Kina Securities Ltd
Annual Report 2021

Plain-text annual report

Kina Securities Limited Annual Report 2021 ARBN 606 168 594 Key Highlights. Underlying NPAT Organic growth momentum Deposits 19% 27% Total Assets 13% Foreign Exchange income 17% Lending 21% Contents. About Kina Chairman’s Message Managing Director and Chief Executive Officer’s Review Our Segments Strategic Overview Total Societal Impact Board of Directors Senior Executive Team Remuneration Report Corporate Governance Directors’ Report Directors’ Declaration Independent Auditor’s Report Statements of Comprehensive Income Statements of Financial Position Statements of Changes in Equity Statements of Cash Flows Notes to the Financial Statements Shareholder Information Corporate Directory 61 64 65 71 72 73 74 75 131 133 5 7 11 15 17 21 25 35 41 55 In memoriam Nancy Moka, had a long and successful career in Banking in PNG, starting in 1999 in Mt Hagen and became part of the Kina team in 2019. She was a valued member of the Banking operations division. Apart from work Nancy was a Board Member of Links of Hope PNG helping children with HIV AIDS and women released from prison to settle back into their communities. Late Nancy passed away on Wednesday 31st March 2021, in Port Moresby after being sick for some time. Hetahu Lohia was the Head of Support Services and joined Kina Bank in 2018, he was known throughout as a true gentlemen. Solomon Kabaru joined Kina Bank in 2009 as a graduate. He was a highly regarded member of the Finance and Technology team and his last role was Chief Data Officer. The late Solo made immense contributions in the use of technology for Kina Bank, functionality we use today in our APP and online can be attributed to the late Solo. He will be greatly missed. 1 Annual Report 2021 2 We’re committed to the core promise of constantly improving the prosperity of the people, communities and markets we serve. We strive to be the bank that represents change – consistently challenging the status quo, not just by creating more choices, but by creating better choices. But this purpose goes beyond creating a better banking experience. On many levels, it’s also about building a better future for PNG, its people and the businesses – large and small – that are critical to the country’s progress. Because at its heart, PNG’s progress is our progress, with our past, present and futures intertwined as one common thread. Together, we’re rolling up our sleeves and shaping the future of PNG, with a focus on making it better every day. That’s what we mean by ‘together it’s possible’. 3 Annual Report 2021 4 Rogu Gabiobu About Kina. Kina Securities Limited (amalgamated entity) Kina Funds Management Limited Kina Investment and Superannuation Services Limited Kina Nominees Limited Kina Wealth Management Limited Kina Securities Limited and its related entities (KSL, Kina, the Kina Group, the Group, or the Company) was established in 1985 as a diversified financial services company offering banking products, funds administration and wealth advice across Papua New Guinea (PNG). Kina offers customers end-to-end financial solutions from savings accounts to business loans, investments to mortgages, financial advice and investment management. We are committed to delivering exceptional service and this is what sets us apart in the market. Since our inception, we have grown to reaching over 650,000 people, administering 850,000 superannuation accounts for beneficiaries and have a total asset base of PGK 3.8 billion. Kina Securities Limited has two key divisions. Kina Bank and Kina Wealth. Kina Bank delivers home, business and corporate loans, everyday banking transactions, credit cards, merchant and payment facilities and banking services to smaller institutions. Kina Wealth encompasses Kina Investment and Superannuation Services, Kina Funds Management and Kina Nominees servicing funds administration, wealth advice, stockbroking, funds management and nominee custodial services. Kina’s Corporate Governance Statement is available on the Company’s website: investors.kinabank.com.pg/Investors/?page=corporate- governance Kina Group Vision Statement Our Vision is to be the most dynamic, progressive and accessible financial services organisation in the Pan Pacific region. Kina’s Purpose Our defining purpose is to constantly improve the prosperity of the people, communities, and markets that we serve. Kina’s Culture Our people are here to make a difference. They are passionate about empowering customers to effect life change. Our Values. Fairness Reflection Honesty Imagination Togetherness Our Strategy. Strategic Pillars Prosperity for our communities is Kina’s DNA. Serving our communities, supporting the growth of Papua New Guinea and continually developing innovative customer-led solutions is at the core of our organisation. Growth & Prosperity Multiple business lines providing customers with a full range of services, strong organic growth, value added services, and synergistic acquisitions. Building Resilience Strong company, well capitalised, well governed, managing risk versus rewards, and insulated against economic or market shocks. Service Excellence Dynamic People Digital from the inside and out, simple processes, great customer service, always first when it matters. We love people, our culture is everything, our people are well trained, adaptable and care. Sustainable Communities We are in the business of doing good, building trust, and creating long-term value for all our stakeholders. 5 Annual Report 2021 6 Chairman’s Message. Mi hamamas tru lo gutpela na strongpela wok yumi mekim lo luksave lo halivim ol sindaun na welbing blo ol pipol, ol kastoma na komuniti. Wanbel I stap wantaim yupela. I am proud of the resilience and significant progress we have made in delivering our purpose of continually improving the prosperity of our people, our customers and our communities. Contributions to PNG economy PGK 447 million1 Customer Acquisition = Net Customer Growth 8% 50% of females in executive roles2 Underlying Cost-to-Income Ratio 58% FX Income growth 2021 17% Dear Shareholders, I am pleased to introduce Kina’s Annual Report for the financial year ended 31 December 2021 (2021). Kina Group is a resilient company. Established in 1985, Kina listed in 2015 in both Papua New Guinea (PNG) and Australia. In the years since, we have come through both challenging and profitable times. Kina’s results in 2021 demonstrate the ongoing strength of the continued successful execution of our organic growth strategy that we have been implementing since 2019. Well executed by our Managing Director and Chief Executive Officer Greg Pawson and his leadership team, the success of the Kina Bank business model has contributed to our growth agenda and our desire to continually improve the prosperity of the communities we serve. Strong results in 2021 The underlining net profit after tax has increased by 27%. Our footings have grown to just over PGK 5 billion. Our foreign exchange (FX) income grew by 17% and we have been averaging return on equity (ROE) of above 16%. Our Funds Administration business continued to record growth in revenue, consistent with increased funds under management. Earnings per share coming in at 24.68 toea per share, compared with 37.25 toea last year, reflect that the economies we are operating in are beginning to recover from the impacts of COVID-19. As customers across the globe adapt to the impacts of COVID-19, a reassessment of the provisions we took in 2020 meant a slight adjustment to our provisions held and this combined with strong revenue and growing FX revenue across all markets led to a solid financial performance in 2021. 