migration of customer data across platforms as the core banking infrastructure and associated ICT would be acquired. One of the key features is that the acquisition is essentially ‘turn-key’ and Kina will assume ownership and operation of the Pacific Businesses effective from the completion date. There will be no disruption to customers or employees in both countries, with no changes to systems or processes or the way customers transact. Completion is subject to regulatory approval in both PNG and Fiji and the process to secure approvals is underway. Strategic Initiatives The acquisition is one of eight strategic programs for 2021 that continue to drive growth in core banking and digital solutions. Kina continues to assert its leadership position creating opportunities to increase market competitiveness and business model resilience. We will maintain our focus on lending to implement an agile, seamless end-to-end lending process across home and business lending. By leveraging customer feedback and introducing improved complaints resolution we aim to significantly enhance the customer experience. We will continue upgrades and improvements to our digital channels and platforms, including a corporate online technology and further innovations for our internet payment gateway. We are also focusing on an artificial intelligence program to continue improvements to AML, compliance and fraud detection. Further concentration on our partnership with MiBank will include joint business development opportunities, customer migration and digital referral processes. We are also developing an SME capital fund through the Kina Funds Management business; exploring new retail products for Wealth Management; and refreshing the strategic intent of our funds administration business. 12 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 13 Total Societal Impact Kina’s sustainability vision is to be recognised as one of PNG’s most sustainable organisations. Closely aligned to the organisation’s 2025 Strategy, we have a clear focus on social, environmental and economic development across three distinct themes, as well as providing community leadership. In the first full year of delivering on our Total Societal Impact Strategy, we have made significant progress on a number of initiatives. Creating the workforce of the future Unemployment is one of the most pressing social and economic issues facing PNG. To help address this, we partnered with the Kokoda Track Foundation, a not for profit organisation, to fund the build and operation of a Flexible Open & Distance Education (FODE) centre in Port Moresby. The centre gives students a second chance at education and progress into employment with relevant skills and qualifications. Throughout 2020, over 150 students were enrolled across grades 10, 11 and 12. We also implemented a mentoring scheme where Kina Bank staff provided one-on-one coaching to students, to help with their studies and to prepare for exams. Our team gave over 130 volunteer hours across each academic term to students and shared their experiences, stories and general life skills to help guide students on their path to success. e-PNG A digital society will help to empower Papua New Guineans. It can help to break down barriers to services, products and platforms; and can increase people’s ability to contribute to decision-making and production. By supporting digital development and literacy, we’re helping to inspire the entrepreneurial development of solutions to PNG-specific problems. A major focus has been our support of the Women in Digital network which we assisted with a series of sponsorships and events. The emphasis has been on providing women with access to and training on new digital platforms that offer financial services. We also sponsored the first female in PNG to be accredited Certified Information Security Manager. We partnered with a local fintech company, NiuPay, to develop a suite of digital access solutions to help bring Government services online. This citizen-centred approach means more Papua New Guineans than ever before now have access to the Lands Department and Immigration and Citizenship Authority, the first Government departments to come online. We see this as an important step toward transforming the way services are offered and payments are made across the public sector, both for efficiency and transparency. We have also partnered with YuTru, an open scheme for the digital identification of people and businesses, to promote financial inclusion and economic and social empowerment. The scheme helps people who previously haven’t been able to access the formal financial system. Community Leadership We have also supported a number of additional programs of work throughout the year. We donated AUD$50,000 to the Fiji cyclone relief effort; we supported our dedicated frontline health workers at the Covid isolation unit in PNG with food and water; and we launched a major mental health program to help our staff and communities stay mentally healthy during these challenging times. Promoting enterprise Access to financial services for many is restricted, and growth of the MSME sector is restrained by a lack of investment and education. Our strategic partnership with MiBank, our financial inclusion partner, created a solid platform for us to reach further into the community and deploy our capabilities and assets – and create mutual value exchange across both organisations. We successfully completed our first ‘bank as a service’ business innovation project to provide MiBank with cards issuing, central bank clearance and POS. Together, we were able to bring more than 130,000 new customers into the formal financial services sector for the first time, by helping them open bank accounts and providing them with financial education. We also created a customer referral pathway between the two organisations to give customer access to the most appropriate products and services depending on their needs. We supported this pillar of our strategy with a series of thought leadership programs for the business community. Launched at the Prime Minister’s Back to Business Breakfast in January 2020, we delivered a series of workshops, talks and presentations focusing on financial literacy and education, business development and outreach. Looking ahead In partnership with the Asian Development Bank we have commenced the development of our Environmental Social Governance Principles and Framework. To be completed in 2021, these will address the nature and extent of environmental and social risks to the business. Our Total Societal Impact Strategy requires ongoing development over time in order to reach our vision, including taking future strategic decisions about scope and suitable operating models. 14 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 15 Economic Outlook 2020 was a challenging year for PNG as the Covid-19 pandemic took a significant toll on all sectors of the economy. The Prime Minister stated in September that PNG’s economy had declined by PGK 10.7 billion in nominal terms by the third quarter, which is significant when considering that PNG had an estimated gross domestic product (GDP) of PGK 81.6 billion. The Department of Treasury (DoT) and the International Monetary Fund (IMF) estimate that real GDP would decline in 2020 by 3.8% and 3.3%, respectively. The deferment of Papua LNG and P’nyang LNG before the Covid-19 outbreak subdued investments in resource-adjacent sectors and tilted risks in the broader economy towards the downside. The pandemic aggravated these risks and caused a number of private and commercial investments to be either delayed or cancelled outright. Discretionary spending was impacted negatively and the closure of Porgera Mine in April 2020 amidst the pandemic added to concerns resulting in significant impact on GDP, expected taxation revenue, and foreign currency inflows. The pandemic triggered a fiscal response that was unprecedented for PNG, as in many other countries. The Government already faced the largest fiscal deficit in the country’s history prior to the pandemic in 2020. It had to reprioritise its spending to support efforts to contain the spread of the virus. The original deficit of PGK 4.6 billion anticipated revenues of PGK 14.1 billion, with total expenditure of PGK 18.7 billion. Due to the impact of the pandemic, revenue saw a 19.4% reduction, resulting in the deficit increasing to PGK 6.6 billion, despite a reduced total expenditure of PGK 18 billion. To allow additional borrowing, the Government amended the debt-to-GDP ceiling prescribed in the Fiscal Responsibility Act from 45% to 60%. This was a necessary amendment in our view as a reduction in fiscal stimulus in the immediate short-term would disadvantage the economy and slow down recovery timeframes. The Government projects that debt levels as a percentage of GDP will increase from 48.9% in 2020 to 52.5% in 2023. These figures, and rate of increase of the debt/GDP ratio, are not out of line with many economies as a result of pandemic induced fiscal support. PNG’s monetary response to the pandemic was also urgent and unprecedented. The Bank of PNG undertook several targeted measures to increase money and FX supply and lower interest rates, which had the added effect of supporting the Government’s fiscal operations during the pandemic. Financial institutions also provided support with banks lowering interest rates and providing for temporary loan repayment deferments to support borrowers. The main economic drivers in the medium term remain the resource projects that are currently being negotiated. Investors and economic stakeholders continue to hope for a speedy resolution to key resource project negotiations to drive confidence and economic growth. These are in addition to the planned Government spending over the medium-term to improve infrastructure, providing confidence that the economy will have some support until the global pandemic subsides. The positive impact of these resource projects is not expected to be felt by the PNG economy in the near-term as the restructuring of commercial terms is likely to push development timelines out further. The resource projects currently in the pipeline for PNG represent an estimated PGK 110 billion in foreign direct investment and domestic production over their respective lives. The Government also remains committed to funding major infrastructure projects throughout the country in the medium-term. The 2021 National Budget projects over PGK 40 billion in Capital Expenditure from 2021 to 2025, averaging 7.9% of GDP per annum within that timeframe. The Government has committed 38% of its 2021 Budget to Capital Expenditure, which is PGK 7.5 billion or 8.3% of GDP. This fiscal support, especially after the sharp downturn witnessed globally, gives some measure of reassurance to economic stakeholders. This combined with proposed reforms and the stated intention to diversify the non-mining sectors has potential to set a solid foundation for future growth. 16 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 17 Board of Directors Isikeli (Keli) Taureka Chairman and Non-Executive Director Member of the Remuneration and Nomination Committee Mr Taureka was appointed as a Director of Kina Securities Limited in April 2016. He currently holds the position of Managing Director of Kumul Consolidated Holdings which is the trustee and shareholder for the Government of PNG in major State owned entities including Air Niugini, Water PNG, PNG Power Limited, Kumul Telikom Holdings,Ports PNG, Post PNG and Motor Vehicles Insurance Limited. He provides extensive knowledge and networks across Papua New Guinea and Fiji. Isikeli previously held a number of senior executive roles with Chevron Corporation including: • President Chevron Corporation Geothermal; President Chevron South East Asia and President of ChevronTexaco China Energy Company with responsibility for Chevron’s oil, gas upstream and geothermal power activities. • Before joining Chevron, he managed the PNG-owned Post and Telecommunication Corporation and held senior management positions in the Bank of South Pacific Limited. He holds a Bachelor of Economics degree from the University of Papua New Guinea and is a Graduate Member of the Australian Institute of Company Directors. 18 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 19 Greg Pawson Chief Executive Officer/Managing Director Greg Pawson was appointed CEO of Kina Securities Limited in 2018. He joins the Group with an extensive knowledge of the financial services industry in Australia, New Zealand, South East Asia and the Pacific. Before his appointment, Mr Pawson was Regional Head of South Asia Pacific for the Westpac Group and held senior executive roles in retail banking, corporate financial services, financial planning and funds management. Andrew Carriline Non-Executive Director Member of the Remuneration and Nomination Committee Mr Andrew Carriline was appointed as a Director of Kina on 16 August 2018. Andrew is an experienced business executive, highly skilled at operating successfully in regulated environments. He recently retired from a major Australian bank, where he spent most of the last decade in senior risk roles. He was also most recently Chairman of the bank’s business in PNG. Before his focus on pure risk roles, Andrew practised corporate law in the public and private sector and has held a number of senior legal and operational roles. Andrew holds Bachelor degrees in Law and Commerce from UNSW and is a graduate of the Australian Institute of Company of Directors. Karen Smith-Pomeroy Non-Executive Director Chairman of the Audit and Risk Committee Ms Karen Smith-Pomeroy is an experienced non-executive director, with involvement across a number of industry sectors. Karen has over 30 years of experience in the financial services sector, with senior roles in Queensland and South Australia, including a period of 5 years as Chief Risk Officer for Suncorp Bank. Karen has specific expertise in risk and governance, deep expertise in credit risk and specialist knowledge of a number of industry sectors, including energy, property and agribusiness. Karen is currently a non-executive director of Queensland Treasury Corporation, Stanwell Corporation Limited, InFocus Wealth Management group and National Affordable Housing Consortium Limited. She is also a member of the Qld Advisory board for Australian Super, Australia’s largest industry super fund. Karen holds accounting qualifications and is a Fellow of the Institute of Public Accountants, Fellow of FINSIA and a graduate of the Australian Institute of Company Directors. Paul Hutchinson Non-Executive Director Member of the Audit & Risk Committee Mr Paul Hutchinson was appointed as a Director of Kina on 16 August 2018. Paul was the Managing Director and Chief Executive Officer of Rural Bank, following over nine years leading the business. Before joining Rural Bank, Paul was Chief Operating Officer with New Zealand Post Limited, responsible for the sales and distribution capabilities of the group and notably the key origination capability for Kiwibank. Paul’s prior experience has included senior appointments with Westpac Banking Corporation (Australia), National Australia Bank and Bank of New Zealand. Paul is currently employed by the University of Adelaide in the capacity of Executive Director for the Faculty of Professionals. 20 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 21 Ila Temu Non-Executive Director Dr Ila Temu was appointed as a Director of Kina on 14 December 2020. Dr Ila Temu was appointed as a Director of Kina on 14 December 2020. Dr Temu is the Executive Director (PNG) of Barrick (Niugini) Limited (BNL), a role he has held for some time now, which places him as one of the senior Managers within BNL Management. Dr Temu has held various senior roles with Placer Dome Niugini since 2000 including General Manager Government Relations, Director Corporate Affairs and Country Manager Tanzania. With Barrick Niugini Ltd, Dr Temu has held similar roles since 2006. Prior to joining Placer Dome, Dr Temu was Managing Director of Mineral Resources Development Company (MRDC), a state-owned organization that held PNG’s equity in major mining and petroleum projects throughout PNG. He has also held senior positions within a number of public organizations, including a term as a Director of the National Research Institute in PNG, Research Director for the Pacific Islands Program at the Australian National University, Canberra and Senior Lecturer at the University of Papua New Guinea. Dr Temu has also held a number of Board Directorships/ Memberships in PNG including Dome Resources Ltd, MRDC, Kina Finances Ltd, PNG Incentive Fund, National Economic Fiscal Commission, Independent Public Business Corporation, the Employees Federation of PNG and Bank of South Pacific where he was Director for 13 years. He was Chairman of PNG Ports Corporation for five years, Chairman of Bank South Pacific (BSP) Capital for three years, and President of the Chamber of Mines and Petroleum for three years. He is currently a Director of Kina Petroleum Ltd, Director of Kumul Petroleum Holdings Ltd, and a Council Member of the Divine Word University. Dr Temu holds a Bachelor of Economics from the University of Papua New Guinea, a Masters in Agricultural Development Economics from the Australia National University, Canberra Australia and a Ph.D in Agricultural Economics from the University of California, Davis, USA. Jane Thomason Non-Executive Director Chair of the Remuneration & Nomination Committee Dr Jane Thomason was appointed as a Director of Kina on 27 April 2018. Jane has worked in international development and policy and implementation in the Asia Pacific region for 30 years. Her international career has included work for governments and donors including the Asian Development Bank, WHO, World Bank, USAID and AusAID. As an entrepreneur and innovator, Dr Thomason has built a $50 million revenue company and merged this with Abt Associates in 2013. Since the merger, Dr Thomason has led the growth and diversification of the company to achieve a tripling of revenue and diversification into new sectors and is now CEO of a $200 million revenue company with 650 staff across Asia and the Pacific. She has held senior appointments including Queensland Director of Women’s Health, CEO of the Queensland Royal Children’s Hospital, Commissioner on the Commission of Inquiry into Child Abuse in Queensland, Chairman of the Wesley Hospital Board, Member of the Uniting Health Care Board, the International Operations Committee of the Red Cross, the Consultative Council of the Australian Centre for International Tropical Health and Nutrition and the Aid Advisory Council to the Australian Minister of Foreign Affairs and Trade (Alexander Downer), She has been a Member of the Burnett Institute Board, and an Adjunct Associate Professor at the University of Queensland. Jane is an active role model for future women leaders and an active supporter of innovation and new technologies, especially blockchain, and their application to the problems of the poor. 22 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 23 Senior Executive Team Greg Pawson Chief Executive Officer/Managing Director Greg Pawson was appointed CEO of Kina Securities Limited in 2018. He joins the Group with an extensive knowledge of the financial services industry in Australia, New Zealand, South East Asia and the Pacific. Before his appointment, Mr Pawson was Regional Head of South Asia Pacific for the Westpac Group and held senior executive roles in retail banking, corporate financial services, financial planning and funds management. Chetan Chopra Chief Financial Officer Chetan is Chief Financial Officer, reporting to the CEO. Chetan is a Chartered Accountant from India and a widely experienced finance executive. He was previously CFO of PNG’s largest superannuation fund, Nambawan Super. An accountant by profession, Chetan worked for many years as a PNG partner for KPMG and as CFO for Dunn and Bradstreet South Asia. He also has held a number of senior leadership roles in both private companies and public sector organisations, including the Australian Taxation Office. Chetan holds a Bachelor of Science from Mumbai University and an MBA from Melbourne Business School, University of Melbourne. Chetan is also a member of Certified Practising Accountants Australia, PNG and India. Lesieli Taviri Executive General Manager Banking Lesieli joined Kina Bank in 2020 and is responsible for running the national branch network and a seamless banking experience to personal and small business customers. In her role, Lesieli leads the focus on customer service satisfaction in branch and through the contact centre, along with the development of digital concierge services. Prior to joining Kina Bank, Lesieli was the CEO of Origin Energy and she is one of PNG’s most highly regarded executive leaders. She holds a number of high-profile board roles including Founding Chair of the Business Coalition for Women. She served as the Deputy Chair of Nambawan Super Limited, PNG’s largest superannuation fund and was formerly a director of Nationwide Microbank Limited. Lesieli is also a graduate member of the Australian and PNG Institute of Company Directors. Nathaniel Wingti GM Treasury and Financial Markets Nathan joined Kina in February 2016 as GM Treasury and Financial Markets. Prior to joining Kina, he spent 15 years at ANZ Bank where his last role was Head of Global Markets PNG and Balance Sheet Manager for ANZ across the Pacific. Nathan has 20 years experience in foreign exchange, money markets and balance sheet management across the Pacific region having worked in PNG, Fiji and Australia. Nathan holds graduate and post graduate qualifications in finance and commerce. He has also completed the AFMA Dealer Accreditation Program and the PNG Institute of Directors Program. He is a current serving Board Member of the Business Council of PNG. Asi Nauna Executive General Manager Lending Asi joined Kina Bank in 2018 to assist with the acquisition of ANZ’s Retail, SME and Commercial operations leading the integration of the SME and Commercial customer streams. In the last two years she has held a senior leadership role in our Business Partners and Wealth team, establishing herself as a dynamic and successful leader with a track record of delivering exceptional results. In her role as Executive General Manager Lending, Asi is responsible for end to end retail and business lending. Prior to joining Kina Bank, Asi was ANZ’s Associate Director, Institutional Banking. Michael Van Dorssen Chief Risk Officer Michael Van Dorssen joined Kina in 2009 and is currently the Chief Risk Officer for the group. Michael has extensive experience in the banking industry in both Australia and PNG, with a career spanning more than 30 years. Prior to joining Kina, Michael worked for Suncorp Limited as the District Manager for the bank’s agribusiness division (from 2004 to 2008) and Westpac Bank PNG Limited (from 1999 to 2002). 24 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 25 Johnson Kalo Chief Information Officer Johnson Kalo was appointed Chief Information Officer in September 2019. Johnson has substantial industry experience in Papua New Guinea having previously held the positions of Deputy Chief Executive Officer and Chief Financial Officer for the Bank South Pacific (BSP). Johnson played a central role in BSP’s acquisition of Westpac’s Pacific assets in Tonga, Samoa, the Cook Islands, SolomonI Islands, Vanuatu and he brings to Kina Bank exceptional leadership qualities. His previous roles also include independent Director of the Board of Credit Corporation and Executive Director of the Port Moresby Stock Exchange (PNGX). He is a fellow of the Financial Services Institute of Australasia and an associate member of Certified Practicing Accountants PNG. Deepak Gupta Executive General Manager of Business Partners and Wealth Deepak Gupta is Executive General Manager Wealth and has had a long and successful career in financial services, having held a variety of senior executive roles in leading financial services institutions including Westpac, AMP and domestic New Zealand institutions. These roles have spanned all facets of institutional funds management, private equity investment, funds administration, financial planning and corporate trusteeship. In addition Deepak has strong governance experience having acted as a non-executive director on the boards of NZX and ASX listed companies, and private businesses in a variety of industries. He has also been active with industry bodies and has represented New Zealand on international analyst bodies. He brings substantial experience and a track record of success and innovation across a number of areas in financial services including successful development of New Zealand’s first institutional private equity fund for retail investors and leading the commercial development and success of New Zealand’s largest registry business for its workplace based retirement savings scheme. Deepak holds a Bachelor of Commerce and Administration from Victoria University, New Zealand, and an MBA from Massey University, New Zealand. He has a Certificate of Investment Analysis from the University of Otago, New Zealand and is a Fellow of the Institute of Finance Professionals New Zealand. Ivan Vidovich Chief Transformation Officer Ivan joined Kina Bank in 2019. In the role of Chief Transformation Officer Ivan is responsible for Group Strategy and Planning, People and Culture, Digital Channels, Innovation, Design, Product and Marketing. Ivan has 20 years senior leadership experience in Australia, Asia and Europe in the financial services and logistics industries with companies including Suncorp, TNT Express and DBS Bank, where he has managed large-scale sales and service operations, strategy, customer experience, innovation and multi-country integration and transformation programs. He brings significant experience in people and culture transformational change and is a strong advocate of diversity and inclusion in the workplace. Ivan holds a Bachelor of Arts from La Trobe University and is a member of the Australian Institute of Company Directors. Gavin Heard GM Corporate Affairs and Investor Relations Gavin joined Kina Bank in 2018 with over 15 years’ experience as a communications specialist. Gavin’s previous roles include working for the BBC in cultural and current affairs broadcasting; developing crisis planning policy for the Australian Government in PNG and in communications for Westpac Pacific. 