1 In TSi sector 2 As at 1 February 2022 Final dividend 2021 and capital position In September 2021, the Company paid a dividend of PGK 8.25 toea (AUD 3.0 cents) per share in relation to the profit for the half year ended 30 June 2021. Subsequent to the balance sheet date, the directors have declared a final dividend of PGK 18.5 toea (AUD 7.0 cents) per share on underlying NPAT for the second half of 2021, making it a cumulative dividend for the full year at PGK 26.75 toea, that converts to AUD 10.0 cents. This demonstrates the Board’s commitment to repatriate earnings back to the owners of our business when growth is achieved. The simplified corporate structure and rights issue carried out in 2021 has enabled Kina’s balance sheet to grow. Our total capital adequacy is 23% and this positions us well for future organic growth. In 2021, we managed our capital adequacy well in response to market conditions and we will maintain a close eye on this in 2022/23. Our shareholders would expect nothing less from a publicly listed bank. Strategic execution continues Publicly listed as a bank in PNG and Australia, Kina has the energy and spirit of innovation, coupled with the desire to provide customers with more choice and to deliver more value for shareholders. During 2021, the Board, Greg and his leadership team continued to deliver on our strategic priorities to drive the growth of the business. We are now in the third year of our five-year refreshed strategic plan and our initiatives will focus on growing organically in the segments of corporate, small-to-medium sized businesses (SMEs) and home lending while we monitor opportunities in the Pan Pacific region. Our strategy is a key contribution to our overall business objectives, however, both our organic and inorganic strategies were tested during 2021. The announcement of the separation from the proposed Westpac PNG and Westpac Fiji acquisition in September 2021 gave the Board an opportunity to review and refresh our strategic initiatives. While the proposed acquisition ultimately did not materialise due to competition concerns at a regulatory level, the Board’s view is that opportunities remain. The program of work that supported this proposed acquisition has now placed Kina in a strong position to expand our product and service offerings with improvements in risk management, ICT, and digital platforms. Growing the Kina Bank of the future Expansion, therefore, continues to be a key focus and we will drive our growth strategy with investments when the business case is strong. We are not chasing growth for the sake of growing. Instead, we are looking for organic opportunities that make a meaningful proposition to our business and profitability, and ultimately contribute to our communities. The Board will navigate a sensible course between investigating any suitable business opportunities that arise and investing for the future while protecting our strong balance sheet in the here and now. Priorities for 2022 and beyond include to deepen both our shareholder base and profitability, while managing market risk effectively as we continue to grow the business. We are actively expanding our shareholder base and further investing in people, local businesses and the overall contribution we make to PNG’s economy. A subdued economy in PNG Kina enjoys the support of the local market. The economy in PNG is one of the strongest in the Pan Pacific region, although economic growth at 5.4% was somewhat subdued in 2021. Real gross domestic product (GDP) increased by 5% from -3% in 2020 to 2% in 2021. Several key mining projects were put on hold and key resources such as coffee, vanilla and sugar experienced a slowdown due to COVID impacts. Despite this backdrop, growth in our targeted segments of corporate lending and FX products supported the strong underlying growth, demonstrating Kina’s expertise in the corporate market here. Adding value for all Kina stakeholders Kina’s goals and those of its stakeholders can only be achieved through effective and successful relationships with all our stakeholders – our shareholders, customers, people, suppliers and our communities. The Board takes its governance role most seriously on our investors’ behalf. As we actively seek to expand our investor base, Kina’s future success will depend on attracting the best investors who share a common goodwill to our cause. Pursuing a value creation strategy entails innovation and agility. In a rapidly evolving technological world, the development of digital assets, adding channels and value- adding products is imperative to maintain a footing in this market. The use of digital technology in PNG continues to increase rapidly, and Kina is at the forefront of this adoption as a bank with the spirit of innovation. 7 Annual Report 2021 8 Final thoughts I have had the privilege of chairing Kina since May 2017, in that time, the evolution of Kina as a challenger brand in the market and industry has come full circle. The 2021 year has seen us grow and our footprint continues to expand in a fast and demanding marketplace. We are now PNG’s second largest bank in lending and we maintain our position as its leading fund administrator and fund manager, securing revenues in excess of PGK 30 million. Kina is a company with exciting future growth opportunities and potential. The challenge for us at the helm will be to make the best and most profitable choices for future investment. While some uncertainty surrounds the global economic outlook for 2022, the Board considers there is strong momentum across the Group and is confident of further growth and margin improvement in the 2022 financial year. My gratitude extends towards our shareholders for their steadfast support. I appreciate their commitment to us and as I look ahead with an optimistic view on growth and our ability to deliver value to all of our communities, I have genuine faith that, collectively, we are living proof that ‘together it’s possible.’ Isikeli Taureka Chairman 14 April 2022 We have grown our customer base from 25,000 three years ago to more than 185,000 – with much of that organic customer growth following the acquisition of the ANZ retail business in PNG in 2019. The ANZ PNG acquisition was a complex program of work, taking 18 months to complete. A primary focus in 2020 was to successfully transition this portfolio into our existing operations which we have now done effectively, increasing Kina’s ability to provide a better banking experience for customers and ongoing investment in market-leading digital products and services. Digital channels allow customers to bank anywhere anytime In 2021, we have made significant enhancements to estabilising our core banking network and infrastructure, including our digital assets and digital channels. Our mobile banking experienced a 98% year-on-year uplift in usage and we continue to align our service offerings and banking access to banking anywhere anytime. We have trialled the electronic ‘Know your customer’ (e-KYC) identification platform which will make a significant difference in local customer experiences. e-KYC is expected to play a game-changing role in acquiring new customers and will help us achieve 25% market share within the next three years. Revenue diversification is also a key initiative for Kina and we are actively partnering with and providing banking services to other institutions. Two such partnerships are with MiBank and TISA (The Teachers Savings and Loans Society) and our payment partnerships are also helping us pave the way to offer full digital solutions to our SME businesses and larger corporate customers. The Strategic Overview on pages 17 to 20 has more detail. Enabling resilience in our communities In terms of competition, it’s vital that we collaborate in appropriate ways and in areas that can advance our collective interests and leverage the full potential of our capacity and capabilities. The community, which is partly represented by the regulators, gives Kina its licence to operate and our Environmental, Social and Governance (ESG) strategy and stakeholder framework reflects how our stakeholders create value for each other through us. Relationships such as these are crucial and we are committed as a company to working within our industry to promulgate our ESG strategy to the full. Naturally, all our stakeholders will look to offer us a transparent and considered view of our ESG performance and progress. As your Chair, I welcome these views as does our full Board and executive leadership team. Encouraging our people Finally, the Board salutes Kina’s people – our employees. As an essential service, banking has never been more important for PNG. Being a bank provides us at Kina with a commercial advantage, but it also means we ask a lot from our people. Day in and day out, they continue to deliver for us and for shareholders. The Board congratulates all of our employees for their flexibility, professionalism and the pride they take in their purpose to realise the Kina Vision of being the most dynamic, progressive and accessible financial services organisation in the Pan Pacific region. We extend our sincere appreciation to everyone for the extra mile they went to in 2021 to deliver value for our communities. We have very capable leadership and I assure you there is a continual assessment of priorities and the allocation of our people resources. I am proud to be a Chair of an ASX-listed company with a 50% female executives (as at February 2022) and female leadership in 52% of its senior manager roles. I would like to thank my Board of Directors for their continued service and robust governance. Their invaluable insights, rigour and support towards building a resilient, customer-centric organisation is helping lead the way in innovation and, in turn, is building a better future in PNG. It humbles me to witness their pride in our brand and company. This year we embarked on a Board mentoring program to drive PNG talent into our Board room. This program sets us apart from our peers in the industry as we proudly strive to develop the skills and capability for the future of our company and our country. Culture transformation An ambitious culture transformation program is now well progressed at Kina. The role of culture in achieving harmony, growth, resilience and competitive advantage cannot be understated, and Greg and his team have significantly uplifted Kina’s culture through an expansive program of work. This level of strategic focus has translated positively into an organisational culture development strategy. The Strategic Overview and Total Societal Impact sections on pages 17 to 24 further expand on this program of work. In memoriam I am saddened to report the loss of three valued and beloved employees during 2021 and at the start of 2022. I thank all of our people for the extraordinary effort that they have made to help their families rebuild their lives. Our support and sympathies are extended the families of the late Nancy Moka, Hetahu Lohia and Solomon Kabaru. 9 Annual Report 2021 10 Managing Director and Chief Executive Officer’s Review. 2021 ibin wanpla gudpla yia blo yumi lo Kina. Kina bin establisim Grup na kamapim gudpla kompatisin lo banking na wealth insait lo PNG. Mi gat bikpla bilip osem bai yumi deliverim planti gudpla samtin wer istap lo strategic plan blo yumi 2021 was a remarkable year for Kina, establishing the Group as a viable competitor in banking and wealth products and services in PNG. I look ahead in 2022 with a sense of optimism as we continue to deliver on our strategic plan. Total customers1 615,000 Mobile banking 98% year on year 1 This is a combined customer base with Kina and MiBank 11 ‘Challenging, difficult and unique’ are examples of how I have heard the past two years described – and all three of these resonate with our experiences at Kina. As a viable competitor in banking and wealth in PNG, 2021 was a remarkable year in many ways. We saw strong positive growth and momentum achieved across the business as the global economy continued its recovery from the impacts of COVID-19. We were able to respond quickly to our customers’ needs. In particular, our digital program of work has seen material changes in the way our customers bank with us day to day. As I sit here in mid April 2022, the economic outlook remains encouraging although inflation continues to be a concern worldwide. Since our financial results release and the date of writing this report, we have seen war erupt between Russia and Ukraine and witnessed unprecedented flooding along the eastern coast of Australia. War, natural disasters, ongoing disruption to global supply chains, surging oil and gas prices and rising global unrest have combined to create a tableau that paints a picture of continuing uncertainty in our world. Our strong COVID-19 response Providing accessibility to financial services is at the core of Kina’s purpose and in 2021 we continued to see a material uplift in our digital products. Over the course of the year, our ability to respond to the ongoing pandemic, subsequent economic matters and a realignment of strategy presented opportunities for Kina to deliver on shareholders’ expectations. The impacts of COVID-19 in PNG required the business to be agile, innovative and a market leader. Yet the toll on the health of our country compelled Kina to rise to the challenges that impacted our staff and customers. Where possible, our branches remained open to help our customers and medium-sized business clients deliver their necessary services to the broader community. We worked tirelessly to support staff in providing transportation to and from the office, introducing Pandemic leave and greater flexibility into our working environment. Our leadership team played a key role in executing timely and effective support as we are committed to supporting a COVID-safe workplace. The Company’s vaccination program has received a 50% uptake, significantly higher than the national average of 10%. A pleasing result in 2021 In 2021, the Kina Group progressed towards transforming and growing the Company as we moved into year three of the current strategic planning cycle. Revenue continued to grow in a tough environment still affected by the lingering aftershocks of COVID-19, as well as other business restrictions. Nonetheless, income grew to PGK 334 million (2020: PGK 315 million ) with the increase coming about largely through a 3% growth in net interest income, a 17% growth in FX income and a 26% growth in fees and commission incomes, primarily from digital channels. The digital channels – one of our key strategic areas – showed very strong growth at an increase of 65% on the previous year, and rapidly improved accessibility for many Kina customers. Despite the challenges of the Westpac acquisition not