26 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 27 1. Introduction & Overview to Shareholders The Remuneration Report is focused on providing information that the Board considers important for shareholders to understand the remuneration framework of Kina Securities Limited (Kina, Kina Group, or the Company). The framework is designed to support delivery of targeted operating financial and non-financial results. The Remuneration Report has not been prepared in accordance with section 300A of the Australian Corporations Act 2001 (Cth). During the year, Kina reviewed its incentive plans to ensure they were aligned with market best practice and that they continue to attract, motivate and retain high calibre management and employees. No material amendments have been made to the Company’s incentive plan for the 2020 financial year. Remuneration Report Contents 28 1. Introduction & Overview to Shareholders 29 2. Kina’s Key Management Personnel (KMP) 30 41 43 43 44 45 47 48 3. Executive Remuneration 4. Non-executive Director Arrangements 5. Related Party Transactions 6. Directors’ Interests in Shares Directors Report Remuneration Report Directors Declaration Independent Auditors Report 53 Statements of Comprehensive Income 54 55 56 57 57 68 69 101 103 Statements of Financial Position Statements of Changes in Equity Statements of Cash Flow Notes to the Financial Statements 1. Summary of Significant Accounting Policies 2. Critical Accounting Estimates and Judgments 3. Financial Risk Management 4. Capital Adequacy 5. Net Interest Income (expense) 6. Net Fee and Commission Income 104 7. Dividend Income 8. Other Income 105 9. Other Operating Expenses 10. Income Taxes 106 11. Deferred Taxes 12. Cash and Due From Banks 107 13. Central Bank Bills 14. Regulatory Deposits 108 109 110 110 114 115 116 118 120 121 123 124 126 127 129 130 130 15. Financial Assets at fair value through Profit or Loss 16. Loans and Advances to Customers 17. Investments in Government Inscribed Stocks 18. Investments in Subsidiaries 19. Property, Plant and Equipment 20. Intangible Assets 21. Other Assets 22. Due to Customers 23. Current Income Tax (assets) Liabilities 24. Employee Provisions 25. Lease Liabilities 26. Other Liabilities 27. Issued and Paid Ordinary Shares 28. Statements of Cash Flows 29. Related Party Transactions 31. Business Combinations 32. Segment Reporting 33. Contingent Liabilities 34. Commitments 35. Fair Value of Financial Assets and Liabilities 36. Auditors’ Remuneration 37. Goodwill 38. Group Reorganisation 39. Events after the Statements of Financial Reporting Date 131 Shareholder Information 28 Kina Securities Limited Annual Report 2020 2. Kina’s Key Management Personnel (KMP) Kina’s KMP comprise the Directors, the Managing Director and Chief Executive Officer (MD&CEO) and the direct reports to the MD&CEO, called the Senior Executive Team of Kina. The Senior Executive Team refers to the MD&CEO and those direct reports with authority and responsibility for planning, directing and controlling the activities of Kina Group, directly or indirectly. The KMP disclosed in this Remuneration Report are: Remuneration and Nomination Committee The Board has established the Remuneration and Nomination Committee (RNC) to ensure that the Company: • Has a Board with an effective composition, size and commitment to adequately discharge its responsibilities and duties and to bring transparency, focus and independent judgment to decisions; • Has coherent remuneration policies and practices to attract and retain directors and senior executives who will create value for shareholders; Non-Executive Directors (section 4 of this Remuneration Report) Name Position held during the financial year ended 31 December 2020* Isikeli Taureka Non-Executive Chairman Karen Smith-Pomeroy Non-Executive Director • Observes those remuneration policies and practices; and • Fairly and responsibly rewards Group Executives having regard to the performance of the Group, the performance of the Group Executives and the general external pay environment. Jane Thomason Paul Hutchinson Non-Executive Director Non-Executive Director The RNC assists the Board in the performance of its statutory and regulatory duties by: Andrew Carriline Non-Executive Director • Formulating advice to the Board on the remuneration Ila Temu¹ Non-Executive Director MD & CEO and Senior Executive Team (direct reports) Name Greg Pawson Chetan Chopra Deepak Gupta Position held during the financial year ended 31 December 2020* MD&CEO Chief Financial Officer and Company Secretary Executive General Manager, Business Partners and Wealth Michael Van Dorssen Chief Risk Officer Gavin Heard Johnson Kalo Ivan Vidovich Nathan Wingti Lesieli Taviri ² Asi Nauna ³ General Manager Corporate Affairs and Investor Relations Chief Information Officer Chief Transformation Officer Head of Treasury Executive General Manager, Banking Executive General Manager, Lending * The term as KMP was for the full year unless otherwise indicated 1 Appointed 14 December 2020 2 Appointed 11 September 2020 3 Appointed 11 September 2020 of the MD&CEO, Senior Executive Team and employees holding Responsible Person positions (as defined in accordance with Banking Prudential Standard BPS310 Corporate Governance - Fit and Proper Requirements (BPS310), issued by the Bank of Papua New Guinea (BPNG)); • Providing an objective, non-executive review of the effectiveness of Kina’s remuneration policies and practices; • Recommending to the Board for approval by shareholders, the amount and structure of directors’ fees; • Overseeing aspects of the “Fit and Proper” requirements of BPNG BPS310; and • Identifying the mix of skills and individuals required to enable the Board to contribute to the successful oversight and stewardship of the Company. Refer to Kina’s Corporate Governance Statement available on Kina’s website at: (http://investors.kinabank.com.pg/ investors/?page=corporate-governance) for more information regarding the RNC. The RNC regularly reviews the following to align remuneration, performance and strategy: • Kina’s remuneration policy; • The structure and quantum of the remuneration of the MD&CEO, members of the Senior Executive Team, staff holding Responsible Person positions and selected risk and compliance staff; and • The structure and level of non-executive directors’ board fees and committee fees. Kina Securities Limited Annual Report 2020 29 Remuneration Report 3. Executive remuneration Remuneration policy and governance framework The RNC reviews and determines Kina’s remuneration policy and structure annually, for approval by the Board, to ensure it remains aligned to the Company’s business needs, and meets its remuneration principles. From time to time, the RNC also engages external remuneration consultants to assist with this review. In particular, the RNC aims to ensure that Kina’s remuneration practices are: • Competitive and reasonable, enabling the Company to attract and retain key talent; • Aligned to the Company’s strategic and business objectives and values, and the creation of shareholder value; • Transparent; and • Acceptable to shareholders. Remuneration Policy Kina’s Remuneration Policy is that: • Remuneration should be set at levels that reflect the relative size of the position, including comparable positions in the relevant market, the performance of the person holding the position and any position- specific factors such as location or strategic importance of the role to Kina; • Remuneration levels must reflect what the Group can afford. The Board through the Remuneration and Nomination Committee will provide the MD&CEO with advice on affordability and this must be factored into the Chief Executive’s annual review of remuneration across all levels; • Where a package includes a variable performance- based component the package must be structured to: • Motivate the employee to achieve personal goals that demonstrably contribute to the Group’s overall strategic direction and medium to long term financial performance objectives; • Encourage the employee to work within the Group’s risk management framework and to comply with the Group’s prudential policies; • Specify measurable, objective, verifiable performance targets which have to be met or exceeded before any additional payment is due; • Specify a measurement period that takes into account the time to observe the real outcomes of the employee’s business activities and efforts; • Discourage the employee from taking extreme risks to achieve short term performance targets that could jeopardize the financial stability and viability of the Group in the medium to long term; • Provide for the Board to set aside part or all of the performance based payments due if in its judgment this is necessary to protect the financial soundness of the Group including unintended and unforeseen consequences when the performance based measures were originally formulated; • Where a package includes equity or equity linked deferred remuneration the package must be structured to forbid the employee leveraging the equity in any way until it is fully vested. The Group will cancel the vested equity and rights to future equity of any employees found to be in breach of this provision of their employment agreement. • The Levels of every role in the organisation shall be identified through a professional Job Evaluation exercise and endorsed by the selected Job Evaluation Panel; • On an overall basis, Kina Group would like to position itself between the 50th and 75th percentile of the defined market, with flexibility to adjust based on market dynamics and organisational strategy; Under the Company’s Securities Trading Policy, Relevant Persons (which includes all directors and officers of Kina (MD&CEO, CFO and Company Secretary) and all direct reports of the MD&CEO), are prohibited from entering into any hedging arrangements that limit the economic risk of holding Kina securities under Kina equity plans. This helps align the interests of directors, the Senior Executives Team and shareholders. • The level structure may be reviewed based on the organisational growth and maturity and from time to time benchmark its remuneration against identified market participants to define its pay structure and pay levels. This survey cycle period shall typically be not more than once in two years; • Remuneration packages may comprise a mix of base pay, performance related pay and other benefits where this is consistent with the structure of packages for similar sized roles in the market. Such mixed remuneration packages must take into account the value of all elements of the package; • Remuneration packages, including any performance based component, must not compromise the independence of any risk and financial control officers of the Group; Remuneration components, approach and mix The Board has determined that to align the interests of Kina’s Senior Executive Team and the goals of Kina and to assist in the attraction, motivation and retention of management and employees of Kina, the remuneration packages of the MD& CEO and the other Senior Executive Team should comprise the following components: Fixed remuneration Total fixed remuneration comprises base salary, other non-cash benefits and includes superannuation. There was no change to the fixed remuneration for the MD&CEO and other executive KMP during the year. STI Award The short term incentive award (STI Award) provides participants with an opportunity to earn an incentive calculated as a percentage of their salary each year, conditional upon achievement of individual key performance indicators (KPIs) which may consist of financial and, if applicable non-financial performance measures. The incentive earned will be paid: • 65% in cash; • 35% in an offer of performance rights. The cash portion of the incentive will be paid in the next pay cycle following confirmation of the performance outcomes being achieved. The performance rights portion (STI Performance Rights) will be issued under Kina’s Performance Rights Plan (Plan) in one tranche and will lapse upon resignation or termination, subject to the absolute discretion of the Board. The Board has the right to vary the STI Award. LTI Award A long term incentive award (LTI Award) that provides an opportunity for employees to receive an equity interest in Kina through the granting of Performance Rights (LTI Performance Rights) under the Plan. Under the LTI Award, LTI Participants may be offered LTI Performance Rights that are subject to vesting conditions set by the Board. The Board has the absolute discretion to vary the LTI Award. Retention Award A one-off equity based Retention Rights allocation under the Plan that was utilised at the time of the Company’s listing on ASX and PNGX in July 2015, to assist in the retention and reward of key eligible employees at that time. The Kina Board has the absolute discretion as to whether the allocation of Retention Rights will continue and apply to other KMP. Fixed Remuneration (FR) The Senior Executive Team may receive their fixed remuneration as cash, or cash with non-monetary benefits such as insurance, allowances and tax advisory services. FR is reviewed annually, or on promotion. It is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. The RNC aims to recommend to the Board, a remuneration package that would position the Senior Executive Team at or near the median for corresponding roles, with flexibility to take into account capability, experience, and value to the organisation and performance of the individual. 30 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 31 Remuneration Report 3. Executive remuneration (continued) Short-term incentive award (STI Award) Structure of STI Award: Features Eligibility Description The MD&CEO and Senior Executive Team are eligible to participate in the STI Award (STI Participants). STI Award components Cash bonus: 65% of the STI Participant’s STI Award. STI Performance Rights: 35% of the STI Participant’s Award. Performance measures Individual KPIs specific to each STI Participant are agreed during the performance appraisal process each year. These KPIs consist of both financial and non-financial performance measures and are agreed with the MD&CEO and KMP at the start of each year. No STI Award is payable unless a minimum Group Net Profit After Tax (NPAT) is achieved. The Board has the absolute discretion to vary this requirement. The Board allocates an annual pool to the STI Award each year. There are levels of targeted performance for allocation of the pool for 2020: • Minimum (85% of budget) • Threshold (85% - 100% budget): 50% • Target (Budget 100%): 90% • Stretch (100+ to 110%+): 100% • Stretch (120%+): up to 120% The pool is then allocated in accordance with the maximum and target STI Award for each KMP (which is detailed later) as a percentage of Gross pay. The Board has the absolute discretion to vary the STI Award. Calculation of STI Performance Rights The number of STI Performance Rights granted is determined by dividing the award value by the 10-day volume weighted average price per share prior to 31 December of the year of award (VWAP). Vesting of STI Performance Rights STI Performance Rights are restricted from exercise until the second anniversary after the grant date and will vest on the second anniversary. These are not subject to any further measurement after award and allotment. Long term incentive award The MD&CEO and the Senior Executive Team participate, at the Board’s discretion, in the LTI Award comprising annual grants of Performance Rights. Further details are shown in the table below: Structure of LTI Features Eligibility LTI components Description Participants must be a permanent full-time or part-time employee or Executive Director of Kina or any of its subsidiaries (LTI Participants). The LTI Award will be delivered as performance rights (LTI Performance Rights) with each right conferring on its owner the right to be issued or transferred one (1) fully paid ordinary share in the Company. Performance measures Since 2016, the LTI Performance Rights will only vest subject to Board assessed satisfaction of the following conditions: • Meeting the required Total Shareholder Return (TSR) performance level based on peer group - 50% weighting; • Over a three-year period, whereby: Peer group relative TSR performance Vesting outcome Below 50th percentile of peer group Nil At 50th percentile 50% vesting Between 50th – 75% percentile Pro rata between 50% to 100% 75% and above 100% vesting • Meeting Earnings Per Share (EPS) target level based on Peer group - 50% weighting; • Compound Annual Growth rate over a three-year period, whereby: EPS performance Vesting Outcome < 5% compound annual growth Nil 5% >5% and < 10% 10% (and above) 50% vesting Pro rata between 50% - 100% 100% vesting Period Date Granted Vesting date FY ended 31 December 2017 FY ended 31 December 2018 FY ended 31 December 2019 FY ended 31 December 2020 1 April 2018 1 April 2019 1 April 2020 1 April 2021 1 April 2020 1 April 2021 1 April 2022 1 April 2023 In 2020, the Board worked with an independent advisor to identify the comparator group companies including the calculation of the vesting schedule. Calculation of LTI Performance Rights Grants are approved annually. The number of LTI Performance Rights for each year will be determined by dividing the LTI Awards by the 10-day volume weighted average price per share prior to 31 December in the year of grant (VWAP). Forfeiture of STI Performance Rights STI Performance Rights are subject to Kina’s clawback policy. Under the clawback policy, unvested STI Performance Rights may be forfeited if the Board determines that adverse events or outcomes arise that should impact on the grant of STI Performance Rights to a STI Participant. Payments and grants Payments of the cash component under the STI Award will be made in April of each year after the release of full year financial results to the ASX and PNGX. Target STI and maximum STI that can be awarded MD&CEO CFO Target Maximum 100% of base salary 150% of base salary 40% of base salary 50% of base salary Other Senior Executives 30% of base salary 45% of base salary 32 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 33 Remuneration Report 3. Executive remuneration (continued) Long term incentive award (continued) Features Description Vesting and exercise of LTI Performance Rights While the grants are approved annually, they will vest no earlier than the third anniversary of the commencement of the performance period and subject to satisfaction of the vesting conditions and performance measures. Features Description Target LTI and maximum LTI that can be awarded MD&CEO CFO Other Senior Executive Team Members Target Maximum 50% 40% 30% 50% 40% 30% The performance periods for the outstanding awards are as follows: Financial Year Date Granted Performance Period Measures Vesting date (subject to performance testing) Calculation of Fair Value of LTI Performance Rights Fair value of the LTI performance rights subject to TSR and EPS vesting conditions for financial reporting purposes is generally estimated based on Kina’s ASX market share price at grant date and using a simulation pricing model applying the assumptions of price volatility, risk free interest rates and dividend yields. Kina engages an independent valuation expert who performs the fair value calculations on the grants based on the valuation methodologies referenced above and below. TSR: A Monte Carlo simulation approach is used to value the LTI Awards subject to the relative TSR performance condition as it incorporates an appropriate amount of flexibility with respect to different features of the award. This approach is assumed to follow Geometric Brownian motion under a risk-neutral measure as follows: • Simulates correlations between Kina’s proxy and other peer companies as well as correlations between other companies in the group; • Ranks simulated performances and the proportion of relative TSR award vested as calculated based on vesting schedule; and • Record present value of TSR-hurdle award vested. The above process is repeated multiple times and the estimated fair value is the average of the results. Fair value of awards subject to EPS is calculated using a risk-neutral assumption. The fair value is the difference between the share prices of the underlying asset, minus the expected present value of future dividends over the expected life if holders of the underlying asset are not entitled to receive future dividends. The fair value of the awards subject to EPS performance condition will be equal to the share price of the underlying asset if holders are entitled to receive future dividends. EPS assessment compound till FY 2021 - 50% 01/04/2024 EPS: 2017 01/04/2018 2018 01/04/2019 2019 01/04/2020 2020 01/04/2021 01/04/2018 to 31/03/2021 01/04/2019 to 31/03/2022 01/04/2020 to 31/03/2023 01/04/2021 to 31/03/2024 EPS assessment compound till FY 2020 - 50% 01/04/2021 Relative TSR assessment compounded to FY 2020 - 50% EPS assessment compound till FY 2021 - 50% 01/04/2022 Relative TSR assessment compounded to FY 2021 - 50% EPS assessment compound till FY 2021 - 50% 01/04/2023 Relative TSR assessment compounded to FY 2021 - 50% Relative TSR assessment compounded to FY 2021 - 50% Forfeiture of LTI Performance Rights Unvested LTI Performance Rights may be forfeited: • If the Board determines that any vesting condition applicable to the LTI Performance Right has not been satisfied in accordance with its terms or is not capable of being satisfied; • In certain circumstances if the LTI Participant’s employment is terminated; or • In other circumstances specified in the LTI Award under the Plan (for example, if the Board determines that the LTI Participant has committed an act of fraud or gross misconduct in relation to the affairs of Kina or for any other reason as determined by the Board in its sole discretion). Lapse of LTI Performance Rights Unless otherwise specified in the vesting conditions or otherwise determined by the Board, a LTI Performance Right lapses on the earliest of: • If the Board determines that any vesting condition applicable to the LTI Performance Right has not been satisfied in accordance with its terms or is not capable of being satisfied; • The expiry of the exercise period (if any); • In circumstances of cessation of employment, i.e. either resignation or termination; • In other circumstances specified in the LTI Award under the Plan (for example, if the Board determines that the LTI Participant has committed an act of fraud or gross misconduct in relation to the affairs of Kina or for any other reason as determined by the Board in its sole discretion); or • If the participant purports to deal in the LTI Performance Right in breach of any disposal or hedging restrictions in respect of the Performance Right. 34 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 35 Remuneration Report 3. Executive remuneration (continued) Retention rights Features Eligibility Description The Board determines the Participants eligible for participation in the allocation of Retention Rights, also taking into account any recommendation made by the RNC. Retention Rights The allocation of Retention Performance Rights was a once off award under the Plan of performance rights (Retention Rights) at the time of listing on ASX and PNGX in July 2015, to assist in the retention and reward of key eligible participants at that time. Vesting Conditions Vesting of the Retention Rights is subject to a service condition wherein Retention Performance Rights only vest upon successful completion of a service period as determined by the Board at the time of grant. Calculation of Retention Rights During 2020, there were no awards of any Retention Rights. During 2018, $300,000 worth of ‘Commencement’ performance rights equalling 402,685 Retention Rights were granted to the MD&CEO, and approved by shareholders at the 2018 Annual General Meeting on 23 May 2018, vesting in equal instalments over 3 years as follows; Forfeiture of Retention Rights • 134,229 vested on 4 December 2018; • 134,229 vested on 4 December 2019; and • 134,227 vested on 4 December 2020. Unvested Retention Rights may be forfeited: • • • If the Board determines that any vesting condition applicable to the Retention Right has not been satisfied in accordance with its terms or is not capable of being satisfied; In certain circumstances if the Retention Rights Award Participant’s employment is terminated; or In other circumstances specified in the Retention Rights Award (for example, if the Board determines that the Retention Rights Award Participant has committed an act of fraud or gross misconduct in relation to the affairs of Kina or for any other reason as determined by the Board in its sole discretion). Lapse of Retention Rights Unless otherwise specified in the vesting conditions or otherwise determined by the Board, a Retention Right lapses on the earliest of: • If the Board determines that any vesting condition applicable to the Retention Right has not been satisfied in accordance with its terms or is not capable of being satisfied; • The expiry of the exercise period (if any); • In circumstances of cessation of employment; • In other circumstances specified in the Retention Rights Award (for example, if the Board determines that the Retention Rights Award Participant has committed an act of fraud or gross misconduct in relation to the affairs of Kina or for any other reason as determined by the Board in its sole discretion); or • If the participant purports to deal in the Retention Right in breach of any disposal or hedging restrictions in respect of the Retention Rights. Timing of grants Grants of Retention Rights only apply to new hires (as a one off). Performance based and non-performance based components All STI and LTI elements of the remuneration of the KMP are performance based. Participant Cash salary/fees/short-term compensated absences Non-monetary benefits Total Greg Pawson Chetan Chopra 2020 2019 2020 2019 Michael van Dorssen 2020 Ivan Vidovich *1 Deepak Gupta Johnson Kalo *2 Nathan Wingti Gavin Heard *3 Asi Nauna *4 Lesieli Taviri *5 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 * Pro-rata based on start dates 1 Appointed 5 August 2019 2 Appointed 23 September 2019 3 Appointed 23 January 2019 4 Appointed 11 September 2020 5 Appointed 11 September 2020 $ 591,300 591,300 400,000 400,000 398,549 400,000 375,000 153,082 350,000 350,000 324,162 89,772 303,901 225,270 220,000 206,740 65,942 - 71,049 - $ $ 183,800 775,100 186,606 777,906 163,296 563,296 169,567 569,567 150,816 549,365 161,048 561,048 42,546 417,546 21,903 174,985 161,270 511,270 169,567 519,567 13,777 337,939 7,294 97,066 108,999 412,900 122,875 348,145 12,764 232,764 28,290 235,030 4,076 70,018 - - 3,020 74,069 - - 36 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 37 Remuneration Report 3. Executive remuneration (continued) External Advisor Services The Kina Performance Rights Plan is administered independently by Link Market Services Pty Ltd. Orient Capital Pty Limited is engaged to provide the assessment of EPS Growth and Relative TSR Performance in relation to the LTI Awards and valuation of the VWAP. During 2020, the Board engaged EY to complete an Executive Incentives Review (STI and LTI), and McGuirk Management Consultants Pty Limited to undertake: (a) a Total Shareholder Return Hurdle Comparison Group Analysis; and (b) a Board Remuneration Benchmarking Review. Company Shares holdings The table below sets out the current holdings of Company Shares by KMP: KMP Shareholding Gregory Pawson Chetan Chopra Deepak Gupta Michael Van Dorssen Nathan Wingti Current Balance April 2021 Vesting Total Shares 402,685 76,441 53,553 117,235 22,192 228,118 197,304 137,851 173,820 28,935 630,803 273,745 191,404 291,055 51,127 Performance Rights holdings The table below sets out the current holdings of Performance Rights (PR) by KMP: First Name Last Name Award Year Grant Date Vesting date Value of PR Granted (AUD) VWAP Period VWAP $ applied PR 31/12/2020 Gregory Pawson Chetan Chopra Michael Van Dorssen Deepak Gupta Nathan Wingti Gavin Heard Ivan Vidovich Adam Downie Wayne Beckley STI LTI LTI STI LTI LTI STI LTI LTI STI LTI LTI STI LTI LTI STI LTI STI STI LTI LTI 2019 2018 2019 19/05/2020 19/05/2022 268,197 31/12/2019 1.4300 187,550 01/04/2019 01/04/2022 295,641 31/12/2018 0.9072 325,883 19/05/2020 01/04/2023 294,722 31/12/2019 1.4300 206,099 2019 01/04/2020 01/04/2022 70,000 31/12/2019 1.4300 48,951 2018 01/04/2019 01/04/2022 144,000 31/12/2018 0.9072 158,730 2019 01/04/2020 01/04/2023 160,000 31/12/2019 1.4300 111,888 2019 01/04/2020 01/04/2022 42,000 31/12/2019 1.4300 29,371 2018 01/04/2019 01/04/2022 107,882 31/12/2018 0.9072 118,918 2019 01/04/2020 01/04/2023 120,000 31/12/2019 1.4300 2019 01/04/2020 01/04/2022 43,750 31/12/2019 1.4300 83,916 30,594 2018 01/04/2019 01/04/2022 91,499 31/12/2018 0.9072 100,859 2019 01/04/2020 01/04/2023 105,000 31/12/2019 1.4300 2019 01/04/2020 01/04/2022 49,000 31/12/2019 1.4300 2018 01/04/2019 01/04/2022 48,000 31/12/2018 0.9072 2019 01/04/2020 01/04/2023 48,000 31/12/2019 1.4300 2019 01/04/2020 01/04/2022 23,100 31/12/2019 1.4300 2019 01/04/2020 01/04/2023 66,000 31/12/2019 1.4300 2019 01/04/2020 01/04/2022 38,500 31/12/2019 1.4300 2019 01/04/2020 01/04/2022 42,000 31/12/2019 1.4300 2019 01/04/2020 01/04/2023 90,000 31/12/2019 1.4300 73,427 34,266 52,910 33,566 16,154 46,154 26,923 29,371 62,937 2018 01/04/2019 01/04/2022 104,999 31/12/2018 0.9072 115,740 Subsequent to, and in relation to, the year-ended 31 December 2020 (FY2020 Awards), the Board approved the following STI and LTI Awards for eligible participants. The STI Performance Rights and LTI Performance Rights components of the FY2020 STI and LTI Awards are subject to shareholder approval at the 2021 AGM to be held on 26 May 2021: First Name Last Name Award Year Grant Date Vesting date Value of PR Granted (AUD) VWAP Period VWAP $ applied FY2020 PR STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI 2020 01/04/2021 01/04/2023 310,433 31/12/2020 0.8868 350,060 2020 01/04/2021 01/04/2024 295,650 31/12/2020 0.8868 333,390 2020 01/04/2021 01/04/2023 113,750 31/12/2020 0.8868 2020 01/04/2021 01/04/2024 160,000 31/12/2020 0.8868 2020 01/04/2021 01/04/2023 52,500 31/12/2020 0.8868 128,270 180,424 59,202 2020 01/04/2021 01/04/2024 120,000 31/12/2020 0.8868 135,318 2020 01/04/2021 01/04/2023 52,500 31/12/2020 0.8868 59,202 2020 01/04/2021 01/04/2024 105,000 31/12/2020 0.8868 118,403 2020 01/04/2021 01/04/2023 61,250 31/12/2020 0.8868 69,069 2020 01/04/2021 01/04/2024 90,000 31/12/2020 0.8868 101,488 2020 01/04/2021 01/04/2023 28,000 31/12/2020 0.8868 2020 01/04/2021 01/04/2024 66,000 31/12/2020 0.8868 2020 01/04/2021 01/04/2023 70,000 31/12/2020 0.8868 2020 01/04/2021 01/04/2024 150,000 31/12/2020 0.8868 2020 01/04/2021 01/04/2023 42,000 31/12/2020 0.8868 31,574 74,425 78,935 169,147 47,361 2020 01/04/2021 01/04/2024 96,000 31/12/2020 0.8868 108,254 2020 01/04/2021 01/04/2023 17,500 31/12/2020 0.8868 19,734 2020 01/04/2021 01/04/2024 96,000 31/12/2020 0.8868 108,254 2020 01/04/2021 01/04/2023 26,250 31/12/2020 0.8868 2020 01/04/2021 01/04/2024 66,000 31/12/2020 0.8868 29,601 74,425 Gregory Pawson Chetan Chopra Michael Van Dorssen Deepak Gupta Nathan Wingti Gavin Heard Ivan Vidovich Johnson Kalo Lesieli Taviri Asi Nauna Employment agreements KMP Contracts • All Senior Executive Team Members’ Employment Contracts are over a period of 3 years with a notice period of 3 months. CEO employment agreement The MD&CEO’s Employment Agreement is for a term of 5 years with a notice period of 6 months. Kina may terminate the MD&CEO’s employment without notice or payment in lieu of notice in circumstances where the MD&CEO: • Is bankrupt or has made any arrangement or composition with his creditors or taken advantage of any legislation for relief of an insolvent debtor; or • Is convicted of any criminal offence, other than an offence which in the reasonable opinion of the Board does not affect his position as MD&CEO of Kina. On termination of the MD&CEO’s Employment Agreement, the MD&CEO will be subject to a restraint of trade period of 12 months. The enforceability of the restraint clause is subject to all usual legal requirements. 38 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 39 Remuneration Report 3. Executive remuneration (continued) Remuneration of employees 4. Non-executive director arrangements Remuneration policy During the year, the number of employees or former employees (not being directors of the Company), receiving remuneration in excess of PGK100,000 per annum from the Group stated in bands of PGK10,000 were as follows: Non-executive directors receive a Board fee and fees for chairing or participating on Board Committees as shown in the table below. They do not receive performance-based pay or retirement allowances. In PGK 1,450,000 - 1,460,000 1,440,000 - 1,450,000 980,000 - 990,000 970,000 - 980,000 920,000 - 930,000 860,000 - 870,000 850,000 - 860,000 800,000 - 810,000 750,000 - 760,000 740,000 - 750,000 640,000 - 650,000 610,000 - 620,000 580,000 - 590,000 570,000 - 580,000 560,000 - 570,000 550,000 - 560,000 540,000 - 550,000 500,000 - 510,000 490,000 - 500,000 480,000 - 490,000 470,000 - 480,000 460,000 - 470,000 450,000 - 460,000 440,000 - 450,000 430,000 - 440,000 420,000 - 430,000 2020 1* - 2 - 1 1 - 1 1 1 - 1 2 - - 1 1 - 2 - 1 1 - 2 - - 2019 In PGK (continued) 2020 2019 - 1* - 2 - - 2 - - - 1 - - 1 1 1 - 2 - 4 - - 1 - 3 1 400,000 - 410,000 390,000 - 400,000 380,000 - 390,000 370,000 - 380,000 360,000 - 370,000 350,000 - 360,000 330,000 - 340,000 320,000 - 330,000 310,000 - 320,000 300,000 - 310,000 280,000 - 290,000 260,000 - 270,000 250,000 - 260,000 240,000 - 250,000 220,000 - 230,000 210,000 - 220,000 200,000 - 210,000 190,000 - 200,000 180,000 - 190,000 170,000 - 180,000 160,000 - 170,000 150,000 - 160,000 140,000 - 150,000 130,000 - 140,000 120,000 - 130,000 110,000 - 120,000 100,000 - 110,000 1 1 2 - 1 - - 2 3 - 1 2 - 1 2 - 1 2 4 10 4 7 9 8 2 18 23 - - 2 1 2 1 1 1 2 4 2 - 1 - - 2 3 2 4 4 3 6 7 9 4 4 8 The fees are exclusive of superannuation. Fees are reviewed annually by the Board, taking into account comparable roles and market data provided by the Board’s independent remuneration advisor. The current base fees were reviewed in 2020 and increases were applied with effect from 1 October 2020. Remuneration components Kina’s Board and Committee fee structure as at 31 December 2020 was: Board fees Board Board Committee fees Audit and Risk Committee Chairman Non-executive Director/committee member $180,000 (excluding superannuation entitlements) $90,000 (excluding any superannuation entitlements) Committee Chair: $22,500 (excluding any superannuation entitlements) Members: $11,250 (excluding any superannuation entitlements) Remuneration and Nomination Committee Committee Chair: $22,500 (excluding any superannuation entitlements) Members: $11,250 (excluding any superannuation entitlements) Disclosure Committee No additional fees are paid No additional fees are paid Members. Fee pool Under the Constitution, the Board decides the total amount paid to each Non-Executive Director as remuneration for their services as a Director of the Company. However, the total amount of fees (including statutory superannuation entitlements, if any) paid to the Directors for their services (excluding, for these purposes, the remuneration of any Executive Director) must not exceed in aggregate in any financial year the amount fixed by the Company in general meeting. For the financial year ended 31 December 2020, this has been fixed at $1.28 million per annum (no change from prior year, and that amount set out in the Company’s Listing Prospectus). Any increase in the total amount payable by the Company to the Non-Executive Directors as remuneration for services must be approved by shareholders in general meeting. The aggregate sum includes any special and additional remuneration for special exertions and additional services performed by a Director as determined appropriate by the Board. *Impact of foreign exchange conversion. Committee fees The Committee Chair fees are not duplicated for those Directors who are appointed to Chair of more than one Committee or the Board. 40 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 41 Remuneration Report 4. Non-executive director arrangements (continued) Non-Executive Director Remuneration details The following payments were made to Non-Executive Directors in the 2020 and 2019 financial years. Director Year Short-term Benefits Post-employment benefits Total Fees 146,250 148,100 91,875 84,996 85,313 80,004 108,803 98,646 3,750 - 95,625 76,250 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Non-monetary benefits Superannuation contributions - - - - - - - - - - - - 36,001 182,251 12,138 160,238 6,615 98,490 6,300 91,296 6,615 91,928 6,300 86,304 - 108,803 4,265 102,911 315 4,065 - - 6,615 99,300 6,300 82,550 Isikeli Taureka Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Ila Temu 1 Jane Thomason 1 Appointed 14 December 2020. Variable Remuneration Special remuneration Directors may be paid such special or additional remuneration as the Board determines for performing extra services or making any special exertions for the benefit of Kina which, in the Board’s opinion, are outside of the scope of ordinary duties of a Director. Reimbursement for out of pocket expenses Directors may be reimbursed for travel and other expenses incurred in attending and returning from any Board, Board Committee or general meetings of Kina shareholders, or otherwise in connection with the business or affairs of the Kina Group. Retirement benefits There are no retirement benefit schemes for Directors, other than statutory superannuation contributions. Participation in incentive schemes The Non-Executive Directors are not entitled to participate in any Kina Group employee incentive scheme. 5. Related party transactions Please refer to Note 29 to the financial statements, for further comments on Related Party transactions. 6. Directors’ interests in shares Directors are not required under the Constitution to hold any shares in the Company. As at the date of this Remuneration Report, the Directors have the following interests in the shares in Kina (either directly or through beneficial interests or entities associated with the Director). Director Isikeli Taureka Greg Pawson Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Jane Thomason Ila Temu Number of Shares Shareholding as at the date of this Remuneration Report (%) 65,000 402,685 125,000 80,299 90,000 35,000 - 0.02% 0.14% 0.04% 0.03% 0.03% 0.01% 0.00% 7. Auditor’s report As a PNG incorporated Company, Kina is not required to have this Remuneration Report audited. This Remuneration Report is prepared as a voluntary disclosure and the Board has decided as a matter of good corporate governance, that it will be put to shareholders for approval at the 2021 AGM. The expected level of disclosure of an Australian incorporated company has been provided through this Remuneration Report. 42 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 43 Dividends The Company paid a dividend of AUD 6.4 cents (PGK 15.5 toea) per share (K27.0m) in April 2020 in relation to the profit for the half year ended 31 December 2019. In September 2020 the Company also paid dividend of AUD 4.0 cents (PGK 10.0 toea) per share (K17.6m) in relation to the profit for the half year ended 30 June 2020. After balance sheet date events Subsequent to balance sheet date, the directors declared a final dividend of AUD 6.0 cents (PGK 16.9 toea) per share (K48.5m) on net profit declared for the second half of financial year 2020. The Group announced the proposed acquisition of Westpac’s Pacific Businesses in PNG and Fiji. This is expected to be completed by September 2021. The acquisition is subject to regulatory approvals by the Bank of Papua New Guinea and the ICCC (Competition regulator) in Papua New Guinea and the Reserve Bank of Fiji and the FCCC (competition regulator) in Fiji. See also note 39 for other subsequent events. Donations During the year the Group made donations totalling K258,491 (2019: K26,336). Auditor’s fees Fees paid to the auditor during the year for professional services are shown in note 36 to the accounts. The external auditor is Deloitte Touche Tohmatsu Ltd. Directors’ report The Directors of Kina Securities Limited and its Subsidiaries (“the Group”, “Company”, “Kina”) submit herewith the annual financial report of the Company and its Subsidiaries for the year ended 31 December 2020. Principal activities The principal continuing activities of the Company and its Subsidiaries during the year were the provision of commercial banking and financial services (including asset financing, provision of commercial and personal loans, money market operations and corporate advice), fund administration, investment management services and share brokerage. Effective 9 July 2020, Kina Securities Limited amalgamated with Kina Bank Limited (KBL), Kina Ventures Limited (KVL) and Kina Properties Limited (KPL) and is now known as Kina Securities Limited. Accordingly, the financial statements of the Company include 12 months results of Kina Securities Limited and 4 months results of the previous KBL, KVL and KPL. The Directors consider there are no unusual or other matters that warrant their comments and the Group’s financial position and results from operations are properly reflected in these financial statements. Operating results and review of operations The net profit attributable to equity holders for the year for the Group was K76.0 million compared with K60.9 million in 2019. The profit includes the following items: • Net interest income of K169.7 million, compared with K114.6 million in the prior year to 31 December 2019. • Net fee and commission income of K76.2 million compared with K47.8 million in the prior year. • Operating income before impairment losses and other operating income of K314.8 million, up from K205.6 million in the prior year. • Expected credit losses on financial instruments at amortised cost of K22.0 million, compared with K5.6 million in the prior year. • Other operating expenses of K182.9 million, compared with K117.2 million in the prior period. Remuneration report Remuneration of employees During the year, the number of employees or former employees (not being directors of the Company), receiving remuneration in excess of K100,000 per annum from the Group stated in bands of K10,000 was as follows: In PGK 1,450,000 - 1,460,000 1,440,000 - 1,450,000 980,000 - 990,000 970,000 - 980,000 920,000 - 930,000 860,000 - 870,000 850,000 - 860,000 800,000 - 810,000 750,000 - 760,000 740,000 - 750,000 640,000 - 650,000 610,000 - 620,000 580,000 - 590,000 570,000 - 580,000 560,000 - 570,000 550,000 - 560,000 540,000 - 550,000 500,000 - 510,000 490,000 - 500,000 480,000 - 490,000 470,000 - 480,000 460,000 - 470,000 450,000 - 460,000 440,000 - 450,000 430,000 - 440,000 420,000 - 430,000 400,000 - 410,000 390,000 - 400,000 380,000 - 390,000 370,000 - 380,000 360,000 - 370,000 350,000 - 360,000 330,000 - 340,000 320,000 - 330,000 310,000 - 320,000 300,000 - 310,000 280,000 - 290,000 260,000 - 270,000 2020 1* - 2 - 1 1 - 1 1 1 - 1 2 - - 1 1 - 2 - 1 1 - 2 - - 1 1 2 - 1 - - 2 3 - 1 2 2019 - 1* - 2 - - 2 - - - 1 - 1 1 1 1 - 2 - 4 - - 1 - 3 1 - - 2 1 2 1 1 1 2 4 2 - 44 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 45 Remuneration report Remuneration of employees (continued) In PGK 250,000 - 260,000 240,000 - 250,000 220,000 - 230,000 210,000 - 220,000 200,000 - 210,000 190,000 - 200,000 180,000 - 190,000 170,000 - 180,000 160,000 - 170,000 150,000 - 160,000 140,000 - 150,000 130,000 - 140,000 120,000 - 130,000 110,000 - 120,000 100,000 - 110,000 Directors remuneration Directors fees paid during the year was as follows: Directors I. Taureka K. Smith- Pomeroy J. Thomason P. Hutchinson A. Carriline I. Temu (appointed 14 December 2020) Managing Director G. Pawson - Salaries - Other benefits including leave entitlements 2020 - 1 2 - 1 2 4 10 4 7 9 8 2 18 23 2020 K’000 362 269 236 211 227 -** 1,305 1,460* 454 1,914 3,219 *Impact of foreign exchange conversion. **Payment made in subsequent year Signed at Port Moresby on behalf of the board on 30 March 2021. Mr. Isikeli Taureka Director Mr. Greg Pawson Director 46 Kina Securities Limited Annual Report 2020 2019 1 - - 2 3 2 4 4 3 6 7 9 4 4 8 2019 K’000 362 240 238 195 207 - 1,242 1,444* 454 1,898 3,140 Directors’ declaration The directors declare that: • In the directors’ opinion, there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. • In the directors’ opinion, the attached consolidated financial statements and notes thereto are in accordance with the PNG Companies Act 1997, including compliance with International Financial Reporting Standards (IFRS) and giving a true and fair view of the financial position and performance of the Group as at and for the year ended 31 December 2020. Signed in accordance with a resolution of the directors. On behalf of the Directors Mr. Isikeli Taureka Director Port Moresby, 30 March 2021 Mr. Greg Pawson Director Port Moresby, 30 March 2021 Kina Securities Limited Annual Report 2020 47 Independent auditor’s report 48 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 49 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. Independent Auditor’s Report to the shareholders of Kina Securities Limited Report on the Audit of the Consolidated Financial Statements Opinion We have audited the accompanying consolidated financial statements of Kina Securities Limited (the “Company”) and its subsidiaries (the “Group”) which comprise the consolidated statement of financial position as at 31 December 2020, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information and directors’ declaration. In our opinion, the accompanying consolidated financial statements, give a true and fair view of the Group’s and the Company’s financial position as at 31 December 2020 and of their financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act 1997 (amended 2014). 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 Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Papua New Guinea, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements for the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Impairment of loans and advances As at 31 December 2020 the Group has recognised provisions amounting to K35.3m for impairment losses on loans and advances held at amortised cost in accordance with the Expected Credit Loss (ECL) model as disclosed in Note 3. Loans and advances subject to provisioning Our procedures in conjunction with our credit specialists included, but were not limited to: Control design and implementation: We tested the design and implementation of controls over the impairment provision including: Deloitte Touche Tohmatsu Deloitte Haus, Level 9 MacGregor Street Port Moresby PO Box 1275 Port Moresby National Capital District Papua New Guinea Tel: +675 308 7000 Fax: +675 308 7001 www.deloitte.com/pg Deloitte Touche Tohmatsu ABN 74 490 121 060 Level 23, Riverside Centre 123 Eagle Street Brisbane, QLD, 4000 Australia Phone: +61 7 3308 7000 www.deloitte.com.au Key Audit Matter How the scope of our audit responded to the Key Audit Matter using the ECL model include the corporate, commercial, residential and personal lending portfolio and loan commitments. Significant judgement was involved in determining the provision for credit impairment (including the timing of recognition and the amount of the provision). Key areas of the judgement include: • The application of the requirements to determine impairment under IFRS 9 Financial Instruments, which is reflected in the Company’s and the Group’s expected credit loss model; • Identification of exposures with a significant movement in credit quality to determine whether 12-month or lifetime expected credit loss should be recognised; • Assumptions used in the expected credit loss model such as the financial condition of the counterparty, repayment capacity and forward-looking macroeconomic factors as disclosed in Note 3; and • Incorporation of forward-looking information to reflect current or future external factors with particular focus on impacts arising due to COVID-19. - The accuracy of data input into the system used for credit grading and the approval of credit facilities; and - The ongoing monitoring and identification of loans displaying indicators of impairment and whether they are migrating on timely basis to appropriate risk grading buckets including generation of days past due reports. Assessing model adequacy: We assessed the appropriateness of management’s internally developed model in determining the impairment loss provision by: - Assessing whether the model adequately addresses the requirements of the applicable accounting standard; - Assessing on a sample basis, the individual exposures to determine if they are classified into appropriate credit risk grades and aging buckets for the purpose of determining the impairment loss provision; - Assessing reasonableness of the loss rates applicable to risk grade and aging buckets; and - Assessing the adequacy of management overlays to the modelled collective provision by recalculating the coverage provided by the collective impairment provision (including overlays) to loan book, taking into account recent history, performance, de-risking of the relevant portfolios and the impact of COVID-19. We also assessed appropriateness of the disclosures in Note 3 to the consolidated financial statements. Impairment of non-current assets As at 31 December 2020 the Group has recognised goodwill amounting to K92.7m, arising from the acquisitions of Maybank (PNG) Limited and Maybank Property (PNG) Limited as disclosed in Note 37. In accordance with IAS 36 Impairment of Assets Cash Generating Units (CGUs) including goodwill must be tested for impairment at least annually. The impairment test requires significant judgement due to assumptions required in preparing a discounted cash flow model (‘value in use’), including: - Identification of appropriate CGUs to which goodwill is allocated for the purpose of impairment testing; - Future cash flows for the CGU In conjunction with our valuation specialists our procedures included, but were not limited to: - Evaluating the appropriateness of management’s identification of the Group’s CGUs, including the identification of indicators of impairment; - Assessing the reasonableness of cash flow projections and growth rates against external economic and financial data, the Group’s own historical performance and historical forecasting reasonableness; - Assessing the key assumptions and methodology used by management in the impairment model, in particular the weighted average cost of capital, the cost of debt and the terminal growth rate; - Evaluating the value in use estimate determined by management against the Company’s market capitalisation; and Independent auditor’s report 50 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 51 Key Audit Matter How the scope of our audit responded to the Key Audit Matter - Discount rates; and - Terminal value growth rates. - Testing the mathematical accuracy of the impairment model. We also assessed the appropriateness of the disclosures in Note 37 to the consolidated financial statements. Other Information The directors are responsible for the other information. The other information comprises the Directors’ Report, which we obtained prior to the date of this auditor’s report, and the annual report (but does not include the consolidated financial statements and the auditors’ report thereon), which is expected to be made available to us after that date. Our opinion on the consolidated 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 consolidated 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 consolidated 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 the directors and use our professional judgement to determine the appropriate action. Responsibilities of the Directors for the Consolidated Financial Statements The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the Companies Act 1997 (amended 2014) and for such internal control as the directors determine is necessary to enable the preparation of the consolidated financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible for assessing the ability of the Group 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 Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated 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. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the International Standards on Auditing 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 consolidated financial statements. As part of an audit in accordance with the International Standards on Auditing, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements, including the disclosures, and whether the consolidated 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. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors 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 the directors of the Company with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes 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. Statements of Comprehensive Income For the year ended 31 December 2020 CONSOLIDATED PARENT Interest income Interest expense Net interest income/(expense) Fee and commission income Fee and commission expense Net fee and commission income Foreign exchange income/(expense) Dividend income Net gains /(losses) from financial assets at fair value through profit and loss Other income Operating income before impairment losses and other operating expenses Expected credit losses on financial instruments at amortised cost Other operating expenses Profit before tax Income tax expense 2020 K ‘000 199,687 (29,964) 169,723 76,352 (134) 76,218 55,239 136 2,510 10,968 314,794 2019 K ‘000 146,482 (31,901) 114,581 47,878 (93) 47,785 41,956 357 153 734 205,566 2020 K ‘000 89,176 (13,719) 75,457 20,960 (122) 20,838 25,772 - 2,666 25,097 149,830 2019 K ‘000 31 (3,492) (3,461) 879 (82) 797 (88) 40,004 (8) 49,919 87,163 (22,018) (5,646) (11,828) - (182,870) 109,906 (33,932) (117,227) 82,693 (21,822) (83,309) 54,693 (17,226) (45,675) 41,488 945 5 5 6 6 7 15 8 3b 9 10 Net profit for the year attributable to the equity holders of the Company 75,974 60,871 37,467 42,433 Other comprehensive income - - - - Total comprehensive income for the year attributable to the equity holders of the Company 75,974 60,871 37,467 42,433 Earnings per share – basic (toea) Earnings per share – diluted (toea) 27 b 27 b 2020 37.25 37.06 2019 35.94 35.74 The notes on pages 57 to 130 are an integral part of these consolidated financial statements. 