going ahead due to regulatory concerns, 2021 still saw Kina deliver a NPAT of PGK 70.8 million compared with PGK 76.0 million in 2020. NPAT (on an underlying basis) was just north of the adjusted forecast and reflects revenue growth, controlled operating expenses and improved management of the loan portfolio. While the statutory NPAT result was impacted by the one-off cost of the fees incurred as a result of the proposed Westpac transaction, on an underlying basis this still represents a 27% growth on the prior year. This affirms our base business remains strong and poised for future growth into 2022. Total dividend for 2021 The cumulative dividend for the full year at PGK 26.75 toea converts to AUD 10 cents. This is a payout ratio of 80% on our underlying profit, which is within our dividend policy, and the Board remains comfortable that the Company has adequate capital to support this payout while maintaining both capital adequacy levels and capital growth. Strong capital management Capital adequacy management was, in fact, a key area of focus for the Board during the year. Kina’s total capital ratio is at 23% ensuring we are well capitalised for future growth initiatives and , in particular, our strategic objectives. The total leverage ratio is in line with the requirements of the Bank of Papua New Guinea – Kina is ahead of the minimum requirement of 6% in terms of the leverage ratio. We will continue to strengthen our investor base. More specifically, we are broadening our investor profile and market coverage as a source of future capital. This is underpinned by an aspiration to join the ASX top 300 listed companies by market capitalisation by 2025. ROE and net interest margin (NIM) On an underlying basis, ROE is at 16.7% while the statutory ROE – impacted because of the cost of the proposed Westpac acquisition – was 12.3%. However, we are confident ROE and our earnings per share will recover in 2022. Our target NIM range is between 6% and 8%, which is reflective of the PNG market. In 2021, we were at the lower end, at slightly above 6%, and this reflects the mix of increased lending to the corporate sector and a strong deposit growth to maintain the loan to deposit ratio. Focusing on developing strategic partnerships Our partnerships include MiBank, TISA (The Teachers Savings and Loan Society), and Nasfund Savings and Loan Society. And in 2022 we will be working with Nambawan Super – these are all relatively small organisations, but as a fee for service model, this is still another income stream for us that will build over time as these organisations grow. An exciting partnership is with Xero, the New Zealand- based software accounting organisation, with whom we Annual Report 2021 12 teamed up to launch our Kina Xero Bank Feed. Xero is a cloud-based accounting software designed for small business and provides clients with the online tools to manage their everyday business needs. At Kina Bank, we want to make keeping on top of business transactions easier for our customers so partnerships such as these make perfect sense. Growing the Kina brand In parallel to the strong organic growth opportunity in PNG, there exists positive market sentiment toward the Kina brand and we aspire to capitalise on this goodwill to build our profits and capital base. The challenge for our leadership team will be to make the smartest and most profitable choices for sustainable growth. Kina now has the second largest market share in lending at about 15%, the largest bank is Bank of South Pacific at 65% and the remaining share is held by Westpac and ANZ. Delivering for our stakeholders Maintaining stability, especially during uncertain times is of paramount importance for all our stakeholders. Our customers want us to continue to deliver optimal experiences and continue to support their own ability to make a fair and decent living. Our shareholders – and that includes many of the people we employ – do not want to see the value of their investment in us erode over time and want to feel confident in our future prospects and business plans. Kina Bank employees are representative of PNG society and deserve the opportunity to work and enjoy future prospects. We are investing in our people as we deepen our footprint in PNG. Building our people capability I thank our people for continuing to go the extra mile in 2021. Watching them deliver for our customers brings me joy. I am pleased to report that much is happening at Kina around continuing to build our people capability and leadership development across the organisation. The Strategic Overview on pages 17 to 20 has more details. Some challenges exist with accessing the right talent, particularly in technology, and we are exploring a number of options to build out that capability. Our Pan Pacific strategy has also looked to expansion in the less expensive market of Fiji. We have already made solid investment in Fiji around incorporation and banking licences – and now, as well as exploring future growth prospects, we are investigating how we might further invest in strengthening our ICT and digital innovation capability there. The cost of technology infrastructure in Fiji is significantly less (about a quarter) of what it is in PNG. There is scope to leverage this, and the fact that Fiji also has high quality ICT talent is a very attractive proposition that could bring us significant advantages. Total Societal Impact Strategy (TSI) We have made significant progress with the implementation of our Total Societal Impact (TSI) strategy in 2021 as the global pandemic and economic consequences that followed continued to drive us to improve the prosperity of our people, customers and communities. There are a significant number of people in PNG (as many as 70%) who are still without a bank account. The potential to make a significant impact on these people’s lives by giving them access to financial services is enormous. Through our microfinance partnership with MiBank, we now provide access to financial services to 119,000 Papua New Guineans who previously did not have a banking facility. Our foothold in microfinance banking continues to grow. Kina’s TSI initiatives are described in more detail in the Strategic Overview on pages 17 to 20. Balancing today with the future I remain clear-eyed about our strategic approach. In 2021, we proved we are resilient, adaptable, and a strong challenger brand in PNG. We are a living example of our mission statement ‘together it’s possible.’ We have an optimistic outlook for Kina and the Pan Pacific region. Our current strategy is the right one to achieve the growth we aspire to. Our approach to future investments will be considered and pragmatic in a way that is supportive of our strategy and desire for expansion, while managing risks and protecting Kina’s balance sheet. Doing the basics well, always remaining conscious of cost structures and growing market access and maintaining profitability for all our stakeholders will enable us to stay sustainable and stable today. Then we can look to the longer term. We are now on a pathway towards realising the Kina Vision of being the most dynamic, progressive and accessible financial services organisation in the Pan Pacific region. Getting closer to our customers and stakeholders, and doing so ‘sustainably’, is a key part of that. Sustainable and stable may sound a little dull, yet looking around at the world today, stability appears to be what everyone craves. Greg Pawson Managing Director and Chief Executive Officer 14 April 2022 13 Annual Report 2021 14 Supporting SME. Our Segments. Retail customer growth 2021 Business loan book growth 2021 15% 22% Account balances growth 2021 Home loan book growth 2021 28% 14% New business accounts 2021 Funds Administration NPAT Growth 1,600 22% Kina Bank Kina Bank delivers home, business and corporate loans, everyday banking transactions, credit cards, merchant and payment facilities and banking services to smaller institutions. In 2021, the focus was on delivering results in the Corporate lending sector and FX revenues. Growing FX and other revenues During the year, we delivered on our objective of working with larger corporates and gaining access to relationships with FX income to grow FX revenue. This meant facilitating transactions with larger corporate clients (such as Oil Search) and the strategy delivered a significant impact on our business growth as FX income grew 17%. Five such new corporate customers provided us a material increase in opportunities across corporate lending, FX products and other banking and funds services. These, together with an increase in the loan book, investment in high-yielding government securities and lower cost of funds contributed positively to our overall performance. Harnessing these relationships with larger corporates will help deliver sustainable revenue growth over the next three years. Growing current account balances It was pleasing to see a 28% growth in our current account balances during 2021. The cost of funds – always a key focus – remained within manageable areas. We onboarded 1,600 new business accounts with customers who also have current accounts with us and retail customer growth saw a 15% increase. Growing the Loan Book by 20% The business loan book grew by 22% over the year – a milestone achievement to exceed PGK 2 billion in lending. This positions us well for the remainder of 2022 and into 2023. For the full year the loan book was up to PGK 1,998 million as we focused on growing key corporate clients. We successfully onboarded over 29 Corporate relationships. There are now a number of large global operations considering Kina Bank as a definite alternative to their other potential banking arrangements in PNG. The home loan book also saw a very positive growth of 14% with competitive offers and an enhanced website to build greater acquisition. Kina Wealth Record funds administration growth We maintained our leading position, and a differentiator for us here in PNG, as the country’s leading funds administrator and fund manager. Our Funds Administration business continued to record growth, consistent with increased funds under management, securing revenues in excess of PGK 30 million. We are launching Kina Private Bank before the end of June 2022, leveraging the significant capability we have as part of our funds administration and investment management business. 15 Annual Report 2021 16 We’re behind Papua New Guinea owned startups. Strategic Overview. Over the next three years our strategic intent is built on our banking and wealth capabilities to provide services and partnerships to create value for our communities. Supporting our strategic evolution are the key strategic pillars of Growth and Prosperity, Resilience, Service Excellence, Dynamic People and Sustainable Communities. Traditional banking • Digital banking Purpose To constantly improve the prosperity of the people, communities and markets that we serve Strategic Pillars Growth & Prosperity Resilience Service Excellence Dynamic People Sustainable Communities Retail Corporate Superannuation Partners 2020-21 Your trusted bank Commercial SME Banking Partners Initiatives Target Growth in Corporate, SME and Home lending Bank to Market Maker Increase Funds under Management Robust balance sheet Digital-first customer experiences API middle ware to improve partnerships Highly engaged and innovative team Delivering value to our communities Sell, service, grow, digitise • Grow banking market share • Digital customer solutions • Digitise core business • Test and learn partnerships and innovative business models Traditional banking • Digital banking • Investment Banking Bank as a service • Partnership Platform Key Metrics Market share Capital ratios Digital usage Digital revenues Engagement scores and gender balance Financial Inclusion acquisition 2022-24 Your trusted financial services partner Ecosystem Services Corporate Commercial Superannuation Partners Banking Partners Outcome Return on equity Return on equity, Earnings per share Return on equity Cost to income Increases in engagement scores Maintain gender balance Customer growth Infrastructure Partner API enabled Digital Partners Partnering to create and capture value (B2B, B2C) • Maturing technology and infrastructure • Targeted acquisitions • Maturing partnerships capability • Selectively scale new business models Pan Pacific diversified investment bank. Digital Partners 2025 Your trusted partner in the Pan Pacific Region Modules and Partners Markets Infrastructure Partner API enabled Convene a marketplace of assets, capabilities and services (B2B, B2C) • Geographical reach; digital-only bank • Customer and partnership marketplace • Bank as a service – B2B • Diversified investment bank Growth & Prosperity The revenue growth benefits realised from in-branch-focus, digital onboarding and targeted marketing, supported by a focus on merchant relationship management, were key to 2021’s results. (See Kina Bank and Kina Wealth segment review on page 15.) Growing partnerships MiBank The 15% strategic investment in, and partnership with, MiBank creates a solid platform from which to reach further into the community and deploy Kina Bank’s capabilities and assets, creating a mutual value exchange across both companies. Bringing to life our Bank as a service model, we have added MiBank to our digital platforms as a funds transfer destination for fee-free digital transfers. The design and testing for in-branch onboarding for new MiBank customers was implemented using the cloud-based fast-field app that transfers data directly from MiBank systems. This initiative extends our reach and approach to servicing smaller institutions that require banking services, while deploying cloud-based technology that positions Kina to move at scale across the Pan Pacific region. Other new offerings likely to drive strong income growth are Kina Private, our independent e-KYC payments platform, and Pei Beta a market-first, new domestic market payments platform due to launch in the second half of 2022. e-KYC Digital onboarding at scale and inclusive of what we call e-KYC, which is ‘digital know your customer’ onboarding is common in Australia, but unique in PNG. Kina is the first bank to launch this in 2022 – and it significantly advances our ability to onboard thousands of customers digitally through our partnership 17 Annual Report 2021 18 with PNG’s two largest superannuation provident funds here – Nambawan Super and Nasfund. This program will be scaled in 2022, which is material in this market, accelerating our customer acquisition ability. Through our partnership with Everest, developments have been finalised for the e-KYC enabled FX app, called ‘Xchange’. Pei Beta – bill payments platform We continue our leadership in first-to-market offerings with digital products and services. In the payments space – and a first for PNG – we launched a prototype for an independent bill payments platform, Pei Beta, that can be used by customers of any bank. This is aimed at facing into potential disruption of traditional payments channels, and adds further weight to Kina Bank being a market leader in digital payments in PNG. Resilience Kina has simplified its corporate structure over the past two years and the completion of a Non-Renounceable Rights Issue back in 2020 further strengthened the capital base. The total regulatory capital adequacy of 23.4% remains well above the (regulatory) minimum of 12%. Alongside our strong balance sheet, we have seen significant improvements in our credit modelling, Anti-Money Laundering monitoring systems and Enterprise Risk Management. Strengthening our risk frameworks and asset management procedures ensures the Bank is resilient in times of volatility. Automated and modernised technology-enabled platforms Kina’s business strategy is underpinned by technology with a focus on improving the experience of our customers. In 2021, we invested in our existing technology assets, modernising the core banking platform. A material opportunity to substantially shift the number of simple manual banking transactions exists by investing in automation and digitisation and this enables our people to focus on providing high-value support to Kina customers. Our ICT program includes a considerable number of initiatives across the Group which will enable further innovation and flexibility to launch the new technologies planned for later in 2022, moving away from an over-reliance on our core banking platform. We will continue to strengthen our technology capability. Service Excellence Digital first – enhancing core banking and digital assets While making significant enhancements to stabilising our core banking network and infrastructure, we also developed our digital assets and channels. Digital banking continues to be a major focus and will be one of our key innovative programs of work to continue over the course of 2022/23. We have always had the aspiration to be the leading digital bank in PNG, and in 2021 we saw tremendous market sentiment towards us in this regard. This mirrors our belief that Kina has ultimately transformed into a strong digital proposition – so much so that we consider we are now proudly PNG’s leading digital bank. In 2021, our digital revenue saw a 65% increase to PGK 23.4 million in 2021, the highest growth by any bank in this market. Kina Konnect mobile banking expanded In another first, we developed and launched digital self-registration for Kina Konnect, meaning existing customers can sign up for mobile banking without having to visit a branch. The functionality for Konnect mobile banking has been significantly enhanced, with customers now able to make loan repayments, check credit card and account balances, and block cards on the go. The destination billers list for Konnect and other digital platforms was expanded, providing more reasons for customers to use these channels and more revenue for Kina Bank through increased fee income. Internet payment gateway (IPG) enhanced Our Internet Payment Gateway (IPG) capability is now enhanced to include the collection of EFT (electronic funds transfer) payments, along with automation of manual processes to 19 improve back-end efficiency and quality. Via our partnership with NiuPay, Kina Bank will soon be the largest local provider of IPG services, overtaking BSP. We have also recently signed an agreement with SNS Technologies for online payment gateway services for their SME ecosystem. This represents another step forward in supporting the growth of digital services for SMEs, and scaling our existing IPG asset. Dynamic people Our people are at the centre of our business. Their passion and drive help our customers with their financial security and prosperity. During the year, we aimed to support our people to have a safe and secure workplace. There is a strong business continuity program to support our 691 staff in staying safe during COVID with transport to and from work for over 12 months. COVID vaccination leave, access to vaccination centres and transportation to and from their homes were vital measures we took during the year to ensure our staff remained safe and protected. We also implemented Kina’s first Family and Sexual Violence assistance program. Our values are our DNA The five values at Kina have been systemically embedded over the course of the past two years. As we build a ‘One team’ culture to drive our innovative mindset various programs of work have provided opportunities. Building the pipeline of the future Kina’s commitment to developing talent locally included a formalised internship and graduate program where we have onboarded 10 new graduates at the start of 2022. Providing employment opportunities for our people to build rich careers in PNG is core to our purpose. We also embarked on a scaled leadership program for 80 current and potential leaders through one-on-one coaching and building essential leadership skills to ensure our talent pipeline remains robust. Addressing gender imbalance Many exceptional women leaders have come from PNG over the years in the areas of politics, business, academia, government and public service. These women have been trailblazers in their respective areas of work and have made a significant contribution to the country’s development. However, despite their achievements, many women face roadblocks in a predominantly traditional Melanesian society where they are provided limited opportunities, including for leadership prospects1. Fewer than 10 women have been elected to the national parliament since Independence and currently there are no female members, making PNG one of only a handful of countries in the world to have no women in its parliament. It was welcomed that the government announced in 2021 that there will be five seats for women in the national parliament in 2022. This was received by many as a positive shift after the results of the 2017 elections, in which no women were voted in. It is hoped in the upcoming 2022 elections that change will be ushered in. A significant milestone at Kina is the gender balance we have achieved in our executive and senior management teams. With the appointment of three new female executives, there is an equal gender balance on the senior leadership team with 50% also reflecting a strong pipeline of strong female PNG talent. Health and Safety A sustained focus remains on Occupational Health and Safety disciplines designed to keep our people and customers safe with improved health awareness, reporting and strong leadership. Sustainable communities We are in the business of doing good, building trust, and creating long-term value for all our stakeholders.’ A separate section on our Sustainable Communities follows on pages 21 to 23. 