52 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 53 Report on Other Legal and Regulatory Requirements In accordance with section 200 of the Companies Act 1997 (amended 2014), in our opinion: (i)We obtained all information and explanations that were required; and (ii)Proper accounting records have been kept by the Group for the year ended 31 December 2020. Our firm carries out other services for the Group and the Company in the areas of assurance, Information Technology (IT) and advisory in relation to risk management. The provision for these other services has not impaired our independence as auditors of the Group and the Company. The engagement partners on the audit resulting in this independent auditor’s report are Benjamin Lee and David Rodgers. DELOITTE TOUCHE TOHMATSU DELOITTE TOUCHE TOHMATSU Benjamin Lee Partner Chartered Accountants Registered under Accountants Act 1996 Port Moresby 30 March 2021 David Rodgers Partner Chartered Accountants Registered Company Auditor in Australia Brisbane 30 March 2021 Statements of Financial Position As at 31 December 2020 Statements of Changes in Equity For the year ended 31 December 2020 CONSOLIDATED PARENT CONSOLIDATED Attributable to the equity holders of the Group Assets Cash and due from banks Central bank bills Regulatory deposits Financial assets at fair value through profit or loss Loans and advances to customers Investments in government inscribed stocks Due from subsidiaries Current income tax assets Deferred tax assets Investments in subsidiaries Property, plant and equipment Goodwill Intangible assets Other assets Liabilities Due to other banks Due to customers Current income tax liabilities Due to subsidiaries Employee provisions Lease Liabilities Other liabilities 12 13 14 15 16 17 29 23 11 18 19 37 20 21 22 23 29 24 25 26 2020 K ‘000 335,147 647,874 185,711 10,682 2019 K ‘000 269,702 722,090 249,713 7,635 1,614,731 114,519 1,401,433 34,003 - 83 16,482 - 86,274 92,786 49,449 145,813 3,299,551 5,385 2,560,715 4,966 - 11,538 47,342 92,571 - 810 10,491 - 96,922 92,786 49,247 62,703 2,997,535 22 2,460,967 4,506 - 9,068 54,958 140,738 2020 K ‘000 361,614 647,874 185,711 6,151 1,609,969 114,519 1,387 - 15,956 248 86,274 92,786 49,150 145,204 3,316,843 5,385 2,599,474 3,761 8,988 10,593 47,342 91,493 2,722,517 2,670,259 2,767,036 2019 K ‘000 43,837 - - 339 - - 351,096 317 3,226 248 16,644 - 6,532 1,216 423,455 - - - 167,212 4,420 9,397 11,364 192,393 Net assets Shareholders’ equity Issued and fully paid ordinary shares Share-based payment reserve 27 a 27 c Capital reserve Retained earnings Total equity 577,034 327,276 549,807 231,062 394,693 2,774 - 179,567 577,034 176,970 2,063 - 148,243 327,276 394,693 2,774 107,494 44,846 549,807 176,970 2,063 - 52,029 231,062 The notes on pages 57 to 130 are an integral part of these consolidated financial statements. These financial statements have been approved for issue by the Board of Directors and signed on its behalf by: Mr. Isikeli Taureka Director Mr. Greg Pawson Director 54 Kina Securities Limited Annual Report 2020 Share Capital Share Based Payment Reserve Retained Earnings Balance as at 31 December 2018 Transition effect IFRS 16 Balance as at 01 January 2019 Profit for the year Other comprehensive income Additional shares issued Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid Balance as at 31 December 2019 Profit for the year Other comprehensive income Additional shares issued Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid K ‘000 142,213 - 142,213 - - 34,757 - - - 176,970 - - 217,723 - - - Balance as at 31 December 2020 394,693 K ‘000 2,651 - 2,651 - - - (1,430) 842 - 2,063 - - - (2,297) 3,008 - 2,774 K ‘000 124,405 (725) 123,680 60,871 - - - - (36,308) 148,243 75,974 - - - - (44,650) 179,567 Total K ‘000 269,269 (725) 268,544 60,871 - 34,757 (1,430) 842 (36,308) 327,276 75,974 - 217,723 (2,297) 3,008 (44,650) 577,034 PARENT Attributable to the equity holders of the Group Balance as at 31 December 2018 Transition effect IFRS 16 Share Capital Share Based Payment Reserve K ‘000 142,213 - K ‘000 2,651 - Balance as at 01 January 2019 142,213 2,651 Profit for the year Additional shares issued Other comprehensive income Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid - 34,757 - - - - - - - (1,430) 842 - Balance as at 31 December 2019 176,970 2,063 Profit for the year Additional shares issued Other comprehensive income Employee share scheme – vested rights Employee share scheme – value of employee services Amalgamation adjustment Dividend paid - 217,723 - - - - - - - - (2,297) 3,008 - - Retained Earnings Capital Reserve Total K ‘000 46,318 (414) 45,904 42,433 - - - - (36,308) 52,029 37,467 - - - - - K ‘000 K ‘000 - - - - - - - - - - - - - - - 191,182 (414) 190,768 42,433 34,757 - (1,430) 842 (36,308) 231,062 37,467 217,723 - (2,297) 3,008 107,494 107,494 (44,650) - (44,650) Balance as at 31 December 2020 394,693 2,774 44,846 107,494 549,807 The notes on pages 57 to 130 are an integral part of these consolidated financial statements. Kina Securities Limited Annual Report 2020 55 Statements of Cash Flows For the year ended 31 December 2020 Cash flows from operating activities Interest received Interest paid Foreign exchange gain/ (loss) Dividend received Fee and commission income received Fee and commission expense paid Net trading and other operating income Recoveries on loans previously written-off Support fees charged from subsidiaries Cash payments to employees and suppliers Income tax paid Cash flows from operating profits before changes in operating assets and liabilities Changes in operating assets and liabilities: - (Increase) in regulatory deposits - (Increase) in loans and advances to customers - Net decrease/(increase) in other assets - Net increase in due to customers - (Decrease)/increase due to other banks - Net increase/(decrease) in other liabilities CONSOLIDATED PARENT 2020 2019 2020 2019 K ‘000 K ‘000 K ‘000 K ‘000 202,364 (27,376) 55,239 136 78,271 (134) 13,256 1,943 cv 146,984 (32,835) 41,956 357 50,531 (93) 887 2,076 - 85,218 (3,704) 25,772 31 (3,492) (88) - 40,004 20,960 (123) 887 (82) 25,791 11,051 1,943 1,751 - 38,860 (169,183) (110,059) (32,269) (50,117) (36,195) 118,321 (30,628) (32,394) 69,176 92,945 (1,179) 35,875 64,002 (112,218) (14,687) (217,160) (225,415) (138,215) (82,487) (41,844) (111,488) 99,748 4,814 (60,110) 96,872 (27,558) 103,677 51,011 4,849 1,025 - - 313 - (504) 928 Net cash inflow/(outflow) generated from/(used in) operating activities 28c (72,872) (137,310) (114,560) 36,612 Cash flows from investing activities Purchase of property, equipment and software Net cash acquired in business combination, net of consideration paid 31 Proceeds from sale of property and equipment Cash acquired on amalgamation Net movement in investment securities Net cash inflow/(outflow) generated from/(used in) investing activities Cash flows from financing activities Dividend paid Proceeds on issuance of shares Net cash inflow/(outflow) generated from/(used) in financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rate movements on cash and cash equivalents Cash and cash equivalents at beginning of year (22,924) (39,005) (22,924) (4,638) - 264 - 52,355 29,695 687,718 16 - - 264 243,321 (403,319) 103,088 - 16 - 8 245,410 323,749 (4,614) (44,650) (36,308) (44,650) (36,308) 217,723 173,073 34,757 (1,551) 217,723 173,073 129,896 106,549 382,262 549 2,515 515 34,757 (1,551) 30,447 504 269,702 160,638 43,837 12,886 Cash and cash equivalents at end of year 28a 400,147 269,702 426,614 43,837 The notes on pages 57 to 130 are an integral part of these consolidated financial statements. Notes to the Financial Statements For the year ended 31 December 2020 1. Summary of significant accounting policies 1.1 General information The Company and its subsidiaries are incorporated in Papua New Guinea. The Groups business activities include provision of banking services, personal and commercial loans, money market operations, provision of share brokerage, fund administration, investment management services, asset financing, and corporate advice. Effective 9 July 2020, Kina Securities Limited amalgamated with Kina Bank Limited (KBL), Kina Ventures Limited (KVL) and Kina Properties Limited (KPL) and is now known as Kina Securities Limited. 1.2 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Papua New Guinea Companies Act 1997. The consolidated financial statements as at and for the year ended 31 December 2020 were authorized for issue by the Board of Directors on 30 March 2021. The consolidated financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments at fair value. Cost is based on the fair values of the consideration given in exchange for assets. 1.3 Amendments to IFRSs that are mandatorily effective for the current reporting period New and revised Standards and amendments thereof effective for the current financial year, and which have been applied in the preparation of these financial statements, that are relevant to the Group include: • Amendments to References to the Conceptual Framework in IFRS Standards. • Amendments to IFRS 3 Definition of a business. • Amendments to IAS 1 and IAS 8 Definition of material. Amendments to References to the Conceptual Framework in IFRS Standards The Group has adopted the amendments included in Amendments to References to the Conceptual Framework in IFRS Standards for the first time in the current year. The amendments include consequential amendments to affected standards so that they refer to the new Framework. Not all amendments, however, update those pronouncements with regard to references to and quotes from the Framework so that they refer to the revised Conceptual Framework. Some pronouncements are only updated to indicate which version of the Framework they are referencing to (the IASC Framework adopted by the IASB in 2001, the IASB Framework of 2010, or the new revised Framework of 2018) or to indicate that definitions in the Standard have not been updated with the new definitions developed in the revised Conceptual Framework. Amendments to IFRS 3 Definition of a business The Group has adopted the amendments to IFRS 3 for the first time in the current year. The amendments clarify that while businesses usually have outputs, outputs are not required for an integrated set of activities and assets to qualify as a business. To be considered a business an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The amendments remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs. The amendments also introduce additional guidance that helps to determine whether a substantive process has been acquired. The amendments introduce an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business. Under the optional concentration test, the acquired set of activities and assets is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar assets. The amendments are applied prospectively to all business combinations and asset acquisitions for which the acquisition date is on or after 1 January 2020. 56 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 57 1.3 Amendments to IFRSs that are mandatorily effective for the current reporting period (continued) Amendments to IAS 1 and IAS 8 Definition of material The Group has adopted the amendments to IAS 1 and IAS 8 for the first time in the current year. The amendments make the definition of material in IAS 1 easier to understand and are not intended to alter the underlying concept of materiality in IFRS Standards. The concept of ‘obscuring’ material information with immaterial information has been included as part of the new definition. The threshold for materiality influencing users has been changed from ‘could influence’ to ‘could reasonably be expected to influence’. The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. In addition, the IASB amended other Standards and the Conceptual Framework that contain a definition of ‘material’ or refer to the term ‘material’ to ensure consistency. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements. 1.4 New and revised IFRS standards in issue but not yet effective At the date of authorisation of these financial statements, the Group has not applied the following revised IFRS standards that have been issued but are not yet effective: IFRS 17 Insurance Contracts IFRS 10 and IAS 28 (amendments) Amendments to IAS 1 Amendments to IFRS 3 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Classification of Liabilities as Current or Non-current Reference to the Conceptual Framework The directors do not expect that the adoption of the Standards listed above will have material impact on the financial statements of the Group in the future period. 1.5 Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its controlled entities (its subsidiaries) made up to 31 December each year. Control is achieved when the Company: • Has the power over the investee; • Is exposed, or has rights, to variable returns from its involvement with the investee; and • Has the ability to use its power to affect its returns. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Group has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group’s voting rights in an investee are sufficient to give it power, including: • The size of the Group’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • Potential voting rights held by the Group, other vote holders or other parties; • Rights arising from other contractual arrangements; and • Any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in the consolidated profit or loss account from the date the Group gains control until the date when the Group ceases to control the subsidiary. Profit or loss and each component of OCI (other comprehensive income) are attributed to the owners of the Group and to the non-controlling interests (NCI), if any. Total comprehensive income of the subsidiaries is attributed to the owners of the Group and to the NCI even if this results in the NCI having a deficit balance. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation, with the exception of foreign currency gains and losses on intragroup monetary items denominated in a foreign currency of at least one of the parties. 1.6 Segment reporting Operating segments are presented on a basis that is consistent with information provided internally to the Group’s key decision makers. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The Group has two reportable segments, which are the two business divisions – Bank and Wealth Management. 1.7 Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Kina, which is the Company’s and the Group’s functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. 1.8 Interest income and interest expense Interest income and expense for all financial instruments except for those classified as held for trading or those measured or designated as at fair value through profit and loss (FVTPL) are recognised as ‘Interest income’ or ‘Interest expense’ in the profit or loss account using the effective interest method. The effective interest rate (EIR) is the rate that exactly discounts estimated future cash flows of the financial instrument through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. The future cash flows are estimated taking into account all the contractual terms of the instrument. The calculation of the EIR includes all fees and points paid or received between parties to the contract that are incremental and directly attributable to the specific lending arrangement, transaction costs, and all other premiums or discounts. For financial assets at FVTPL transaction costs are recognised in profit or loss at initial recognition. The interest income/expense is calculated by applying the EIR to the gross carrying amount of non-credit impaired financial assets (i.e. at the amortised cost of the financial asset before adjusting for any expected credit loss allowance), or to the amortised cost of financial liabilities. For credit-impaired financial assets the interest income is calculated by applying the EIR to the amortised cost of the credit-impaired financial assets (i.e. the gross carrying amount less the allowance for expected credit losses (ECLs)). For financial assets originated or purchased credit-impaired (POCI) the EIR reflects the ECLs in determining the future cash flows expected to be received from the financial asset. 1.9 Fee and commission income The Group recognises fee and commission income from following major services it provides to customers; • Investment and portfolio management - The Group manages investments for a number of superannuation funds and corporate clients. These services are provided by the Group on monthly basis and therefore billed accordingly. Revenue is recognised as and when the bill is raised i.e. when performance obligation is satisfied. • Fund administration - The Group earns a fee through administration of funds for its customers based on the fee rates agreed under the terms of the contract. The services are billed to customers on monthly basis at which point revenue is recognised, i.e. at the time when performance obligation is satisfied. • Share brokerage - The Group generates share brokerage from trading services for customers on Port Moresby Stock Exchange (“PNGX”) and Australian Stock Exchange (“ASX”). Revenue is recognised upon settlement of the trade which is commensurate with when the performance obligation is satisfied. • Loan fee and bank commission - The Group charges various loan fee and commissions to its customers during the tenure of the loan unrelated to establishment of the loan facility. Revenue is recognised when services promised under the contract are rendered and performance obligations are satisfied. 58 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 59 1.10 Leases Policy applicable from 01 January 2019 At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A right-of-use asset and a corresponding lease liability is recognised with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight- line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether: • The contract involves the use of an identified asset – this may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; • The Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and • The Group has the right to direct the use of the asset. The Group has this right when it has the decision- making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Group has the right to direct the use of the asset if either: • The Group has the right to operate the asset; or • The Group designed the asset in a way that predetermines how and for what purpose it will be used. At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the leases of land and buildings in which it is a lessee, the Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of- use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right- of- use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, at the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: • Fixed payments, including in-substance fixed payments, less any lease incentive receivable; • Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; • The amount expected to be payable under a residual value guarantee, if any; and • The exercise price, if any, under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. 1.11 Taxation The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the country where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authority. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rate (and law) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The deferred tax liability in relation to investment property that is measured at fair value is determined assuming the property will be recovered entirely through sale. Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 1.12 Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the following: • Fair values of the assets transferred; • Liabilities incurred to the former owners of the acquired business; • Equity interests issued by the Group; • Fair value of any asset or liability resulting from a contingent consideration arrangement; and • Fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition-related costs are expensed as incurred. The excess of the following is considered as goodwill: • Consideration transferred; • Amount of any non-controlling interest in the acquired entity; and • Acquisition date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired if those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently re-measured to fair value with changes in fair value recognised in profit or loss. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquire is re- measured to fair value at the acquisition date. Any gains or losses arising from such re-measurement are recognised in profit or loss. 60 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 61 1.13 Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less from date of acquisition that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. 1.14 Financial instruments Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Recognised financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognised immediately in profit or loss. Financial assets All financial assets are recognised and de-recognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the time frame established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at FVTPL. Transaction costs directly attributable to the acquisition of financial assets classified as at FVTPL are recognised immediately in profit or loss. All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Specifically: • Debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI), are subsequently measured at amortised cost; • Debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are SPPI, are subsequently measured at fair value through other comprehensive income (FVTOCI); • All other debt instruments (e.g. debt instruments managed on a fair value basis, or held for sale) and equity investments are subsequently measured at FVTPL. Debt instruments at amortised cost or at FVTOCI The Group assesses the classification and measurement of a financial asset based on the contractual cash flow characteristics of the asset and the Group’s business model for managing the asset. The Group classifies and measures at amortised cost or at FVTOCI, assets where contractual terms give rise to cash flows that are solely payments of principal and interest on the principal outstanding (SPPI). For the purpose of SPPI test, principal is the fair value of the financial asset at initial recognition. That principal amount may change over the life of the financial asset (e.g. if there are repayments of principal). Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. The SPPI assessment is made in the currency in which the financial asset is denominated. An assessment of business models for managing financial assets is fundamental to the classification of a financial asset. The Group determines the business models at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The Group’s business model does not depend on management’s intentions for an individual instrument, therefore the business model assessment is performed at a higher level of aggregation rather than on an instrument-by-instrument basis. At initial recognition of a financial asset, the Group determines whether newly recognised financial assets are part of an existing business model or whether they reflect the commencement of a new business model. The Group reassess its business models each reporting period to determine whether the business models have changed since the preceding period. Financial assets at FVTPL Financial assets at FVTPL are: • Assets with contractual cash flows that are not SPPI; or/and • Assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or • Assets designated at FVTPL using the fair value option. These assets are measured at fair value, with any gains/losses arising on re-measurement recognised in profit or loss. Reclassification If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that results in reclassifying the Group’s financial assets. During the current financial year there was no change in the business model under which the Group holds financial assets and therefore no reclassifications were made. Changes in contractual cash flows are considered under the accounting policy on Modification and de- recognition of financial assets described below. Impairment The Group measures and recognises loss allowances for ECLs on the following financial instruments that are not measured at FVTPL: • Loans and advances; • Investment in government inscribed stocks; • Other financial assets; • Loan commitments issued; and • Financial guarantee contracts issued. ECLs are required to be measured through a loss allowance at an amount equal to: • 12-month ECL, i.e. lifetime ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or • Full lifetime ECL, i.e. lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3). A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL. More details on the determination of a significant increase in credit risk and determination of ECL are provided in note 3. Credit impaired financial assets A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the recovery of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence of credit-impairment includes observable data about the following events: • Significant financial difficulty of the borrower or issuer; • A breach of contract such as a default or past due event; • The lender of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession that the lender would not otherwise consider; • The disappearance of an active market for a security because of financial difficulties; • The purchase of a financial asset at a deep discount that reflects the incurred credit losses; or • The facility is overdue by more than specified number of days. The Group assesses whether debt instruments that are financial assets measured at amortised cost are credit- impaired at each reporting date. To assess if sovereign and corporate debt instruments are credit impaired, the Group considers factors such as bond yields, credit ratings and the ability of the borrower to raise funding. A loan is considered credit-impaired when a concession is granted to the borrower due to a deterioration in the borrower’s financial condition, unless there is evidence that as a result of granting the concession the risk of not receiving the contractual cash flows has reduced significantly and there are no other indicators of impairment. For financial assets where concessions are contemplated but not granted the asset is deemed credit impaired when there is observable evidence of credit-impairment including meeting the definition of default. 62 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 63 1.14 Financial instruments (continued) Definition of default The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk (see note 3). The Group considers the following as constituting an event of default: • The borrower is past due more than a specified number of days depending upon the type of loan arrangement on any material credit obligation to the Group; or • The borrower is unlikely to pay its credit obligations to the Group in full. The definition of default is appropriately tailored to reflect different characteristics of different types of assets. For some loan arrangements, the Group has determined based on reasonable and supportable information that the default event has not occurred even if the contractual payments are more than 90 days past due and has therefore rebutted the presumption provided in IFRS 9. This is in line with general payment behavior of the borrowers in the economy. When assessing if the borrower is unlikely to pay its credit obligation, the Group takes into account both qualitative and quantitative indicators. The information assessed depends on the type of the asset, for example in corporate lending a qualitative indicator used is the breach of covenants, which is not relevant for retail lending. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. The Group uses a variety of sources of information to assess default which are either developed internally or obtained from external sources. More details are provided in note 3. Significant increase in credit risk The Group monitors all financial assets, issued loan commitments and financial guarantee contracts that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk the Group will measure the loss allowance based on lifetime rather than 12-month ECL. The Group’s accounting policy is not to use the practical expedient that financial assets with ‘low’ credit risk at the reporting date are deemed not to have had a significant increase in credit risk. As a result, the Group monitors all financial assets, issued loan commitments and financial guarantee contracts that are subject to impairment for significant increase in credit risk. In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date with the risk of a default occurring that was anticipated when the financial instrument was first recognised. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable. For some loan arrangements, the Group has determined based on reasonable and supportable information that credit risk has not increased significantly even if the contractual payments are more than 30 days past due and has therefore rebutted the presumption provided in IFRS 9. This is in line with general payment behavior of the borrowers in the economy. Write-off Loans and debt securities are written off when the Group has no reasonable expectations of recovering the financial asset (either in its entirety or a portion of it). This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. A write- off constitutes a de-recognition event. The Group may apply enforcement activities to financial assets written off. Recoveries resulting from the Group’s enforcement activities will result in impairment gains. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: • For financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets; • For loan commitments and financial guarantee contracts: as a provision; and • Where a financial instrument includes both a drawn and an undrawn component, and the Group cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Group presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision. Financial liabilities A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Group or a contract that will or may be settled in the Group’s own equity instruments and is a non- derivative contract for which the Group is or may be obliged to deliver a variable number of its own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Group’s own equity instruments. Financial liabilities are classified as ‘other financial liabilities’ as the Group does not have any financial liabilities that are classified or designated as at FVTPL. Other financial liabilities Other financial liabilities, including deposits and borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The EIR is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. When the Group exchanges with the existing lender one debt instrument into another one with substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, the Group accounts for substantial modification of terms of an existing liability or part of it as an extinguishment of the original financial liability and the recognition of a new liability. 64 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 65 1.16 Intangible assets and other non-financial asset Goodwill Goodwill is measured as described in note 37 Goodwill having an indefinite useful life is not amortized but it is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments. Other non-financial assets Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets cash-generating units (CGU). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at the end of each reporting period. 1.14 Financial instruments (continued) Financial guarantee contracts A financial guarantee contract is a contract that requires 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. Financial guarantee contracts issued by a group entity are initially measured at their fair values and, if not designated as at FVTPL and not arising from a transfer of a financial asset, are subsequently measured at the higher of: • The amount of the loss allowance determined in accordance with IFRS 9; and • The amount initially recognised less, where appropriate, cumulative amount of income recognised in accordance with the Group’s revenue recognition policies. Financial guarantee contracts not designated at FVTPL are presented as provisions on the consolidated statement of financial position and the remeasurement is presented in other revenue. The Group has not designated any financial guarantee contracts as at FVTPL. 1.15 Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation. Depreciation is calculated on the basis of straight line to write-off the cost of such assets to their residual values over their estimated lives as follows: Furniture and fittings Building improvements 10% 30% Motor vehicles 15% to 30% Office equipment 11.25% to 15% The assets’ residual values and useful lives are reviewed, and adjusted, if appropriate at each balance date. Gains and losses on disposal (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. Repairs and maintenance costs are charged to statement of comprehensive income, when the expenditure is incurred. Customer deposits relationship / intangible 1.18 Employee benefits A customer deposit relationship asset was recognized with the acquisition of Maybank (PNG) Limited in 2015. Also, the acquisition of Australian and New Zealand (ANZ) Bank’s retail, commercial and SME banking businesses in PNG on 23 September 2019 gave rise to the recognition of core customer deposit intangible (note 20), representing the value, or avoided cost, of having a deposit base from consumer and business transaction accounts, savings accounts, term deposits and other money market accounts that provide a cheaper source of funding than alternative sources of funding. Customer deposit relationship is amortized using the straight-line method over a period of five years and three years on the Maybank and ANZ acquisition respectively, and is stated at cost less accumulated amortization and impairment. Customer deposit relationship is also assessed for any indication of impairment at each reporting date and whenever there is an indicator that these maybe impaired. Software Costs associated with maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with identifiable and unique software products controlled by the Group that will probably generate economic benefits exceeding costs beyond one year are recognized as intangible assets. Direct costs include staff costs of the software development team and an appropriate portion of relevant overheads. Expenditure which enhances or extends the performance of computer software programs beyond their original specifications is recognized as a capital improvement and added to the original cost of the software. Computer software development costs recognized as assets are amortized using the straight-line method over their useful lives, not exceeding a period of five years. 1.17 Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligations can be made. Short-term obligations Provision is made for benefits accruing to employees in respect of annual leave and other short term obligations when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within twelve months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognized in respect of employee benefits which are not expected to be settled within twelve months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. The contributions in relation to employees of the Group who contribute to defined contribution pension plans are charged to the statement of comprehensive income in the year to which they relate. Share-based payments Senior executive employees are entitled to participate in a share ownership incentive scheme. The fair value of share rights provided to senior executive employees as share-based payments is recognized as an expense with a corresponding increase in equity. The fair value is measured at grant date and is recognized over the period the services are received being the expected vesting period at the end of which the senior executive employees would become entitled to exercise their share rights. The fair value of the share based payments is based on the market price of the shares at grant date and market vesting conditions upon which the rights were granted. Non-market vesting conditions are taken into account by adjusting the number of rights which will eventually vest. Cash bonus The Group recognizes a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation. 66 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 67 1.19 Share capital and other equity accounts Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends on ordinary shares are recognised in equity in the period in which they are declared by the Company’s directors. Reserves Capital reserve comprises accumulated gains on historic asset revaluation. Share-based payment reserve comprises the fair value of unvested performance rights as at the reporting date. 1.20 Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to owners of the company, excluding any costs of servicing equity other than ordinary shares by the weighted average number of ordinary shares outstanding during the financial year (note 27(b)). 2. Critical accounting estimates and judgments In the application of the Group’s accounting policies, which are described in note 1, the directors are required to make judgements that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The areas involving significant estimates or judgments are: • Significant increase in credit risk – note 3; • Recognition of deferred tax asset for carried forward tax losses – note 11(a); • Estimated allowance for loans and advances to customers – note 16 and 3(b); • Estimated goodwill impairment – note 37; Diluted earnings per share • Estimated useful life of intangible asset – note 20; • Estimation of the fair value of performance right grants and the number of grants expected to vest – note 27(c). Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. 1.21 Fiduciary activities The Group provides custodian, trustee, corporate administration, investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these consolidated financial statements. Details of such investments held under trust may be found in note 30. 3. Financial risk management By its nature the Group’s activities are principally related to the use of financial instruments. 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. The Group seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due. The Group raises its interest margins by obtaining above-average margins, net of provisions, through lending to commercial and retail borrowers with a range of credit standing. 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 foreign currency market. The Board places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. Risk in the Group is managed by a system of delegated limits. These limits set the maximum level of risks 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 then to the respective operational managers. a) Market risk Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads and equity prices, will reduce the Group’s income or the value of its portfolios. The group is exposed to the following type of market risks: (i) Foreign exchange risk; (ii) Interest rate risk; and (iii) Equity price risk. (i) Foreign exchange risk The Group undertakes transactions denominated in foreign currencies from time to time and resulting from these activities, exposures in foreign currencies arise. Though there are no specific hedging activities to mitigate any currency risk, this exposure is monitored by management on an ongoing basis. Exposure The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in PGK, was as follows: K’000 USD AUD SGD GBP EUR NZD JPY PHP MYR INR FJD LKR THB 31 December 2020 Cash Balance 288 492 95 Due from other banks 90,405 3,926 1,820 90,693 4,418 1,915 42 665 707 199 517 660 541 233 74 - - 407 (1,243) 716 1,201 233 481 (1,243) 31 December 2019 Cash Balance 707 473 61 44 239 Due from other banks 98,789 (962) (200) 508 1,907 99,496 (489) (139) 552 2,146 583 292 875 214 221 435 67 288 355 - 83 83 - 174 174 - 19 19 12 228 240 20 587 607 - 9 9 - - - - 160 160 - - - There was no material liabilities denominated in foreign currency. 68 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 69 3. Financial risk management (continued) Sensitivity As shown in the previous table, the Group is primarily exposed to changes in US/PGK exchange rates. The sensitivity of profit or loss to changes in the exchange rates arises mainly from US dollar denominated financial instruments. USD/PGK – exchange rate – increase 10% (2019:10%) USD/PGK – exchange rate – decrease 10% (2019: 10%) (ii) Interest rate risk Impact on statement of comprehensive income in K ‘000 2020 (8,219) 10,045 K ‘000 2019 (8,981) 10,977 Interest rate risk in the statements of financial position arises from the potential for a change in interest rate to have an adverse effect on the earnings in the current 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 statements of financial position. Sensitivity to interest rates arises from mismatches in re-pricing dates, cash flows and other characteristics of the assets and their corresponding liability funding. These mismatches are actively managed by the Assets and Liabilities Committee (ALCO), which meets regularly to review the effects of fluctuations in the prevailing levels of market interest rates of the financial position and cash flows of the Group. The following table risks summarises the Group’s exposure to interest rate risks: Assets Cash and due from banks Central bank bills Loans and advances to customers Investments in government inscribed stocks Liability Due to customers Assets Cash and due from banks Central bank bills Loans and advances to customers Investments in government inscribed stocks Liability Due to customers Year ended 31 December 2020 Carrying amount Average Interest rate K ‘000 335,147 647,874 1,614,731 114,519 % p.a. 0.03% 6.27% 9.45% 12.11% 2,560,715 1.03% Year ended 31 December 2019 Carrying amount Average Interest rate K ‘000 269,702 722,090 1,401,433 34,003 % p.a. 0.19% 5.74% 9.64% 7.51% 2,460,967 1.25% Sensitivity Given the profile of assets and liabilities at 31 December 2020 and prevailing interest rates, a 100 basis points increase/decrease in market rates in relation to lending will result in a maximum possibility of K1,407,752 (2019: K14,014,330) decrease/increase in net interest income at a Group level. (iii) Equity price risk The Group is exposed to equity securities price risk due to the majority of the investments in listed equity securities through profit or loss. To manage its price risks arising from financials assets at fair value through profit or loss, the Group diversifies its portfolio. Diversification of portfolio is done in accordance with the limits set by the Group. The Group’s financial assets at fair value through profit or loss are publicly traded on the Port Moresby Stock Exchange (PNGX) and the Australian Stock Exchange (ASX). Sensitivity The sensitivity analysis below has been determined based on the exposure to equity price risks at the end of the reporting period. If equity prices had been 5% higher/lower, net profit for the year ended 31 December 2020 and net assets as of balance date would have been affected by K534,112 (2019: K381,777). The Group’s sensitivity to equity prices has changed relative to asset balance from the prior year. Impact on statement of comprehensive income in K ‘000 K ‘000 2020 534 (534) 2019 382 (382) Equity prices – increase 5% (2019:5%) Equity prices – decrease 5% (2019: 5%) b) Credit risk Credit risk is the risk that a customer or counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group’s main income generating activity is lending to customers and therefore credit risk is a principal risk. Credit risk mainly arises from loans and advances to customers and other banks (including related commitments to lend such as loan or credit card facilities) and investments in debt securities. The Group considers all elements of credit risk exposure such as counterparty default risk, geographical risk and sector risk for risk management purposes. (i) Credit risk management The Group’s credit committee is responsible for managing the Group’s credit risk by: • Ensuring that the Group has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances in accordance with the Group’s stated policies and procedures, IFRS and relevant supervisory guidance. • Identifying, assessing and measuring credit risk across the Group, from an individual instrument to a portfolio level. • Creating credit policies to protect the Group against the identified risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to continually monitor exposures against internal risk limits. • Limiting concentrations of exposure by type of asset, counterparties, industry, credit rating, geographic location etc. • Establishing a robust control framework regarding the authorisation structure for the approval and renewal of credit facilities. • Developing and maintaining the Group’s risk grading to categorise exposures according to the degree of risk of default. Risk grades are subject to regular reviews. • Developing and maintaining the Group’s processes for measuring ECL including monitoring of credit risk, incorporation of forward looking information and the method used to measure ECL. • Ensuring that the Group has policies and procedures in place to appropriately maintain and validate models used to assess and measure ECL. • Establishing a sound credit risk accounting assessment and measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk and to account for ECL. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of credit risk. The internal audit function performs regular audits making sure that the established controls and procedures are adequately designed and implemented. 70 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 71 3. Financial risk management (continued) (ii) Significant increase in credit risk As explained in note 1 the Group monitors all financial assets that are subject to impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk the Group will measure the loss allowance based on lifetime rather than 12-month ECL. The determination of significant increase in credit risk is driven by internal risk ratings and days by which the contractual payments under terms of the financial instrument are overdue as explained below. Internal credit risk ratings In order to minimise credit risk, the Group has tasked its credit management committee to develop and maintain the Group’s credit risk grading to categorise exposures according to their degree of risk of default. The Group’s credit risk grading framework comprises eight categories. The credit rating information is based on a range of data that is determined to be predictive of the risk of default and applying experienced credit judgement. The nature of the exposure and type of borrower are taken into account in the analysis. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. The credit risk grades are designed and calibrated to reflect the risk of default as credit risk deteriorates. As the credit risk increases the difference in risk of default between grades changes. Each exposure is allocated to a credit risk grade at initial recognition, based on the available information about the counterparty. All exposures are monitored and the credit risk grade is updated to reflect current information. The monitoring procedures followed are both general and tailored to the type of exposure. The following data are typically used to monitor the Group’s exposures: • Payment record, including payment ratios and ageing analysis; • Extent of utilisation of granted limit; • Forbearances (both requested and granted); • Changes in business, financial and economic conditions; • Credit rating information supplied by external rating agencies; • For retail exposures: internally generated data of customer behaviour, affordability metrics etc.; and • For corporate exposures: information obtained by periodic review of customer files including audited financial statements review, known events and conditions impacting the credit risk of the borrower, changes in the financial sector the customer operates etc. The Group uses credit risk grades as a primary input into the determination of whether there has been a significant increase in credit risk in addition to information on days past due. Following table provides how each credit grade is defined and its mapping to external credit rating: Credit risk grades S&P rating Description A B C D E F G H A’s B’s B’s Low risk. Minimum total assets of +K2,000 m and very strong repayment capacity. Low to fair risk Minimum total assets of +K1,000 m and strong repayment capacity. Moderate risk Minimum total assets of +K100 – K200 m and sound repayment capacity. Unrated Acceptable risk. Sound financial history demonstrating surplus repayment capacity. Unrated Watch list/special mention. Credit weaknesses are evident and repayment capacity is jeopardised. Unrated Substandard Unrated Doubtful Unrated Loss A review of the effectiveness of the risk grading process is undertaken annually at a minimum and considers evidence abnormal or material variations, loss rates and quality of the information utilised to assess the credit risk. The Group determines that credit risk is deemed to have increased significantly if: • Credit rating of the borrower has deteriorated since initial recognition; or • The facility is overdue to by a specific number of days depending upon the type of loan. The Group has monitoring procedures in place to ensure that the criteria used to identify significant increases in credit are effective, meaning that significant increase in credit risk is identified before the exposure is defaulted. The Group performs periodic back-testing of its ratings to consider whether the drivers of credit risk that led to default were accurately reflected in the rating in a timely manner. Incorporation of forward-looking information In determining the ECL, expected cash flows are appropriately probability weighted and include adjustments for forward looking information. Measurement of ECL The key inputs used for measuring ECL are (1) Probability of default (PD), (2) Loss given default (LGD) and (3) Exposure at default (EAD). PD is an estimate of the likelihood of default over a given time horizon. It is estimated as at a point in time. The calculation is based on rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These models are based on market data (where available), as well as internal data comprising both quantitative and qualitative factors. LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from any collateral. EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities. The Group determines PD and LGD through an internal risk rating model which classifies each exposure based on the risk rating and stage of default (as noted below) with each risk rating having an associated loss rate. The loss rates reflect weighted average PDs and LGDs. In addition, model adjustments are included in determination of ECL when it is judged that existing inputs, assumptions and model techniques do not capture all relevant risk factors. The Group defines stage of default as follows: Stage 1 Stage 2 These exposures are regarded as performing loans and lower loss rates are applied in determining the ECL representing ECL equivalent to 12 months expected losses. Exposures are classified as Stage 2 if credit rating has worsened since initial recognition or if facility is overdue by specified number of days. Stage 3 Stage 3 exposures are considered in default in accordance with the definition of default above. Groupings based on shared risks characteristics In determining the ECL, the financial instruments are grouped on the basis of shared risk characteristics, such as instrument type, credit risk grade, collateral type, the value of collateral relative to financial asset (loan-to-value (LTV) ratios) etc.: Class of financial instrument Financial statement line Cash and due from banks at amortised cost Cash and due from banks Treasury and central bank bills at amortised cost Central bank bills Regulatory deposits at amortised cost Regulatory deposits Loans and advances to customers at amortised cost Loans and advances to customers Investments in government inscribed stocks at amortised cost Investments in government inscribed stocks Bank guarantees Contingent liabilities Other financial assets Other assets Note Note 12 Note 13 Note 14 Note 16 Note 17 Note 33 Note 21 An analysis of the Group’s credit risk concentrations per class of financial asset is provided in the following tables. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. For documentary letters of credit and bank guarantee, the amounts in the table represent the amounts committed or guaranteed, respectively. 72 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 73 3. Financial risk management (continued) CONSOLIDATED 31 December 2020 31 December 2019 Cash and due from banks at amortised cost K’000 K’000 Treasury and central bank bills at amortised cost Concentration by sector Cash on hand With central bank (exchange settlement account) With other banks Total Concentration by region Papua New Guinea Offshore* Total 118,811 112,024 104,312 335,147 237,539 97,608 335,147 82,413 58,314 128,975 269,702 167,363 102,339 269,702 *Bank accounts maintained in Australia, New Zealand, Great Britain, Singapore, Malaysia, Philipines, Japan, India and Turkey. Cash and due from banks at amortised cost Concentration by sector Cash on hand With central bank (exchange settlement account) With other banks Total Concentration by region Papua New Guinea Offshore* Total Treasury and central bank bills at amortised cost Concentration by sector With central banks Total Concentration by region Papua New Guinea Total PARENT 31 December 2020 31 December 2019 K’000 K’000 118,811 112,024 130,779 361,614 273,279 88,335 361,614 3 - 43,834 43,837 226 43,611 43,837 CONSOLIDATED 31 December 2020 31 December 2019 K’000 K’000 647,874 647,874 647,874 647,874 722,090 722,090 722,090 722,090 Concentration by sector With central banks Total Concentration by region Papua New Guinea Total Regulatory deposits at amortised cost Concentration by sector With central banks Total Concentration by region Papua New Guinea Total Regulatory deposits at amortised cost Concentration by sector With central banks Total Concentration by region Papua New Guinea Total PARENT 31 December 2020 31 December 2019 K’000 K’000 647,874 647,874 647,874 647,874 - - - - CONSOLIDATED 31 December 2020 31 December 2019 K’000 K’000 185,711 185,711 185,711 185,711 249,713 249,713 249,713 249,713 PARENT 31 December 2020 31 December 2019 K’000 K’000 185,711 185,711 185,711 185,711 - - - - 74 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 75 3. Financial risk management (continued) Loans and advances to customers at amortised cost K’000 K’000 Loans and advances to customers at amortised cost K’000 K’000 CONSOLIDATED 31 December 2020 31 December 2019 PARENT 31 December 2020 31 December 2019 Concentration by sector Individuals: Mortgages Unsecured lending Corporate entities: Agriculture, Forestry & Fishing Mining Manufacturing Electrical, Gas & Water Building and Construction Wholesale & Retail Hotel & Restaurants Transport & Storage Financial Intermediation Real Estate/Renting/Business Services Equipment Hire Other Business Personal Banking Total Concentration by region Papua New Guinea Total 481,492 33,436 13,763 14,528 16,786 7,459 105,606 379,893 104,928 12,635 14,329 329,776 23,038 109,838 2,569 507,593 114,288 7,085 19,078 14,878 1,160 86,664 198,747 91,905 8,897 592 271,028 10,811 30,602 58,630 1,650,076 1,421,958 1,650,076 1,650,076 1,421,958 1,421,958 Concentration by sector Individuals: Mortgages Unsecured lending Corporate entities: Agriculture, Forestry & Fishing Mining Manufacturing Electrical, Gas & Water Building and Construction Wholesale & Retail Hotel & Restaurants Transport & Storage Financial Intermediation Real Estate/Renting/Business Services Equipment Hire Other Business Personal Banking Total Concentration by region Papua New Guinea Total 481,492 33,436 13,763 14,528 16,786 7,459 105,606 379,893 104,928 12,635 14,329 329,776 23,038 104,576 2,569 1,644,814 1,644,814 1,644,814 - - - - - - - - - - - - - - - - - - 76 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 77 3. Financial risk management (continued) Investments in government inscribed stocks at amortised cost K’000 K’000 Bank guarantees CONSOLIDATED 31 December 2020 31 December 2019 Concentration by sector Sovereign Total Concentration by region Papua New Guinea Total 116,193 116,193 116,193 116,193 34,492 34,492 34,492 34,492 PARENT 31 December 2020 31 December 2019 Investments in government inscribed stocks at amortised cost K’000 K’000 Concentration by sector Sovereign Total Concentration by region Papua New Guinea Total 116,193 116,193 116,193 116,193 - - - - Concentration by sector Corporate entities Agriculture, Forestry & Fishing Mining Wholesale & Retail Hotels and Restaurants Building and Construction Transport & Storage Electrical, Gas & Water Other Business Total Concentration by region Papua New Guinea Total Bank guarantees Concentration by sector Corporate entities: Agriculture, Forestry & Fishing Mining Wholesale & Retail Hotels and Restaurants Building and Construction Transport & Storage Electrical, Gas & Water Other Business Total Concentration by region Papua New Guinea Total CONSOLIDATED 31 December 2020 31 December 2019 K’000 K’000 26,285 22,003 13,300 - 20,106 4,510 1,470 1,030 88,704 88,704 88,704 25,306 400 9,402 400 2,059 7,987 1,170 23,651 70,375 70,375 70,375 PARENT 31 December 2020 31 December 2019 K’000 K’000 26,285 22,003 13,300 - 20,106 4,510 1,470 1,030 88,704 88,704 88,704 - - - - - - - - - - - - 78 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 79 3. Financial risk management (continued) The amount of bank guarantees disclosed above represent notional amount guaranteed being the maximum exposure to credit risk An analysis of the Group’s credit risk exposure per class of financial asset, internal rating and “stage” without taking into account the effects of any collateral or other credit enhancements is provided in the following tables. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. For loan commitments and financial guarantee contracts, the amounts in the table represent the amounts committed or guaranteed, respectively. Cash and due from banks at amortised cost 12-month ECL Lifetime ECL Lifetime ECL CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 335,147 335,147 - 335,147 K’000 K’000 - - - - - - - - PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 Cash and due from banks at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 361,614 361,614 - 361,614 K’000 K’000 - - - - - - - - CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 Cash and due from banks at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 269,702 269,702 - 269,702 K’000 K’000 - - - - - - - - Total K’000 335,147 335,147 - 335,147 Total K’000 361,614 361,614 - 361,614 Total K’000 269,702 269,702 - 269,702 Cash and due from banks at amortised cost 12-month ECL Lifetime ECL Lifetime ECL PARENT 31 December 2019 Stage 1 Stage 2 Stage 3 Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 43,837 43,837 - 43,837 K’000 K’000 - - - - - - - - CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 Treasury and central bank bills at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 647,874 647,874 - 647,874 K’000 K’000 - - - - - - - - PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 Treasury and central bank bills at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 647,874 647,874 - 647,874 K’000 K’000 - - - - - - - - CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 Treasury and central bank bills at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 722,090 722,090 - 722,090 K’000 K’000 - - - - - - - - Total K’000 43,837 43,837 - 43,837 Total K’000 647,874 647,874 - 647,874 Total K’000 647,874 647,874 - 647,874 Total K’000 722,090 722,090 - 722,090 80 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 81 3. Financial risk management (continued) PARENT 31 December 2019 CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Treasury and central bank bills at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 K’000 K’000 - - - - - - - - - - - - CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 Regulatory deposits at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 185,711 185,711 - 185,711 K’000 K’000 - - - - - - - - PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 Regulatory deposits at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 185,711 185,711 - 185,711 K’000 K’000 - - - - - - - - Total K’000 - - - - Total K’000 185,711 185,711 - 185,711 Total K’000 185,711 185,711 - 185,711 Regulatory deposits at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 249,713 249,713 - 249,713 K’000 K’000 - - - - - - - - PARENT 31 December 2019 Stage 1 Stage 2 Stage 3 Regulatory deposits at amortised cost 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 K’000 K’000 - - - - - - - - - - - - - - - - Total K’000 249,713 249,713 - 249,713 Total K’000 CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 1,417,091 - - - - 1,417,091 (12,058) 1,405,033 K’000 65,994 24,620 36,628 56,083 937 184,262 (19,777) 164,485 K’000 699 - 10 3,188 25,776 29,673 (3,510) 26,163 Loans and advances to customers at amortised cost Grade C-D: Moderate and acceptable risk Grade E: Watchlist/special mention Grades F: Substandard Grade G: Doubtful Grade H: Loss Total gross carrying amount Loss allowance Carrying amount POCI K’000 - - - - 19,050 19,050 - 19,050 Total K’000 1,483,784 24,620 36,638 59,271 45,763 1,650,076 (35,345) 1,614,731 82 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 83 3. Financial risk management (continued) PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 1,414,258 - - - - 1,414,258 (12,058) 1,402,200 K’000 65,617 24,620 36,628 56,083 937 183,885 (19,718) 164,167 K’000 699 - 10 3,188 23,724 27,621 (3,069) 24,552 Loans and advances to customers at amortised cost Grade C-D: Moderate and acceptable risk Grade E: Watchlist/special mention Grades F: Substandard Grade G: Doubtful Grade H: Loss Total gross carrying amount Loss allowance Carrying amount POCI K’000 - - - - 19,050 19,050 - Total K’000 1,480,574 24,620 36,638 59,271 43,711 1,644,814 (34,845) 19,050 1,609,969 There is no loss allowance on POCI assets as this is balance acquired from ANZ which has been fair valued accordingly. CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 1,293,933 23,580 5,854 1,371 - 1,324,738 (12,102) 1,312,636 K’000 47,121 7,220 17,098 2,379 - 73,818 (6,699) 67,119 K’000 57 - 857 569 6,411 7,894 (1,724) 6,170 Loans and advances to customers at amortised cost Grade C-D: Moderate and acceptable risk Grade E: Watchlist/special mention Grades F: Substandard Grade G: Doubtful Grade H: Loss Total gross carrying amount Loss allowance Carrying amount POCI K’000 - - - - 15,508 15,508 - Total K’000 1,341,111 30,800 23,809 4,319 21,919 1,421,958 (20,525) 15,508 1,401,433 PARENT 31 December 2019 Loans and advances to customers at amortised cost Grade C-D: Moderate and acceptable risk Grade E: Watchlist/special mention Grades F: Substandard Grade G: Doubtful Grade H: Loss Total gross carrying amount Loss allowance Carrying amount Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 K’000 K’000 POCI K’000 Total K’000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Investments in government inscribed stocks at amortised cost Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount Investments in government inscribed stocks at amortised cost Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total K’000 116,193 116,193 (1,674) 114,519 K’000 K’000 - - - - - - - - K’000 116,193 116,193 (1,674) 114,519 PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total K’000 116,193 116,193 (1,674) 114,519 K’000 K’000 - - - - - - - - K’000 116,193 116,193 (1,674) 114,519 84 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 85 CONSOLIDATED 31 December 2019 PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL Total Bank guarantees 12-month ECL Lifetime ECL Lifetime ECL 3. Financial risk management (continued) Investments in government inscribed stocks at amortised cost Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount Investments in government inscribed stocks at amortised cost Grades A-B: Low to fair risk Total gross carrying amount Loss allowance Net carrying amount K’000 34,492 34,492 (489) 34,003 K’000 K’000 - - - - - - - - PARENT 31 December 2019 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 K’000 K’000 - - - - - - - - - - - - CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 Bank guarantees 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Maximum exposure to credit risk Loss allowance Net carrying amount K’000 88,704 88,704 - 88,704 K’000 K’000 - - - - - - - - 86 Kina Securities Limited Annual Report 2020 K’000 34,492 34,492 (489) 34,003 Total K’000 - - - - Total K’000 88,704 88,704 - 88,704 Grades A-B: Low to fair risk Maximum exposure to credit risk Loss allowance Net carrying amount K’000 88,704 88,704 - 88,704 K’000 K’000 - - - - - - - - CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 Bank guarantees 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Maximum exposure to credit risk Loss allowance Net amount K’000 70,375 70,375 - 70,375 K’000 K’000 - - - - - - - - PARENT 31 December 2019 Stage 1 Stage 2 Stage 3 Bank guarantees 12-month ECL Lifetime ECL Lifetime ECL Grades A-B: Low to fair risk Maximum exposure to credit risk Loss allowance Net amount K’000 K’000 K’000 - - - - - - - - - - - - This table summarises the loss allowance as of the year end by class of exposure/asset. Total K’000 88,704 88,704 - 88,704 Total K’000 70,375 70,375 - 70,375 Total K’000 - - - - Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total CONSOLIDATED 31 December 2020 31 December 2019 K’000 35,345 1,674 4,038 41,057 K’000 20,525 489 4,038 25,052 Kina Securities Limited Annual Report 2020 87 3. Financial risk management (continued) Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total PARENT 31 December 2020 31 December 2019 K’000 34,845 1,674 4,038 40,557 K’000 - - 101 101 Other financial assets comprise of miscellaneous receivables from individuals on which lifetime ECL has been recognised. No ECL has been recognised on other classes of financial assets either due to negligible probability of default or the assets being fully collateralized by high quality liquid assets. Table below summarises the movement in ECL during the year by class of financial assets: Balance at 01 January 2020 Additional ECL recognised Write-offs Bad debt recoveries CONSOLIDATED Provision derecognized in respect of sales of loan book Balance at 31 December 2020 K’000 K’000 K’000 K’000 K’000 K’000 20,525 20,833 (7,096) 1,943 (859) 35,345 Balance at 01 January 2020 Amalgamation adjustment Additional ECL recognised PARENT Write-offs Bad debt Recoveries Provision derecognized in respect of sales of loan book Balance at 31 December 2020 K’000 K’000 K’000 K’000 K’000 K’000 K’000 - - 101 101 29,029 11,828 (7,096) 1,943 (859) 34,845 1,674 3,937 - - - - - - - - 1,674 4,038 34,640 11,828 (7,096) 1,943 (859) 40,557 Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total CONSOLIDATED Balance at 01 January 2019 Additional ECL recognised Write-offs Bad debt Recoveries Balance at 31 December 2019 Loss allowance by classes K’000 K’000 K’000 K’000 K’000 489 1,185 4,038 - - - - - - - 1,674 4,038 Loans and advances to customers at amortised cost 18,451 5,957 (5,959) 2,076 20,525 Investments in government inscribed stocks at amortised cost 800 (311) Other financial assets 4,038 - - - - - 489 4,038 25,052 22,018 (7,096) 1,943 (859) 41,057 Total 23,289 5,646 (5,959) 2,076 25,052 PARENT Balance at 01 January 2019 Additional ECL recognised Write-offs Bad debt Recoveries Balance at 31 December 2019 Loss allowance by classes K’000 K’000 K’000 K’000 K’000 Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total - - 101 101 - - - - - - - - - - - - - - 101 101 Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total 88 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 89 3. Financial risk management (continued) The table below analyses the movement of the loss allowance during the year per class of assets except for those where there have been no significant movement in the ECL since prior year or where no ECL is recognised: CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 12,102 84 (811) (6) - 4,716 K’000 6,698 (84) 812 (404) (4,406) 17,972 (4,027) (811) K’000 1,725 - (1) 410 (747) 2,245 (122) Loss allowance – Loans and advances to customers at amortised cost Loss allowance as at 01 January Changes in the loss allowance - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Loss allowance as at 31 December 12,058 19,777 3,510 Loss allowance – Loans and advances to customers at amortised cost Loss allowance as at 01 January Amalgamation adjustment Changes in the loss allowance - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 - 12,102 84 (811) (6) - 4,716 K’000 - 6,648 (84) 812 (404) (4,406) 17,963 (4,027) (811) K’000 - 1,483 - (1) 410 (747) 2,046 (122) 3,069 Loss allowance as at 31 December 12,058 19,718 POCI K’000 - - - - - - - - POCI K’000 - - - - - - - - - Total K’000 20,525 - - - (5,153) 24,933 (4,960) 35,345 Total K’000 - 20,233 - - - (5,153) 24,725 (4,960) 34,845 CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 11,010 86 (477) (5) - 6,363 K’000 6,053 (86) 477 (106) (2,599) 5,115 K’000 1,388 - - 111 (1,282) 6,582 (4,875) (2,156) (5,074) Loss allowance – Loans and advances to customers at amortised cost Loss allowance as at 01 January Changes in the loss allowance - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Loss allowance as at 31 December 12,102 6,698 1,725 POCI K’000 - - - - - - - - Total K’000 18,451 - - - (3,881) 18,060 (12,105) 20,525 PARENT 31 December 2019 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 K’000 K’000 POCI K’000 Total K’000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Loss allowance – Loans and advances to customers at amortised cost Loss allowance as at 01 January Changes in the loss allowance - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Loss allowance as at 31 December 90 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 91 3. Financial risk management (continued) In relation to investment in government inscribed stocks, there have been no significant movements in the ECL during the year except due to derecognition. More information about the significant changes in the gross carrying amount of financial assets during the period that contributed to changes in the loss allowance, is provided at the table below: CONSOLIDATED 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL POCI Total K’000 1,324,738 K’000 73,818 8,602 (114,785) (5,728) 536,918 (8,363) 115,628 (12,964) 36,610 K’000 7,894 (239) (843) 18,692 5,357 K’000 15,508 K’000 1,421,958 - - - - - - 6,718 585,603 (332,654) (16,061) (441) (3,176) (352,332) - 1,417,091 (4,406) 184,262 (747) 29,673 - (5,153) 19,050 1,650,076 Loans and advances to customers at amortised cost Gross carrying amount as at 01 January Changes in the gross carrying amount - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 New financial assets originated or purchased Financial assets that have been derecognised Write-offs Gross carrying amount as at 31 December PARENT 31 December 2020 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 - K’000 - K’000 - POCI K’000 Total K’000 Loans and advances to customers at amortised cost Gross carrying amount as at 01 January Amalgamation adjustment 1,319,158 72,883 7,438 15,508 1,414,987 Changes in the gross carrying amount - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 New financial assets originated or purchased Financial assets that have been derecognised Write-offs Gross carrying amount as at 31 December Loans and advances to customers at amortised cost Gross carrying amount as at 01 January Changes in the gross carrying amount - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 New financial assets originated or purchased Financial assets that have been derecognized Write-offs Gross carrying amount as at 31 December 8,602 (114,785) (5,573) 534,092 (8,363) 115,628 (12,767) 36,234 (239) (843) 18,340 4,777 - - - - - - 6,718 581,821 (327,236) (15,324) (1,105) (3,176) (346,841) - 1,414,258 (4,406) 183,885 (747) 27,621 - (5,153) 19,050 1,644,814 CONSOLIDATED 31 December 2019 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 836,048 6,654 (35,188) (1,014) 799,200 K’000 28,413 (6,654) 35,188 (944) 30,677 K’000 5,653 - - 1,958 6,220 (280,962) (10,263) (4,653) - 1,324,738 (2,599) 73,818 (1,284) 7,894 POCI K’000 - - - - Total K’000 870,114 - - - 15,508 851,605 - - (295,878) (3,883) 15,508 1,421,958 92 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 93 3. Financial risk management (continued) PARENT 31 December 2019 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL K’000 K’000 K’000 POCI K’000 Total K’000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Loans and advances to customers at amortised cost Gross carrying amount as at 01 January Changes in the gross carrying amount - Transfer to stage 1 - Transfer to stage 2 - Transfer to stage 3 New financial assets originated or purchased Financial assets that have been derecognized Write-offs Gross carrying amount as at 31 December Investments in government inscribed stock In relation to investment in government inscribed stocks which continue to be classified as Stage 1, there have been no significant movements in the carrying amount during the year except due to derecognition. The table below provides an analysis of the gross carrying amount of loans and advances to customers by past due status. Loans and advances to customers 0-29 days 30-59 days 60-89 days 90-180 days More than 181 days Total PARENT YEAR ENDED 2020 YEAR ENDED 2019 Gross carrying amount Loss allowance Gross carrying amount Loss allowance K’000 1,384,515 53,153 47,834 59,968 99,344 K’000 14,427 799 1,673 9,163 8,783 1,644,814 34,845 K’000 K’000 - - - - - - - - - - - - Collateral held as security and other credit enhancements The Group holds collateral or other credit enhancements to mitigate credit risk associated with financial assets. The main types of collateral and the types of assets these are associated with are listed in the table below. Exposure type Mortgage lending Personal lending Corporate lending Investment securities Lease receivables Type of collateral held Mortgage over residential property Mortgage over residential property / bill of sale Mortgage over commercial property Sovereign guarantee Charge over property and equipment Bank guarantee and documentary letters of credit Charge over cash deposit In addition to the collateral included in the table above, the Group holds other types of collateral and credit enhancements, such as second charges, floating charges and guarantees for which specific values are not generally available. CONSOLIDATED YEAR ENDED 2020 YEAR ENDED 2019 Mortgage lending Loans and advances to customers 0-29 days 30-59 days 60-89 days 90-180 days More than 181 days Total Gross carrying amount Loss allowance Gross carrying amount Loss allowance K’000 1,387,203 53,222 47,868 60,345 101,438 K’000 14,427 799 1,673 9,222 9,224 K’000 1,307,764 22,082 8,763 47,012 36,337 1,650,076 35,345 1,421,958 K’000 14,378 330 28 4,582 1,207 20,525 The Group holds mainly residential properties as collateral for the mortgage loans it grants to customers. In some cases it does hold cash as collateral. It monitors its exposure to retail mortgage lending using a Loan To Discounted Value (LTDV) ratio. At origination, the Group lends based on a discounted collateral value which is calculated at 80% of the market value at that time. This becomes the Value definition for the LTDV. The Group then lends up to 100% of this Value. The following table reflects the exposure by ranges based on this methodology. The Group believes that this methodology provides further risk reduction in case of changes in market value. For credit-impaired loans the value of collateral is based on the most recent valuations. 94 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 95 3. Financial risk management (continued) Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Fully cash covered Total Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Fully cash covered Total Credit impaired – Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Total CONSOLIDATED YEAR ENDED 2020 YEAR ENDED 2019 Gross carrying amount Gross carrying amount K’000 60,938 68,368 43,021 174,952 133,892 253 481,424 K’000 51,636 40,964 14,186 114,106 99,350 416 320,658 PARENT YEAR ENDED 2020 YEAR ENDED 2019 Gross carrying amount Gross carrying amount K’000 60,938 68,368 43,021 174,952 133,892 253 481,424 K’000 - - - - - - - CONSOLIDATED YEAR ENDED 2020 YEAR ENDED 2019 Gross carrying amount Gross carrying amount K’000 2,427 7,310 2,362 3,307 7,150 22,556 K’000 1,515 1,129 - 1,410 5,667 9,721 Credit impaired – Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Total Personal Lending PARENT YEAR ENDED 2020 YEAR ENDED 2019 Gross carrying Gross carrying Amount K’000 2,427 7,310 2,362 3,307 7,150 22,556 Amount K’000 - - - - - - The Group’s personal lending portfolio consists of secured and unsecured loans as follows: Secured Unsecured Total CONSOLIDATED YEAR ENDED 2020 YEAR ENDED 2019 Gross carrying Gross carrying K’000 481,492 33,436 514,928 K’000 507,593 114,288 621,881 For secured loans, the Group requires formal valuation of collateral to be performed prior to approval of the loan facility. The valuation is conducted by the external firm of valuers independent of the Group who are required to meet certain minimum standards as per the Group’s policy. Collateral value determined by the valuer is further discounted by 20-30% before determining the facility limit. The discounted value of the collateral must exceed the facility limit by at least 12.5% to allow for sufficient buffer should there be any adverse movement in value due change in macroeconomic indicators. The collateral value is updated when the facility is classified as stage 3 or at least every 2 years. The Group monitors the collateral value on an ongoing basis and in event of any indicator which may result in significant decline will require the fresh valuation to be performed. As at 31 December 2020, the portfolio of secured personal lending is entirely secured by eligible collateral. For unsecured loans, the Group takes a higher level of return to reflect the credit risk. However, credit risk standards are maintained to ensure a reasonable standard of debt servicing is proven. Corporate lending The most relevant indicator of corporate customers’ creditworthiness is an analysis of their financial performance and their liquidity, leverage, management effectiveness and growth ratios. In addition, the Group also requires collaterals and guarantees to secure the corporate loans. Similar to personal lending, collaterals are required to be valued by independent firm of valuers before the facility is approved. Approved facility limit is equal to or less than the assessed value of the collateral discounted by 10-50% to allow for sufficient buffer should there be any adverse movement in the value due to change in macroeconomic indicators. Collateral values are updated at least every 2 years if there are any changes to the loan facilities or if the facility is classified as stage 3 loan. The Group monitors the collateral value on an ongoing basis and in event of any indicator which may result in significant decline will require the fresh valuation to be performed. As at 31 December 2020, the portfolio of the corporate lending is fully collateralized by eligible collateral. 96 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 97 3. Financial risk management (continued) Investment securities The Group holds investment in government inscribed stocks measured at amortised cost with a carrying amount of K114,519,320 (2019: K34,003,163) which are collateralized by sovereign guarantee. Bank guarantee and documentary letters of credit Bank guarantees and documentary letters of credit are fully collateralized by charge over the cash deposits. Credit risk disclosures in the financial statements of the parent The credit risk disclosures included above relate only to the consolidated financial statements of the Group. Corresponding disclosures for the parent company have not been presented in these financial statements as the parent company does not have any material financial instruments other than intercompany lending amounting to K1m (31 December 2019: K351m). Details of the intercompany lending are disclosed in note 29 to the financial statements. c) Liquidity risk Liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group’s liquidity and funding risks are governed by a policy framework which is approved by the Board of Directors. Liquidity and funding positions and associated risks are overseen by the ALCO. The following outlines the Group’s approach to liquidity and funding risk management focusing on conditions brought on by the current global economic environment: • Ensuring the liquidity management framework is compatible with local regulatory requirements. • Daily liquidity reporting and scenario analysis to quantify the Group’s positions. • Targeting commercial and corporate customers’ liability compositions. • Intense monitoring of detail daily reports to alert management and directors of abnormalities. • Arranging back up facilities to protect against adverse funding conditions and to support day-to-day operations. The Group is monitoring its liquidity contingency plans, lending requirements and guidelines which include: • The monitoring of issue severity/stress levels with high level diligence. • Early warning signals indicative of an approaching issue and a mechanism to monitor and report these against signals. • Action plans and courses of action to account for early warning signals as noted above. • Management reporting at a higher level. • Maintenance of contractual obligations in regards to deposits. • Assigned responsibilities for internal and external written communications. Maturities of financial assets and liabilities The table below presents a maturity analysis of Group’s financial liabilities including issues financial guarantee contracts and corresponding analysis of financial assets held to manage the inherent liquidity risk using undiscounted contractual cash flows associated with those assets and liabilities. CONSOLIDATED Up to 1 month 1 to 3 months 4 to 12 months 1 to 5 years Over 5 years Total contract value Total carrying value K’000 K’000 K’000 K’000 K’000 K’000 K’000 31 December 2020 Cash and due from banks Central bank bills Regulatory deposits Total financial assets 335,147 65,000 185,711 - - 35,000 575,000 - - 585,858 35,000 575,000 Due to other banks 5,385 - - - - - - - Due to customers 2,026,766 286,671 282,025 20,189 Other liabilities 57,228 - - - Total financial liabilities 2,089,379 286,671 282,025 20,189 Issued financial guarantee contracts 250 32,339 49,861 6,254 Issued loan commitments 177,528 Total 177,778 27,396 59,735 - - 49,861 6,254 31 December 2019 Cash and due from banks 269,702 - - Central bank bills Regulatory deposits Total financial assets - 5,000 750,000 249,713 519,415 - - 5,000 750,000 Due to other banks 22 - - - - - - - Due to customers 2,072,939 173,791 170,667 72,891 Other liabilities 126,735 - - - Total financial liabilities 2,199,696 173,791 170,667 72,891 Issued financial guarantee contracts Issued loan commitments Total 1,502 2,498 35,710 30,665 31,417 32,919 100,384 102,882 - - 35,710 30,625 - - - - - - - - - - - - - - - - - - - - - - 335,147 675,000 185,711 335,147 647,874 185,711 1,195,858 1,168,732 5,385 5,385 2,615,651 2,560,715 57,228 57,228 2,678,264 2,623,328 88,704 204,924 293,628 269,702 755,000 249,713 N/A N/A N/A 269,702 722,090 249,713 1,274,415 1,241,505 22 22 2,490,288 2,460,967 126,735 126,735 2,617,045 2,587,724 70,375 131,801 202,176 N/A N/A N/A 98 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 99 3. Financial risk management (continued) PARENT Up to 1 month 1 to 3 months 4 to 12 months 1 to 5 years Over 5 years Total contract value Total carrying value K’000 K’000 K’000 K’000 K’000 - - - - - - 31 December 2020 Cash and due from banks Central bank bills Regulatory deposits Due from subsidiaries Total financial assets K’000 361,614 65,000 185,711 1,387 - - 35,000 575,000 - - - - 613,712 35,000 575,000 Due to other banks 5,385 - - Due to customers 2,065,525 286,671 282,025 20,189 Other liabilities Due to subsidiaries 56,197 8,988 - - - - - - Total financial liabilities 2,136,095 286,671 282,025 20,189 31 December 2019 Cash and due from banks 43,837 Central bank bills Regulatory deposits Due from subsidiaries Total financial assets Due to other banks Due to customers Other liabilities Due to subsidiaries Total financial liabilities - - 351,096 394,933 - - 9,038 167,212 176,250 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 361,614 675,000 185,711 1,387 K’000 361,614 647,874 185,711 1,387 1,223,712 1,196,586 5,385 5,385 2,654,410 2,599,474 56,197 8,988 56,197 8,988 2,724,980 2,670,044 43,837 43,837 - - - - 351,096 394,933 351,096 394,933 - - 9,038 167,212 176,250 - - 9,038 167,212 176,250 - - - - - - - - - - - - - - - - - - - - 4. Capital Adequacy Kina Securities Limited (“KSL”) as the parent Company is required to comply with prudential standard PS1/2003 `Capital Adequacy` issued by the Bank of Papua New Guinea (“BPNG”). BPNG is the Government authority responsible for the prudential supervision of Banks and financial institution in Papua New Guinea. The prudential guidelines issued by BPNG follow the prudential guidelines set by the Bank of International Settlements under the terms of the Basel Accord (Basel 1). KSL calculates and reports its capital adequacy in respect of the bank. Prudential Standard PS1/2003 `Capital Adequacy’ is intended to ensure KSL maintains a level of capital which: 1. Is adequate to protect the interest of depositors and creditors, 2. Is commensurate with risk profile and activities of KSL, and 3. Provide public confidence in KSL as a financial institution and the overall banking system. PS1/2003 `Capital Adequacy` prescribes ranges of capital ratios to measure whether KSL is under, adequately, or well capitalised and also prescribes a leverage ratio. The minimum capital adequacy ratios prescribed under PS1/2003 `Capital Adequacy` are: 1. Tier 1 risk based ratio of 8%, 2. Total risk-based capital of 12%, 3. Leverage capital of 6%. As at 31 December 2020, KSL’s capital ratios were in compliance with the BPNG Minimum capital adequacy requirements as follows: The liquidity gap in ‘up to 1 month bucket’ is due to assumption that current and saving deposits amounting to K1,330m (31 December 2019:1,919m) included within ‘due to customers’ mature within one month since these are on demand and do not have any fixed or determinable maturity. 