1Women in leadership: reforms to bring about attitudinal change in PNG by Andrew Anton Mako, The Devpolicy Blog, The Australian National University, 24 May 2021 Annual Report 2021 20 Total Societal Impact. Revenues PGK 334 million Employee Salaries PGK 75 million Income Tax Paid PGK 30 million Dividends paid to PNG Residents PGK 8 million Sustainable communities Total Societal Impact At Kina, we are committed to becoming one of the most sustainable companies in PNG. We are in the business of doing good work, building trust, and creating long-term value for all our stakeholders – including our communities where we want to make a meaningful contribution – while balancing the needs of our customers, people and shareholders. This is in our DNA. In 2021, Kina delivered in excess of PGK 447 million to the PNG economy through the salaries we pay to our 691 staff, our tax contribution, dividends to PNG residents and revenues that we share with our customers and our suppliers. We have growth ambitions that will help build a more competitive market in PNG. Our offering of better products and experiences for our small-to-medium sized customers helps contribute to critical employment opportunities across all regions in PNG. The TSI strategy identified three key areas of focus being: 2019 2020 2021 Expanding financial inclusion Established partnership with MiBank • 130,000 customers included in the Financial system • Fee free online banking for Consumer customers • Bank services to MiBank card issuance and payments • 66,800 customers included in Financial system • Total of 196,800 customers across three years and 432,800 at MiBank Creating a workplace for the future • Project Wok • Individual Coaching and Support • Kokoda Track Foundation helping with Flexible Open and Distance education (FODE) centres • Expanded Graduate program • WAN PNG supporting job seekers • Domestic violence leave for our staff • Board mentoring program • 50% of females in senior executive roles* • 50% PNG nationals in executive roles Promoting enterprise and innovation • Women in Digital program • Business Coalition for Women • Women in Digital network • Launched the Prime Minister’s breakfast • Fee free accounts online for SMEs • Partnership with Xero • Entrepreneurial partnerships Kina’s Total Societal Impact (TSI) strategy recognises the need to foster and grow sustainable communities broadly across social, environmental, and economic development. The TSI strategy has been in operation since 2019 with the aim of addressing key social matters that impede the development and economic progress for people and communities in PNG. The TSI has been executed on several levels – through strategic partnerships and leveraging both our combined assets across core businesses of Banking and Wealth. This also allows our partnerships’ collective expertise to develop market-leading products that support growth across the whole PNG economy. This multi-layered approach complements our purpose and digital-first mindset, using ever-expansive technology and our people to build a better life in PNG. Over the last three years, progress has been made across all three pillars of the TSI strategy. In this third year of this TSI strategy, we delivered several material changes to the way we think about and deliver sustainable outcomes. Expanding financial inclusion The strategic investment with MiBank has been a key focus over the past year. Financial inclusion remains one of the most prominent structural issues for the PNG economy with over 70% of the population unbanked. Mibank onboarded 66,800 new customers during the year, resulting in 432,800 customers in total. The program was significantly impacted by COVID lockdowns in provincial regions, therefore limiting access to branches. Progress in building digital services for the MiBank partnerships is steadily increasing productivity and ultimately accessibility to financial services and products. Our ability to onboard MiBank customers in Kina branches will materially improve accessibility across provincial areas. A vital piece of infrastructure for Financial Inclusion and SME development is our branch expansion plans. We will look to open seven new branches in regional areas that will include a Commercial centre that will not only provide Lending products but will be a Hub for local business to utilise our expertise. Another important program is the rollout of our Point of Sale terminals to business in provincial areas. We will be adding another 1,000 terminals in 2022. Creating a workplace for the future Youth unemployment continues to challenge the prosperity of the PNG economy. We have worked since the inception of the TSI program with various partners to help bridge the gap in capabilities and job opportunities. WAN PNG is a key partner whose goal is to increase the development and employment of local talent. The key obstacles people face in PNG are a shortage of employment opportunities, unclear pathways to gainful employment and a shortage of training and upskilling. In the last two years, the Kina team has volunteered over 150 hours in mentoring, coaching and tutoring secondary students to help set them up for success following the completion of their formal education. We have a dedicated resource in our People and Culture team who works with WAN PNG with various upskilling, resumé development and career opportunity advice. 21 Annual Report 2021 22 * As at February 2022 Promoting enterprise and innovation The SME thought leadership program was delivered throughout PNG despite the impact of COVID-19. Enhancing opportunities and development is a focus for the PNG government and Kina has worked alongside many government programs providing expertise and sponsorship this year. This included sponsorship of the annual Prime Minister’s Back to Business Breakfast, Kokoda Track Foundation teaching centres and leadership through the Flexible, Open and Distance Education (FODE) scholarships and in-training services. The Emstret Hub is the first co-working space in PNG to help entrepreneurs, small businesses and professionals to deliver their services and products. Kina hosts monthly events and provides economic insight to the network. Environment-related commitments Following on from introducing the TSI strategy, Kina has now embarked on the first stage of our environmentally sustainable commitments. In 2021, we began addressing environmental issues within our operating landscape. The E&S Policy is designed to support the execution of Kina’s Environmental and Social Management System (ESMS). The objective is to avoid or minimise and mitigate potential risks or adverse impacts of our lending on the environment and affected people. The practical application of the E&S policy is an assessment tool for our lending and credit teams. The tool will be used across credit-related products in reviewing environmental and gender aspects of our current and perspective customers. We have trained 60 credit and lending specialists in the assessment framework with a continued educational program being implemented in 2022. The ESMS will be integrated into our annual credit review cycle to ensure compliance with the policy. A summary of the E&S policy can be found on the website at investors.kinabank.com.pg/investors Looking ahead, our formal ESG strategy will likely be completed in mid-2022, and this will incorporate materiality assessments with extensive engagement with all key stakeholders on what is important for our Kina community to grow sustainably in our chosen markets. Helping our communities In honour of our valued staff member Nancy Moka, we donated PGK 100,000 to the Links of Hope charity where Nancy was a director. Nancy passed away during 2021 and was a committed volunteer and supporter of Links of Hope, which supports children impacted by the HIV epidemic and women released from prison in the creation of small business enterprises. Children in the program are supported by monthly nutrition care packages, educational programs, school fees and uniforms. We continued to sponsor various events and programs to promote sustainable communities. In 2021, we focused on health initiatives. This included the sponsorship of meals for a week with our Brand Ambassador Julz for the Port Moresby General Hospital. Kina also provided much-needed donations for urgent medical supplies and the sponsorship of the Eskies for Milk campaign. 