100 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 101 4. Capital Adequacy (continued) 5. Net interest income (expense) Risk weighted assets Capital : tier 1 Capital : tier 2 Capital : tier 1 and tier 2 Capital adequacy ratios Tier 1 capital Total capital ratio Leverage capital ratio 2020 K ‘000 2019 K ‘000 1,670,142 1,598,159 370,986 58,344 429,330 22.2% 25.4% 11.2% 252,596 70,932 323,528 15.8% 20.1% 8.5% The measure of capital used for the purpose of prudential supervision is referred to as base capital. Total base capital varies from the capital shown the on statements of financial position and is made up of tier 1 (core) and tier 2 (supplementary) capital, after deducting the value of investments in other banks and financial institutions. Tier 1 capital is obtained by deducting intangible assets including deferred tax assets from equity capital and audited retained earnings (or accumulated losses). Tier 2 capital cannot exceed the amount of tier 1 capital, and can include subordinated loan capital, specified assets revaluation reserves, un-audited profits (or losses) and a small percentage of general loan provisions. The Leverage Capital is calculated as Tier 1 Capital (less inter-group loans) divided by Total Assets. Risk-weighted assets are derived from on-statements of financial positions assets. On-statements of financial position assets are weighted for credit risk by applying weightings (0, 20, 50 and 100 percent) according to risk classification criteria set by the BPNG, for example cash and money market instruments have a zero risk weighting which means that no capital is required to support the holding of these assets. Interest income Cash and short-term funds Investment in government inscribed stocks Loans and advances to customers Interest expense Banks and customers Lease Liability Due to subsidiaries (note 29) Net interest income/(expense) 6. Net fee and commission income Fees and commission income Investment and portfolio management Fund administration Shares brokerage Loans fees and bank commissions Other fees (net of expense) Fee and commission expenses Net fee and commission income CONSOLIDATED PARENT 2020 K ‘000 44,937 8,990 2019 K ‘000 33,570 2,560 145,760 110,352 199,687 146,482 2020 K ‘000 17,259 5,471 66,446 89,176 (29,964) (29,318) (13,685) - - (29,964) 169,723 (2,583) - (31,901) 114,581 - (34) (13,719) 75,457 2019 K ‘000 31 - - 31 - (803) (2,689) (3,492) (3,461) CONSOLIDATED PARENT 2020 K ‘000 2019 K ‘000 2020 K ‘000 9,279 19,669 1,197 24,469 21,738 76,352 (134) 76,218 2019 K ‘000 10,121 18,261 879 13,591 5,026 47,878 - - 690 9,360 10,910 20,960 (93) (122) 47,785 20,838 - - 879 - - 879 (82) 797 102 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 103 7. Dividend Income 9. Other operating expenses Dividend income from investments Financial assets at fair value through profit or loss Investment in subsidiaries 8. Other Income Profits from disposal of property and equipment Realised gains/losses Support fees from subsidiaries (note 29) Office space recharge (note 29) Management fees (note 29) Gain on sale of Esiloan portfolio Intercompany charges Other 104 Kina Securities Limited Annual Report 2020 CONSOLIDATED PARENT 2020 K ‘000 2019 K ‘000 2020 K ‘000 136 - 136 357 - 357 - - - CONSOLIDATED PARENT 2020 K ‘000 221 4,004 - - - 3,025 - 3,718 10,968 2019 K ‘000 53 178 - - - - - 503 734 2020 K ‘000 221 952 1,751 1,699 350 3,025 16,536 563 2019 K ‘000 4 40,000 40,004 2019 K ‘000 56 178 38,860 2,895 7,772 - - 158 Staff costs Acquisition costs relating to business combination Administrative expenses Depreciation and amortization Operating lease Software maintenance and support charges Auditor’s remuneration (note 36) Other Break-up of staff costs: Salaries, wages and other benefits Superannuation costs Cost of employee share based incentive plan 25,097 49,919 Total staff costs CONSOLIDATED PARENT 2019 K ‘000 58,443 191 25,446 17,033 2,444 1,687 1,017 10,966 117,227 2020 K ‘000 35,067 - 19,006 18,653 511 1,741 1,144 7,187 83,309 CONSOLIDATED PARENT 2019 K ‘000 52,795 2,765 2,883 2020 K ‘000 29,990 1,879 3,198 2019 K ‘000 27,729 16 6,323 5,825 49 285 377 5,071 45,675 2019 K ‘000 23,517 1,329 2,883 58,443 35,067 27,729 2020 K ‘000 75,186 - 48,900 35,065 3,353 3,562 1,248 15,556 182,870 2020 K ‘000 68,233 3,944 3,009 75,186 As at 31 December 2020 the Group had 691 (2019: 740) employees and 2 (2019: 5) consultants. The Company had 626 (2019:228) employees (post amalgamation) and 2 (2019: 2) consultants. 10. Income Taxes The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: Profit before tax Prima facie tax at 30% (2019: 30%) Tax effect of: Permanent differences Prior year adjustment Income tax expense Represented by: Current tax Deferred taxes Income tax expense CONSOLIDATED PARENT 2020 K ‘000 109,906 32,972 (2,834) 3,794 33,932 2019 K ‘000 82,693 24,808 2020 K ‘000 54,693 16,408 2019 K ‘000 41,488 12,446 63 (1,929) (12,044) (3,049) 21,822 2,747 17,226 (1,347) (945) 39,923 (5,991) 33,932 25,120 (3,298) 21,822 23,243 (6,017) 17,226 1,298 (2,243) (945) Kina Securities Limited Annual Report 2020 105 11. Deferred Taxes a) Net deferred tax assets where there is a right to offset: Allowance for losses Employee benefit provision Lease liability CONSOLIDATED PARENT 2020 K ‘000 16,158 3,526 14,202 33,886 2019 K ‘000 12,127 2,720 16,488 31,335 2020 K ‘000 15,978 3,179 14,202 33,359 2019 K ‘000 30 1,327 2,819 4,176 Depreciation and amortisation (17,388) (20,302) (17,388) (1,192) Others Net deferred tax asset/(liabilities) (16) (542) (15) (17,404) (20,844) (17,403) 16,482 10,491 15,956 242 (950) 3,226 b) The movement on deferred tax account is as follows: Balance at beginning of year Statement of comprehensive income credit/(charge) Balance at end of year Represented by: Deferred tax assets (note 11(a)) Deferred tax liabilities (note 11(a)) 12. Cash and due from banks Cash on hand Exchange settlement accounts Due from other banks CONSOLIDATED PARENT 2020 K ‘000 10,491 5,991 16,482 2019 K ‘000 7,193 3,298 10,491 2020 K ‘000 3,226 12,730 15,956 33,886 31,335 33,359 (17,404) (20,844) (17,403) 16,482 10,491 15,596 CONSOLIDATED PARENT 2020 K ‘000 118,811 112,024 104,312 335,147 2019 K ‘000 82,413 58,314 2020 K ‘000 118,811 112,024 128,975 130,779 269,702 361,614 2019 K ‘000 787 2,439 3,226 4,176 (950) 3,226 2019 K ‘000 3 - 43,834 43,837 13. Central bank bills Central bank and treasury bills Less than 90 days Over 90 days Unearned discount CONSOLIDATED PARENT 2020 K ‘000 2019 K ‘000 2020 K ‘000 2019 K ‘000 65,000 - 65,000 610,000 755,000 610,000 (27,126) (32,910) 647,874 722,090 (27,126) 647,874 - - - - Central bank bills are debt securities issued by the Bank of Papua New Guinea (BPNG). Central bank bills amounting to K65m (2019: Knil) with a maturity term of one to three months from the date of purchase are classified as cash and cash equivalents (note 28). Central bank bills are measured at amortized cost. 14. Regulatory deposits Regulatory deposit of the Group as at 31 December 2020 amounted to K185,711,050 (2019: K249,712,700). This represents mandatory balance required to be maintained in a non-interest bearing account with the Central Bank - Bank of Papua New Guinea. Regulatory deposits are measured at amortized cost. Regulatory deposit of the parent as at 31 December 2020 amounted to K 185,711,050 (2019: K nil). 15. Financial assets at fair value through profit or loss Equity securities Listed Unlisted Convertible notes CONSOLIDATED PARENT 2020 K ‘000 4,680 6,002 - 10,682 2019 K ‘000 4,834 2,636 165 7,635 2020 K ‘000 2019 K ‘000 177 5,974 - 6,151 174 - 165 339 The movement in financial assets at fair value through profit or loss is reconciled as follows: Balance at beginning of year Gains/(losses) from changes in fair value Additions Balance at end of year CONSOLIDATED PARENT 2020 K ‘000 7,635 2,510 537 10,682 2019 K ‘000 4,907 153 2,575 7,635 2020 K ‘000 339 2,666 3,146 6,151 2019 K ‘000 347 (8) - 339 The fair value of the listed equities is based on quoted market prices at the end of the reporting period. The quoted market price used is the current market prices. These financial instruments are categorized as level 1 within the fair value hierarchy. Unlisted equities are categorized within level 3 of the fair value hierarchy. 106 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 107 16. Loans and advances to customers 17. Investments in government inscribed stocks Loans to individuals Loans to corporate entities Gross loans and advances to customers Expected credit losses Details of gross loans and advances to customers are as follows: Overdrafts Property mortgage Asset financing Insurance premium funding Business and other loans Movements in expected credit losses are as follows: Balance at beginning of year Provision derecognised in respect of sales of loan book* Impairment losses during the year Loans written off Bad debt recoveries Amalgamation adjustment Balance at end of year CONSOLIDATED PARENT 2020 K ‘000 2019 K ‘000 2020 K ‘000 2019 K ‘000 514,928 621,881 514,928 1,135,148 800,077 1,129,886 1,650,076 1,421,958 1,644,814 (35,345) (20,525) (34,845) 1,614,731 1,401,433 1,609,969 CONSOLIDATED PARENT 2020 K ‘000 83,611 2019 K ‘000 68,273 2020 K ‘000 83,611 481,424 320,658 481,424 17,653 1,949 20,056 2,289 17,653 1,949 1,065,439 1,010,682 1,060,177 1,650,076 1,421,958 1,644,814 CONSOLIDATED PARENT 2020 K ‘000 20,525 (859) 20,833 (7,096) 1,943 - 2019 K ‘000 18,451 5,957 (5,959) 2,076 - 35,345 20,525 2020 K ‘000 - (859) 11,828 (7,096) 1,943 29,029 34,845 - - - - - 2019 K ‘000 - - - - - - 2019 K ‘000 - - - - - - In June 2020, Kina divested Esiloan portfolio to Nationwide Microbank Limited (MiBank) for an amount of PGK 34.2m. The transaction was in line with the strategic partnership announced between Kina and Mibank in August 2019 to provide greater financial inclusion and provision of micro-finance to customers. The gain on sale of Esiloan portfolio amounted to K3.0m recognised under other income. Government inscribed stocks principal balance Unamortised premium Unamortised discount Accrued interest CONSOLIDATED PARENT 2020 K ‘000 118,000 301 (4,777) 2,669 2019 K ‘000 33,000 437 (8) 1,063 2020 K ‘000 118,000 301 (4,777) 2,669 Gross investments in government inscribed stocks 116,193 34,492 116,193 Expected credit losses (1,674) (489) (1,674) 114,519 34,003 114,519 The movement in investments in government inscribed stocks is as follows: Balance at beginning of year Additions / (maturities) Amortized discount/(premium) Accrued interest Write back / (addition) of expected credit losses Amalgamation adjustment CONSOLIDATED PARENT 2020 K ‘000 34,003 85,000 (4,906) 1,607 (1,185) - 2019 K ‘000 34,195 2020 K ‘000 - - 85,000 (70) (433) 311 - (4,906) 1,607 (1,185) 34,003 114,519 34,003 114,519 2019 K ‘000 - - - - - - - 2019 K ‘000 - - - - - - - Investments in government inscribed stocks are measured at amortized cost. Included within the balance is an amount of K nil (31 December 2019: K nil) which has been pledged with a third party against repurchase agreement transaction. 18. Investments in subsidiaries Kina Funds Management Limited (KFM) Kina Investment and Superannuation Services Limited (KISS) Kina Wealth Management Limited (KWML) Kina Nominees Limited (KNL)** Total Investment at cost Provision for impairment Balance as at 31 December SHAREHOLDINGS* 2020 2019 2020 2019 % 100 100 100 100 % Amount (K) Amount (K) 100 100 100 100 2 2 2 2 2 2 500,002 500,002 500,010 500,010 (251,677) (251,677) 248,333 248,333 *All the subsidiaries are incorporated in Papua New Guinea. The results of the operations of above subsidiaries have been consolidated in the Group’s financial statements. ** Impairment loss on investment in subsidiary amounted to nil for the year ended 31 December 2020 (2019: nil). 108 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 109 19. Property, plant and equipment CONSOLIDATED Furniture & Fittings Building improvements Motor Vehicles Office Equipment Land & Building Work in Progress Right-of- use assets Total K’000 1,238 - 3,620 - (48) 4,810 - - - K’000 7,334 K’000 4,174 K’000 16,699 K’000 2,129 K’000 2,320 K’000 K’000 - 33,894 - - - 10,524 1,949 21,420 2,246 (2,419) 17,685 - (338) 5,785 74 (214) 37,979 2,129 - - - - - - (2,320) - - 24,381 24,381 38,418 75,931 - - - (3,019) 62,799 131,187 893 1,168 5,055 - - - (1,326) - - - - - 1,074 1,976 10,166 - - - - (1,272) (2,598) 4,810 18,578 5,627 43,034 2,129 1,074 63,503 138,755 (1,013) (4,148) (3,170) (13,455) - - - - (437) 48 (1,402) (832) 1,582 (882) 338 (2,641) 199 (3,398) (3,714) (15,897) Charge during the year (1,087) (2,314) (1,083) (4,821) - (2,489) - 1,283 - (5,712) (3,514) (20,718) - - - - - - - - - - - - - - - - - (21,786) (3,149) (3,149) (6,705) (11,497) - 2,167 (9,854) (34,265) (11,228) (20,533) 1,034 2,317 (20,048) (52,481) 2,321 12,866 2,114 22,316 2,129 1,074 44,454 86,274 3,408 14,287 2,071 22,082 2,129 - 52,945 96,922 Cost Balance 31 December 2018 IFRS 16 transition impact on the opening balance Additions Transfer in (out) Disposals Balance 31 December 2019 Additions Transfer in (out) Disposals Balance 31 December 2020 Accumulated depreciation Balance 31 December 2018 IFRS 16 transition impact on the opening balance Charge during the year Disposals Balance 31 December 2019 Disposals Balance 31 December 2020 Book value Balance 31 December 2020 Balance 31 December 2019 PARENT Cost Balance 31 December 2018 IFRS 16 transition impact on the opening balance Additions Transfer in (out) Disposals Balance 31 December 2019 Amalgamation adjustment Additions Disposals Balance 31 December 2020 Accumulated depreciation Balance 31 December 2018 IFRS 16 transition impact on the opening balance Charge during the year Disposals Balance 31 December 2019 Amalgamation adjustment Furniture & Fittings Building improvements Motor Vehicles Office Equipment Land & Building Work in Progress Right-of- use assets Total K’000 K’000 878 2100 K’000 10,683 K’000 2,129 K’000 K’000 K’000 110 - 16,481 K’000 582 - 2 - - 688 - - 547 1,494 2,246 - 3,671 - (239) 3,654 - 616 - - - - - - 11,909 2,129 - - (2,246) - - - 11,057 11,057 3,051 5,710 - - - (239) 14,108 36,159 48,691 95,028 1,074 1,976 10,166 - (1,272) (2,598) 4,122 14,014 2,131 26,070 - - 893 1,168 5,055 - (1,326) - - - - 4,810 18,578 5,627 43,034 2,129 1,074 63,503 138,755 (530) - (36) - (566) (718) (2,033) (9,421) - - - (35) - (516) 239 (1,069) - (753) (2,310) (10,490) (1,480) (3,815) (1,642) (7,914) - - - - - - - - - - - - - - - - - - - (12,702) (2,467) (2,467) (2,929) (4,585) - 239 (5,396) (19,515) (9,240) (24,091) (6,447) (11,192) 1,034 2,317 (20,049) (52,481) Charge during the year (443) Disposals Balance 31 December 2020 - (2,489) (1,144) - (844) 1,283 (2,314) - (5,712) (3,513) (20,718) Book value Balance 31 December 2020 Balance 31 December 2019 2,321 12,866 2,114 22,316 2,129 1,074 43,454 86,274 123 2,918 1,344 1,419 2,128 - 8,712 16,644 110 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 111 20. Intangible assets CONSOLIDATED Cost Balance 31 December 2018 Additions Transfer in (out) Balance 31 December 2019 Additions Transfer in (out) Balance 31 December 2020 Accumulated depreciation Balance 31 December 2018 Charge for the year Balance 31 December 2019 Charge during the year Balance 31 December 2020 Book value Balance 31 December 2020 Balance 31 December 2019 Work in Progress Total Software K ‘000 13,345 7,700 16,476 37,521 5,058 206 Customer deposit relationship / intangible K ‘000 3,780 18,688 K ‘000 16,014 322 - (14,834) 22,468 - - 1,502 9,676 (206) K ‘000 33,139 26,710 1,642 61,491 14,734 - 42,785 22,468 10,972 76,225 (4,250) (3,110) (7,360) (7,711) (2,457) (2,427) (4,884) (6,821) (15,071) (11,705) - - - - - (6,707) (5,537) (12,244) (14,532) (26,776) 27,714 30,161 10,763 17,584 10,972 1,502 49,449 49,247 PARENT Cost Balance 31 December 2018 Additions Disposals Balance 31 December 2019 Amalgamation adjustment Additions Transfer in (out) Balance 31 December 2020 Accumulated depreciation Balance 31 December 2018 Charge during the year Disposals Balance 31 December 2019 Amalgamation adjustment Charge during the year Disposals Balance 31 December 2020 Book value Balance 31 December 2020 Balance 31 December 2019 Software Customer deposit relationship / intangible Work in Progress Total K ‘000 K ‘000 K ‘000 K ‘000 6,058 1,979 316 8,353 29,168 5,058 206 - - - - 22,468 - - 1,372 360 (676) 1,056 446 9,377 (206) 7,430 2,339 (360) 9,409 52,082 14,435 - 42,785 22,468 10,673 75,926 (1,636) (1,241) - (2,877) (7,959) (4,235) - - - - - (8,479) (3,226) - (15,071) (11,705) - - - - - - - 27,714 5,476 10,763 10,673 - 1,056 (1,636) (1,241) - (2,877) (16,438) (7,461) - (26,776) 49,150 6,532 The Group recognised customer deposit relationship upon acquisition of Maybank (PNG) Limited on 30 September 2015. Also, the acquisition of Australian and New Zealand (ANZ) Bank’s retail, commercial and SME banking businesses in PNG on 23 September 2019 gave rise to the recognition of core customer deposit intangible. The intangible assets were estimated to have a useful life of five years and three years respectively based on the license term of software and expected length of customer deposit relationship and core deposit intangible. Customer deposit relationship and core deposit intangible has a remaining useful life of one year respectively. 112 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 113 21. Other assets 24. Employee provisions CONSOLIDATED PARENT CONSOLIDATED Prepayments Security deposits and bonds Other debtors Less: expected credit losses Movement of expected credit loss on other assets is as follows: Balances at beginning of year Amalgamation adjustment Balance at end of year 22. Due to Customers Corporate customers Retail customers 23. Current income tax (assets) liabilities Balance at beginning of year Paid during the year Current provision Amalgamation adjustment Prior year under provision Balance at end of year Net current income tax (assets) liabilities is represented by: Current income tax asset Current income tax liability 2020 K ‘000 1,550 5,435 142,866 149,851 (4,038) 2019 K ‘000 6,241 5,292 55,208 66,741 (4,038) 2020 K ‘000 1,512 5,387 142,343 149,242 (4,038) 145,813 62,703 145,204 4,038 - 4,038 4,038 - 4,038 101 3,937 4,038 2019 K ‘000 572 498 247 1,317 (101) 1,216 101 - 101 CONSOLIDATED PARENT 2020 K ‘000 2019 K ‘000 2020 2019 K ‘000 K ‘000 1,925,006 1,624,450 1,963,765 635,709 836,517 635,709 2,560,715 2,460,967 2,599,474 - - - CONSOLIDATED PARENT 2020 K ‘000 3,696 2019 K ‘000 8,154 2020 K ‘000 (317) (36,195) (30,628) (32,394) 39,923 25,120 - (2,541) 4,883 (83) 4,966 4,883 - 1,050 3,696 (810) 4,506 3,696 23,243 13,448 (219) 3,761 - 3,761 3,761 2019 K ‘000 1,011 (1,179) 1,298 - (1,447) (317) (317) - (317) Provision for Annual Leave Provision for Long Service Leave Provision for Salaries Provision for Bonus Total PARENT Provision for Annual Leave Provision for Long Service Leave Provision for Salaries Provision for Bonus Total 2020 Represented by: Short term provisions Long term provisions Total employee provision CONSOLIDATED Provision for Annual Leave Provision for Long Service Leave Provision for Salaries Provision for Bonus Total Opening balance K ‘000 3,156 2,065 67 3,780 9,068 2020 Additions Payments K ‘000 3,706 619 K ‘000 (2,164) (590) 49,508 (49,537) 5,116 (4,188) 58,949 (56,479) 2020 Closing balance K ‘000 4,698 2,094 38 4,708 11,538 Opening balance Additions Payments Closing balance K ‘000 K ‘000 K ‘000 1,607 635 71 2,107 4,420 2,109 1,285 59 2,798 6,251 K ‘000 3,387 503 (628) 580 45,599 (45,633) 4,955 (2,590) 54,444 (48,271) Consolidated K ‘000 9,445 2,093 11,538 2019 2,343 904 K ‘000 (1,296) (124) 39,028 (39,020) 2,308 (1,326) 44,583 (41,766) 4,366 1,718 37 4,472 10,593 Parent K ‘000 3,785 6,808 10,593 Closing balance K ‘000 3,156 2,065 67 3,780 9,068 Opening balance Additions Payments K ‘000 K ‘000 114 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 115 24. Employee provisions (continued) PARENT Provision for Annual Leave Provision for Long Service Leave Provision for Salaries Provision for Bonus Total 2019 Represented by: Short term provisions Long term provisions Total employee provision 2019 Opening balance Additions Payments K ‘000 1,068 412 62 1,100 2,642 K ‘000 1,380 303 17,361 1,311 K ‘000 (841) (80) (17,352) (304) 20,355 (18,577) Consolidated K ‘000 7,003 2,065 9,068 Closing balance K ‘000 1,607 635 71 2,107 4,420 Parent K ‘000 3,785 635 4,420 PARENT Maturity analysis – contractual undiscounted cash flows Less than one year One to five years More than five years Total undiscounted lease liabilities at 31 December Lease liabilities included in statement of financial position at 31 December Current Non-current Amounts recognised in statement of comprehensive income Interest on lease liabilities Expense relating to short-term leases 25. Lease Liabilities Details of associated lease liabilities recognised in respect of the right of use assets are presented below: 31 December 2020 31 December 2019 K ‘000 11,724 31,434 16,161 59,319 11,834 35,508 47,342 3,841 6,552 10,393 K ‘000 3,572 6,546 528 10,646 2,971 6,426 9,397 803 985 1,788 Amounts recognised in statement of cash flows Total cash outflow for leases 19,986 3,461 Total cash flows for leases is recorded under Cash payments to employees and suppliers in the statement of cash flows. CONSOLIDATED Maturity analysis – contractual undiscounted cash flows Less than one year One to five years More than five years Total undiscounted lease liabilities at 31 December Lease liabilities included in statement of financial position at 31 December Current Non-current Amounts recognised in statement of comprehensive income Interest on lease liabilities Expense relating to short-term leases 31 December 2020 31 December 2019 K ‘000 11,724 31,434 16,161 59,319 11,834 35,508 47,342 3,841 6,552 10,393 K ‘000 13,163 35,603 22,544 71,310 9,319 45,639 54,958 2,583 5,746 8,329 Amounts recognised in statement of comprehensive income Total cash outflow for leases 19,986 7,796 Total cash flows for leases is recorded under Cash payments to employees and suppliers in the statement of cash flows. 116 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 117 26. Other liabilities Accruals Unclaimed money and stale cheques Bank cheques Accounts payable Unearned commission income Lease incentive payable Advance payments Other liabilities Balance at end of year CONSOLIDATED PARENT 2020 K ‘000 14,497 9,028 20,044 6,271 1,676 4,783 22,902 13,370 92,571 2019 K ‘000 12,694 8,166 46,716 4,996 1,309 5,483 16,215 45,159 140,738 2020 K ‘000 13,894 9,028 20,044 6,223 1,676 4,783 22,902 12,943 91,493 2019 K ‘000 2,326 36 - 2,002 - - - 7,000 11,364 27. Issued and paid ordinary shares a) Movement The Company does not have authorized capital and ordinary shares have no par value. The table below provides movement in share capital. Balance as at 31 December 2018 Share issued during the year Balance as at 31 December 2019 Share issued during the year Balance as at 31 December 2020 Number of shares ‘000 163,993 10,752 174,745 112,191 286,936 Share capital K ‘000 142,213 34,757 176,970 217,723 394,693 In September 2020, the group conducted a Non-Renounceable Rights Issue (ANREO) to further strengthen the capital base and regulatory ratios. Based on this, a total of 112,190,731 additional shares were issued resulting in an increase in share capital of PGK217.7m. b) Earnings per share Basic earnings per ordinary share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares on issue during the year. The group has no significant dilutive potential ordinary shares. Consequently, basic earnings per ordinary share equals diluted earnings per share. CONSOLIDATED Net profit attributable to shareholders – K’000 Weighted average number of ordinary shares basic earnings Weighted average number of ordinary shares diluted earnings Basic earnings per share (in toea) Diluted earnings per share (in toea) 2020 75,974 203,941 205,024 37.25 37.06 2019 60,871 169,369 170,308 35.94 35.74 c) Share-based payment reserve Kina operates both a Short Term Incentive (STI) and Long Term Incentive (LTI) plan. The purpose of these Plans is to assist in the reward, retention and motivation of key management personnel and align the interests of management and shareholders. The plans are commensurate with those adopted by major banks in Australia and the Pacific and is managed by an independent Plan manager. The operation of both the STI and LTI plans are explained below: Short term incentive plan (STI Plan) The STI plan provides participants with an opportunity to earn an incentive calculated as a percentage of their salary each year, conditional upon them achieving specified performance targets. Under the plan 65% of any award granted is paid as a cash bonus, with the remaining 35% awarded as a grant of performance rights to shares. The granted performance rights are restricted from exercise and subject to the Company’s clawback policy and subject to the rules of the Plan. The following STI plan arrangements were in place during the year ended 31 December 2020: Date of grant Number of share rights granted Market value at grant date Vesting date Vesting conditions Long term incentive plan (LTI plan) 1 April 2020 1 April 2019 403,180 440,776 AUD 576,547 AUD 485,864 1 April 2022 1 April 2021 Continued service Continued service The LTI plan provides participants with an opportunity to receive an equity interest in Kina through the granting of performance rights. LTI plan participants may be offered performance rights that may be subject to vesting conditions as set out by the Board. The selection of participants is at the discretion of the Board. A performance right is a contractual right to receive one ordinary share in Kina, subject to performance and vesting conditions being met. Each vested performance right represents a right to one ordinary share. If the participant leaves Kina any unvested Performance Rights will be forfeited (unless the Board determines otherwise). The following LTI plan arrangements were in place during the year ended 31 December 2020 Date of grant Number of share rights granted Market value at grant date Fair value at grant date Vesting date Vesting conditions 1 April 2020 1 April 2019 16 February 2018 617,987 1,069,800 974,780 AUD 883,722 AUD 970,523 AUD 690,394 AUD 349,163 AUD 543,493 AUD 419,155 1 April 2023 1 April 2022 1 April 2021 Continued service Continued service Continued service 50% target TSR 50% target TSR 50% target TSR 50% target EPS growth 50% target EPS growth 50% target EPS growth The estimated fair value of share rights issued on 1 April 2019 under the LTI plan was AUD 0.54, compared to the grant date market value per share of AUD 1.135. Fair value is generally estimated using a Monte Carlo simulation model taking into account the share price at grant date, the vesting period, share price volatility, risk-free interest rate and market performance conditions. Retention incentive The retention plan is a once off award of performance rights to assist in the retention of key eligible participants. No retention rights were granted during the year. 118 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 119 27. Issued and paid ordinary shares (continued) Movement in outstanding share rights Outstanding rights at beginning of year New rights granted Rights vested and shares issued/purchased Rights forfeited or lapsed Outstanding rights at end of year CONSOLIDATED 2020 2019 Number Number 3,586,169 2,573,006 1,021,167 1,555,663 (945,851) (542,500) - - 3,661,485 3,586,169 The fair value at grant date of share rights awarded under the incentive schemes is recognized as an expense over the expected vesting period with a corresponding increase in the share based payments reserve in equity. The movement in the Share Based Premium Reserve is as below: Brought forward from previous year Expense arising from share incentive plans Rights vested Rights forfeited or lapsed Total CONSOLIDATED 2020 K ‘000 2,063 3,008 (2,297) - 2,774 2019 K ‘000 2,651 842 (1,430) - 2,063 28. Statements of cash flows a) For the purposes of the statements of cash flow, cash and cash equivalents comprises the following: Cash and due from banks (note 12) Central bank bills (note 13) b) Movement in investment securities is as follows: Central bank bills (note 13) Central bank bills & other eligible bills (less than 3 months) Government inscribed stocks (note 17) Financial assets at FVTPL CONSOLIDATED PARENT 2020 K ‘000 335,147 65,000 400,147 2019 K ‘000 269,702 - 269,702 2020 K ‘000 361,614 65,000 426,614 2019 K ‘000 43,837 - 43,837 CONSOLIDATED 2020 K ‘000 582,874 65,000 114,519 10,682 773,075 2019 Movement K ‘000 722,090 - 34,003 7,636 763,729 K ‘000 (139,216) 65,000 80,516 3,046 9,346 c) Reconciliation of net profit after tax for the year to net cash flows from operating activities is presented below. Net profit after tax Profit from disposal of property and equipment Depreciation and amortization (note 19 and 20) (Premium)/discount amortization (note 17) Share-based payment expense Net (losses)/gains from changes in fair values of financial assets (note 15) Increase/(decrease) in income tax payable Increase/(decrease) in deferred income tax (note 11b) Changes in net assets and liabilities: Decrease/(increase) in assets: Increase/(decrease) in liabilities: CONSOLIDATED PARENT 2020 K ‘000 75,974 (221) 35,065 (4,906) 711 2,510 1,186 (5,991) 2019 K ‘000 60,871 2 17,033 (70) (588) 153 (4,141) (3,298) 2020 K ‘000 37,467 (221) 18,653 (4,906) 711 2,666 4,077 (12,730) (226,709) (371,349) (233,347) 49,509 164,802 73,070 Effect of change in accounting policy as disclosed in note 1.3 - (725) - Net cash inflow/(outflow) from operating activities (72,872) (137,310) (114,560) 2019 K ‘000 42,433 - 5,825 - (588) (8) (1,328) (2,439) 325 (7,194) (414) 36,612 29. Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. The Group is controlled by Kina Securities Limited (“KSL”) incorporated in Papua New Guinea, which owns 100% of the ordinary shares of its subsidiaries, unless otherwise stated. A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and foreign currency transactions. These transactions were carried out on normal commercial terms and at normal market rates. The volumes of related party transactions, outstanding balances at 31 December 2020, and related expenses and income for the year ended are as follows: a) Directors and management transactions From time to time during the year, Directors and Senior Management of the Parent and subsidiaries had deposits in the Group on normal terms and conditions. Brokerage rates for buying and selling shares for the Senior Management and staff are discounted. A listing of the members of the Board of Directors is shown in the Annual Report. In 2020, the total remuneration of the Directors was K3,219,047 (2019: K3,140,026). Key management personnel (KMP) of the group includes directors and the executive general managers (EGMs) during the year. The table below shows the Group specified EGM remuneration in aggregate (in K’000). 2020 2019 No of KMP 10 13 Salary 7,650 8,388 Bonus 2,093 1,985 Super Equity Options Other benefits - - 711 1,013 2,084 2,314 Total 12,538 13,700 120 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 121 b) Subsidiary transactions and balances The Company maintains an intercompany account with subsidiary undertakings, which are interest bearing at the rate of KSL cost of funds plus 12.50 (2019: 12.50) basis points, unsecured and with no fixed term of repayment. Details as follows: TRANSACTIONS BALANCE OUTSTANDING Income Expenses Income Expenses Due From Due To 2019 2020 K ‘000 K ‘000 2019 K ‘000 2020 K ‘000 723 2,869 - - - - - 2020 K ‘000 54 372 - - - - - KFM KISS KWM KBL* KVL* KPL* KNL 2019 K ‘000 2,827 4,491 - 670 670 - 42,209 1,349 - - - - - - 1,323 - - - - - 64 - - - 351,096 - - 2020 K ‘000 - (8,880) (108) - - - - 2019 K ‘000 (7,386) (28,812) (285) (130,704) - (25) - 3,592 426 49,527 2,689 1,387 351,096 (8,988) (167,212) *Amalgamated entities (KBL, KVL and KPL) shown for comparative purposes. 30. Investments under trust The Group acts as trustee holding or placing of assets on behalf of superannuation funds and individuals. As the Group acts in a fiduciary capacity, these assets are not assets of the Group and, therefore, are not included in its statements of financial position. The Group is also engaged in investing client monies. A corresponding liability in respect of these monies is also excluded from the statements of financial position. Investments under trust at year end are: Clients funds held for shares trading CONSOLIDATED PARENT 2020 K ‘000 2,202 2,202 2019 K ‘000 4,869 4,869 2020 K ‘000 2,138 2,138 2019 K ‘000 4,869 4,869 31. Business Combinations Acquisition of ANZ Bank’s retail, commercial and SME banking businesses in PNG On 23 September 2019, the Group through Kina Bank Limited, a 100% owned subsidiary of Kina Securities Limited, acquired ANZ Bank’s retail, commercial and SME banking businesses in PNG. ANZ is an Australian multinational banking and financial services company. The acquisition will enhance Kina Bank’s products and services that will complement its vision to become fastest growing, dynamic and leading digital bank in the country. The fair value of the financial assets and liabilities recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below. Fair value of the assets and liabilities recognised on acquisition Assets Cash and cash equivalents Loans and Advances Fixed Assets Right of use asset Intangible asset Deferred tax asset Other Assets Liabilities Customers’ Deposit Lease Liabilities Other Liabilities Total identifiable net assets at fair value Total consideration Purchased price allocation Intangible asset Fair value adjustment on loan Deferred tax asset, net Others Total consideration transferred K ‘000 711,947 329,586 8,172 32,916 18,688 666 6,088 1,048,837 32,916 2,081 24,229 24,229 18,486 4,875 666 202 24,229 The fair value of the acquired receivables is K329,586m and a gross contractual value of K350,293m,with a loss allowance of K20,707m recognised on acquisition. Effective 9 July 2020, Kina Securities Limited amalgamated with Kina Bank Limited (KBL), Kina Ventures Limited (KVL) and Kina Properties Limited (KPL) and is now known as Kina Securities Limited (note 38). 122 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 123 32. Segment reporting The segment information provided to the Chief Executive Officer for the reportable segments for the year ended 31 December 2020 is as follows: The segment information provided to the Chief Executive Officer for the reportable segments for the year ended 31 December 2019 is as follows: Banking & Finance Wealth Management Corporate Total Banking & Finance Wealth Management Corporate Total K ‘000 K ‘000 K ‘000 Interest income Interest expense Foreign exchange income Fee and commission income Other revenue Total external income Other operating expenses Provision for impairment Depreciation and amortisation Total external expenses Profit before inter-segment revenue and expenses Inter-segment income Inter-segment expenses Profit before tax Income tax expense Profit after tax Total assets Total assets include: K ‘000 199,581 (29,964) 55,196 46,489 10,566 281,868 (138,450) (21,811) (35,065) (195,326) 86,542 15,392 (11,800) 90,134 (28,807) 61,327 3,285,349 106 - 43 29,729 3,048 32,926 (9,355) (207) - (9,562) 23,364 - (3,592) 19,772 (5,125) 14,647 14,202 Additions to non-current assets Total liabilities (22,924) - (2,719,289) (3,228) - - - - - - - - - - - - - - - - - - - 199,687 (29,964) 55,239 76,218 13,614 314,794 (147,805) (22,018) (35,065) (204,888) 109,906 15,392 (15,392) 109,906 (33,932) 75,974 3,299,551 (22,924) (2,722,517) Interest income Interest expense Foreign exchange income Fee and commission income Other revenue Total external income Other operating expenses Provision for impairment Depreciation and amortisation Total external expenses Profit before inter-segment revenue and expenses Inter-segment income Inter-segment expenses Profit before tax Income tax expense Profit after tax Total assets Total assets include: Additions to non-current assets Total liabilities K ‘000 146,445 (31,098) 42,048 18,845 268 176,508 (51,324) (5,906) (10,453) (67,683) 108,825 1,779 (40,194) 70,410 (19,453) 50,957 K ‘000 K ‘000 K ‘000 6 - (4) 28,143 588 28,733 31 146,482 (803) (31,901) (88) 797 388 325 41,956 47,785 1,244 205,566 (11,033) (37,836) (100,193) 260 - (5,646) - (6,581) (17,034) (10,773) (44,417) (122,873) 17,960 (44,092) 910 46,838 82,693 49,527 (7,318) 11,552 (3,314) 8,238 (2,015) (49,527) 731 945 82,693 (21,822) 1,676 60,871 2,813,044 17,221 167,270 2,997,535 (34,367) - (4,638) (39,005) (2,642,276) (2,673) (25,310) (2,670,259) Banking and finance segments includes the operations of the Kina Bank while Wealth Management includes fund management and fund administration business. The section for Corporate is nil as the entities have been amalgamated into Banking. There is only one segment for the Parent entity and the information is the same as the primary statements. 124 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 125 33. Contingent liabilities Litigations and claims Contingent liabilities exist in respect of actual and potential claims and proceedings that have not been determined. An assessment of the Group’s likely loss has been made on a case by case basis for the purposes of the financial statements and specific provisions are made where appropriate. As at 31 December 2020, the Group is a party to some litigation before the courts, however, management does not believe these will result in any material loss to the Group. There was no litigation matter of a material nature that is not already provided for in the financial statements. Other contingent liabilities The Bank guarantees the performance of customers by issuing bank guarantees to third parties. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers, therefore these transactions are subject to the same credit origination, portfolio maintenance and collateral requirements applied to customers applying for loans. As the facilities may expire without being drawn upon, the notional amount does not necessarily reflect future cash requirements. The credit risk of these facilities may be less than the notional amount but as it cannot be accurately determined, the credit risk has been taken as the contract notional amount. CONSOLIDATED Bank guarantee 34 Commitments Capital commitments 2020 K ‘000 88,704 88,704 2019 K ‘000 70,375 70,375 There was a total of K4,927,290 relating to commitments under contracts for capital expenditure at balance sheet date (31 December 2019: K4,802,205). Loan commitments There was a total of K204,924k relating loan commitment at balance sheet date (31 December 2019: K131,801k). 35. Fair value of financial assets and liabilities The Group measures fair values in accordance with IFRS 13, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Group also uses a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value, which gives highest priority to quoted prices. • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Assets and liabilities are classified as Level 1 if their value is observable in an active market. • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability. • Level 3 inputs are unobservable inputs. Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data. Where possible, fair value is determined by reference to a quoted market price for the instrument valued. The group does not hold any material financial instruments for which quoted prices are not available other than investment in unlisted shares which are classified in Level 3 category. The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped by fair value hierarchy level. Financial instruments measured at fair value The following tables present the Group’s and the parent’s assets and liabilities that are measured at fair value at 31 December 2020. CONSOLIDATED Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted - Investment in convertible notes – Unlisted Total assets PARENT Investment securities measured at FVTPL - Investment in shares – Listed - Investment in convertible notes – Unlisted Total assets Level 1 K ‘000 4,680 - - 4,680 Level 1 K ‘000 177 - 177 Level 2 K ‘000 Level 3 K ‘000 Total K ‘000 4,680 6,002 - - 6,002 - - - - - 6,002 10,682 Level 2 K ‘000 Level 3 K ‘000 - - - - 5,974 5,974 Total K ‘000 177 5,974 6,151 126 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 127 35. Fair value of financial assets and liabilities (continued) 36. Auditors’ remuneration The following tables present the Group’s and the parent’s assets and liabilities that are measured at fair value at 31 December 2019. CONSOLIDATED ASSETS Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted - Investment in convertible notes – Unlisted Total assets PARENT ASSETS Investment securities measured at FVTaPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets Level 1 K ‘000 4,834 - - 4,834 Level 1 K ‘000 174 - 174 Level 2 K ‘000 Level 3 K ‘000 - - - - - 2,636 165 2,801 Level 2 K ‘000 Level 3 K ‘000 - - - - 165 165 Total K ‘000 4,834 2,636 165 7,635 Total K ‘000 174 165 339 Reconciliation of level 3 fair value measurements of financial assets and financial liabilities The group holds investment in unlisted securities amounting to K6,002,718 (31 December 2019: K2,801,607) in level 3 category for which carrying amount is considered as reasonable approximation of fair value. As such no reconciliation of level 3 financial instruments has been presented in these financial statements. The parent holds investment in unlisted securities amounting to K5,974,431 (31 December 2019: K165,000) in level 3 category for which carrying amount is considered as reasonable approximation of fair value. As such no reconciliation of level 3 financial instruments has been presented in these financial statements. Financial instruments not measured at fair value For the financial instruments not measured at fair value as at 31 December 2020 and 2019, there is no material difference between the fair value and carrying value of the Group’s and the Parent’s financial assets and liabilities. CONSOLIDATED ENTITY Audit and audit related Tax services Other services PARENT Audit and audit related Other services 2020 K ‘000 909 - 339 2019 K ‘000 942 - 75 1,248 1,017 2020 K ‘000 819 325 1,144 2019 K ‘000 329 48 377 37. Goodwill On September 2015, the Group, through Kina Ventures Limited, a 100% owned subsidiary of Kina Securities Limited, acquired all of the shares in Maybank (PNG) Limited and Maybank Property (PNG). Maybank (PNG) and Maybank Property (PNG) are the PNG subsidiaries of Malaysia’s largest bank. The acquisition strengthened Kina Bank’s investment in PNG as it is an excellent fit for its expansion program. The goodwill arising on this acquisition was recorded at K92,786,000. The goodwill was attributable to Maybank (PNG) Limited’s strong position and synergies expected to arise after the Group’s acquisition of the new subsidiary. None of the goodwill is expected to be deductible for tax purposes. Goodwill was tested for impairment as at 31 December 2020 and no impairment loss arose on this assessment. The goodwill is allocated and tested at the KSL level. The recoverable amount has been determined using both the fair value and value in use at each reporting date. Value in use refers to expected future cash flows over the next five years on a discounted cash flow basis. The fair value is determined based on the multiples of future maintainable earnings. The calculations of value in use includes cash flow projections covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rate of 3.0% (31 December 2019: 3.0%). The estimated cash flows are discounted using a discount rate of 4.7% (31 December 2019: 6.5%). The fair value calculation includes future maintainable earnings of K128.5m (31 December 2019: K74.8m) and earnings multiple of 8 times. There is no reasonably possible change in these key assumptions on which the CGU’s recoverable amount is based would cause its carrying amount to exceed its recoverable amount. 128 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 129 38. Group reorganisation During the year, the Group reorganised its legal structure so that the subsidiaries Kina Bank Limited, Kina Ventures Limited and Kina Properties Limited (amalgamating subsidiaries) were amalgamated into Kina Securities Limited (KSL). The amalgamation was affected at the carrying amount of net assets of the amalgamating subsidiaries immediately before the effective date of amalgamation. The difference between the pre-amalgamation carrying amount of the net assets and the investment in the amalgamating subsidiaries was recognised as ‘capital reserves’ in separate financial statements of KSL. Further, the separate financial statement of KSL includes results of the amalgamating subsidiaries from the effective date of amalgamation. The amalgamation does not have any impact on the consolidated financial statements. 39. Events after the statements of financial reporting date Subsequent to the financial reporting date, the directors declared a final dividend of AUD 6.0 cents / PGK 16.9 toea per share (K48.5m). The Group announced the proposed acquisition of Westpac’s Pacific Businesses in PNG and Fiji which is expected to be completed by September 2021. The acquisition is subject to regulatory approvals by the Bank of Papua New Guinea and the ICCC (Competition regulator) in Papua New Guinea and the Reserve Bank of Fiji and the FCCC (competition regulator) in Fiji. Kina’s intention is to maintain Westpac PNG’s commercial banking licence and operate the acquired business under a new, independent brand. The new brand will effectively continue the Westpac business but under a new name. The spread of Novel Coronavirus (Covid-19) subsequent to year end is currently impacting businesses globally and constitutes a “Non-Adjusting Subsequent Event” as defined in IAS 10 ‘Events after the Reporting Period’. The extent of impact varies by industry mainly resulting in supply chain disruption, reduced availability of human resource, increased cost of alternative working arrangements, reduced tourism, stock market volatility and consequent increase in provisioning requirements and reduction in revenue streams from industries impacted. Given the recent surge in Covid-19 cases in Papua New Guinea in 2021, this is still reported as a subsequent event. The Group is in the process of assessing possible financial impacts of the situation on its business, however, given it is still evolving, the exact financial impact cannot be quantified at this stage. Furthermore, the carrying amount of significant assets and liabilities recognised in these financial statements are not materially sensitive to market factors or forward-looking assumptions other than loan recoverability should conditions materially deteriorate. Based on a preliminary assessment of impacts and the fact Papua New Guinea is not significantly affected by the situation at this stage, the directors and the management of the Group believe that direct financial impact is unlikely to be material at this stage. Further, there is no evidence to suggest at this stage that the situation will affect the Group’s ability to continue as going concern. There has been no other transactions or events of a material and unusual nature between the end of the reporting period and the date of the report likely, in the opinion of the Directors of the Group, to affect significantly the operations of the Group, the results of those operations, or state of affairs of the Group in future years. Shareholder Information Kina Securities Limited ARBN: 606 168 594 Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in the Report is set out below. The information is current as at 31 March 2021. a) The distribution of security holders Range 100,001 and Over 50,001 to 100,000 10,001 to 50,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total b) 20 largest shareholders of quote security holders Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited Asian Development Bank J P Morgan Nominees Australia Pty Limited Comrade Trustee Services Limited Citicorp Nominees Pty Limited National Nominees Limited Mineral Resources CMCA Holdings Limited Airwolf Limited Columbus Investments Limited Gas Resources PNG LNG Plant Limited Kina Asset Management No 1 Limited Garmaral Pty Ltd Mr Ivan Lu GEAT Incorporated CS Fourth Nominees Pty Limited Hitsuma Sdn Bhd Perpetual Shipping Limited Capital Nominees Limited Chan Beng Lee Prof Alan Jonathan Berrick Total top 20 Balance of register Total Register Securities % 196,132,527 28,313,090 51,126,396 7,664,527 3,395,472 303,888 68.35 9.87 17.82 2.67 1.18 0.11 286,935,900 100.00 No. of holders 293 387 2,095 933 1,125 497 5,330 % 5.50 7.26 39.31 17.50 21.11 9.32 100.00 Number of shares % of Issued Capital 59,582,530 20.77 10,751,916 9,995,887 7,951,328 6,861,116 5,595,217 5,312,834 2,885,390 2,726,355 2,139,037 2,000,000 1,732,615 1,619,301 1,570,500 1,474,468 1,250,000 1,250,000 1,214,437 1,163,660 1,128,016 3.75 3.48 2.77 2.39 1.95 1.85 1.01 0.95 0.75 0.70 0.60 0.56 0.55 0.51 0.44 0.44 0.42 0.41 0.39 128,204,607 158,731,293 44.68 55.32 286,935,900 100.00 130 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 131 Shareholder Information (continued) c) Number of security holders and securities on issue Quoted securities: 286,935,900 Unquoted securities: 4,170,743 d) Unmarketable Parcel of Shares The number of shareholders holding less than a marketable parcel of ordinary shares is 189. e) Substantial Shareholders Name HSBC Custody Nominees (Australia) Limited Name of Shares % of issued captial 59,582,530 20.77 f) Stock Exchanges The Company’s ordinary fully paid shares are listed on the Australian Securities Exchange (ASX) and the Papua New Guinea National Stock Exchange (PNGX). g) Voting Rights Each ordinary shareholder present at a general meeting (whether in person, by proxy or by representative), is entitled to one vote on a show of hands, or on a poll, for each fully paid ordinary share held. Corporate Directory Directors Isikeli Taureka (Chairman) Greg Pawson (CEO) Karen Smith-Pomeroy Dr Jane Thomason Paul Hutchinson Andrew Carriline Dr Ila Temu Company Secretary Chetan Chopra Share Registry Papua New Guinea PNG Registries Limited Level 2 Aon Haus PO Box 1265 Port Moresby Papua New Guinea Telephone: +675 321 6377 Facsimile: +675 321 6379 Email: brenda@online.net.pg Australia Link Market Services Ltd Level 21, 10 Eagle St Brisbane QLD 4000 Telephone: 1300 544 474 (within Australia) Telephone: +61 1300 544 474 (outside Australia) Auditor Deloitte Touche Tohmatsu Level 9 Deloitte Haus MacGregor St Port Moresby PO Box 1275 Port Moresby National Capital District Papua New Guinea Telephone: +675 308 7000 Facsimile: +675 308 7001 www.deloitte.com/pg Stock Exchange Listing ASX Code: KSL PNGX Code: KSL www.kinabank.com.pg Registered Office Boroko Branch Turumu St Boroko PO Box 1718, Boroko 111 National Capital District Papua New Guinea Goroka Branch Cnr of Fox & Elizabeth St Ground Floor, Gouna Plaza PO Box 767, Goroka 441 Eastern Highlands Province Harbour City Branch ANZ Habour City Off Poreporena Freeway PO Box 1152, Port Moresby 121 National Capital District Papua New Guinea Head Office Level 9, Kina Bank Haus, Douglas St, Port Moresby, National Capital District Papua New Guinea Telephone: +675 308 3000 Hides Branch Block 8 – HGDC Para Camp Tari, Hela Province Hela Province Papua New Guinea Jacksons Branch Jacksons International Airport PO Box 1152, Port Moresby 121 National Capital District Papua New Guinea Kimbe Branch Cnr San Remo Drive and Talasea Rd PO Box 466, Kimbe 621 West New Britain Province Papua New Guinea Kokopo Branch Post PNG Haus Williams Road PO Box 41, Kokopo East New Britain Province Lae Market Branch Cnr Cedarbank St and Aircorps Rd Second St, Top Town PO Box 674, Lae Morobe Province Papua New Guinea Lae Top Town Branch Ground Floor Nambawan Super Haus 2nd St Top Town PO Box 682, Lae Morobe Province Papua New Guinea Lihir Branch PO Box 223 Portion 830, Wide Rd Londolovit Lihir Island NIP Papua New Guinea Madang Branch Section 20, Lot 08 Coastwatcher’s Ave PO Box 181, Madang 511 Madang Province Papua New Guinea Mt Hagen Branch Hagen Dr PO Box 121, Mt Hagen 281 Western Highlands Province Papua New Guinea Port Moresby Branch Cnr Musgrave St and Champion Parade PO Box 143, Port Moresby 121 National Capital District Papua New Guinea Vision City Branch Ground Floor Sir John Guise Dr PO Box 1141, National Capital District Papua New Guinea Waigani Drive Branch Cnr Waigani and Islander Dr PO Box 1141, Port Moresby National Capital District 121 Papua New Guinea Waigani Cameron Rd Branch Cnr Waigani Drive and Cameron Rd PO Box 252, Waigani 131 National Capital District Papua New Guinea Wewak Branch Centre St PO Box 1069, Wewak 531 East Sepik Province Papua New Guinea 132 Kina Securities Limited Annual Report 2020 Kina Securities Limited Annual Report 2020 133 kinabank.com.pg #TogetherItsPossible 

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