23 Annual Report 2021 24 Links of Hope operates a child sponsorship program. Board of Directors. 25 Annual Report 2021 26 Managing Director/Chief Executive Office Gregory Pawson (left) and Chairman Isikeli (Keli) Taureka (right). Isikeli (Keli) Taureka Non-Executive Chairman Chair of the Disclosure Committee Mr Isikeli Taureka was appointed as a Director of Kina in April 2016. As at 14 March 2022, Mr Taureka holds the position of Managing Director of Laba Holdings Limited which comprises shareholdings from four local areas supporting PNG LNG projects. Previously, he held 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. Isikeli previously held a number of senior executive roles with Chevron Corporation. Before joining Chevron, he was the Managing Director of the PNG-owned Post and Telecommunication Corporation and held senior management positions in the Bank of South Pacific Limited. Isikeli provides extensive knowledge and networks across PNG and Fiji. 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. Gregory Pawson Managing Director/Chief Executive Officer Mr Greg Pawson was appointed Managing Director and Chief Executive Officer of Kina in 2018. He joined the Group with an extensive knowledge of the financial services industry in Australia, New Zealand, South East Asia and the Pacific. Before his appointment, Greg 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. His extensive banking experience includes more than 16 years at Westpac where he had accountability for Westpac’s Country/Institutional, Retail and Commercial banking businesses operating in India, Singapore, Indonesia, PNG and Fiji, and the divestment of Westpac’s retail businesses in the Cook Islands, Tonga, Samoa, Vanuatu and the Solomon Islands. Prior to this role he was Westpac’s General Manager Commercial Banking for three years leading the Australian Commercial banking customer segment with revenue in excess of $1.2 billion and responsible for 1,500 employees. Greg holds a Master of Business Administration from the Australian Institute of Management Adelaide and is a graduate member of the Australian Institute of Company Directors. 27 Annual Report 2021 28 Andrew Carriline Non-Executive Director Member of the Audit and Risk Committee, Remuneration and Nomination Committee and the Disclosure 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 was an executive at a major Australian bank, where until 2017 he was the Chief Risk Officer in the Institutional Bank, as well as Chairman of the bank’s business in PNG. Since 2017 Andrew has accepted a number of non-executive roles in the ‘for profit’ and ‘not-for-profit’ sectors. Before his focus on purely risk roles, Andrew practised corporate law in the public and private sectors 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 member of the Australian Institute of Company Directors. Paul Hutchinson Non-Executive Director Member of the Audit and Risk Committee Mr Paul Hutchinson was appointed as a Director of Kina on 16 August 2018. Paul is currently employed by the University of Adelaide in the capacity of Program Director, responsible for large scale organisation restructuring and major projects. Previously, Paul was the Managing Director and Chief Executive Officer of Rural Bank (specialising in the provision of financial services to the agribusiness sector), Chief Operating Officer of New Zealand Post and held various other senior appointments with Westpac , National Australia Bank and Bank of New Zealand. Paul’s extensive background in strategy, finance, sales and distribution, commercial operations and risk management has been honed over 30 years in the financial services sector. He is well versed in corporate governance practices and currently holds directorships with RSPCA (South Australia), the Planning, Finance and Performance Committee for the SACE Board, Regional Council for the Financial Services Institute of Australasia (FINSIA) and is the Chair of the University of Adelaide’s Business School Advisory Board and International Centre for Financial Services. Previous board appointments include Rural Bank Ltd, Outsource Australia Ltd and Datamail Group Ltd. Paul has attended the Bankers Course in conjunction with the New Zealand Bankers’ Association and the University of Victoria and is a graduate of the Harvard Business School General Management Program. He is a Fellow of the Institute of Financial Services and is a member of the Australian Institute of Company Directors, having attended both the Company Directors Course and International Company Directors Course. 29 Annual Report 2021 30 Karen Smith-Pomeroy Non-Executive Director Chair of the Audit and Risk Committee, Member of the Remuneration and Nomination Committee and the Disclosure Committee Ms Karen Smith-Pomeroy was appointed as a Director of Kina on 12 September 2018. Karen is an experienced non-executive director, with involvement across a number of industry sectors. Karen has many years of experience in the financial services sector, including a period of five 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 and Stanwell Corporation Limited and is Chair of the Regional Investment Corporation and National Affordable Housing. Karen holds accounting qualifications and is a Fellow of the Institute of Public Accountants, a Senior Fellow of the Financial Services Institute of Australasia (FINSIA), a certificate member of the Governance Institute of Australia and a graduate member of the Australian Institute of Company Directors. Dr Ila Temu Non-Executive Director Member of the Remuneration and Nomination Committee Dr Ila Temu was appointed as a Director of Kina on 14 December 2020. Ila is Country Manager for Barrick (Niugini) Limited (BNL), a role he has held for some time now. 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. Prior to joining Placer Dome, Ila was Managing Director of Mineral Resources Development Company (MRDC), a state-owned organisation that held PNG’s equity in major mining and petroleum projects throughout PNG. He has also held senior positions within a number of public organisations, 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. Ila 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. Ila holds a Bachelor of Economics from the University of Papua New Guinea, a Masters in Agricultural Development Economics from the Australian National University, Canberra Australia and a Ph.D in Agricultural Economics from the University of California, Davis, USA. 31 Annual Report 2021 32 Dr Jane Thomason Non-Executive Director Chair of the Remuneration and Nomination Committee Dr Jane Thomason was appointed as a Director of Kina on 27 April 2018. An entrepreneur and innovator, Jane has worked in international development 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. Since 2017, she has focused on Fintech and Blockchain and is a thought leader in the applications of blockchain technology to solve social problems. She is the Co- Founder of the British Blockchain and Frontier Technology Association, Chair, Kasei Holdings Blockchain Securities), Aquis Stock Exchange, London, and is on the Editorial Board of both Frontiers in Blockchain and Journal of Metaverse. Dr Thomason co-authored the books Blockchain Technologies for Global Social Change and Applied Ethics in a Digital Age. She is a Thinkers 360 in the Top 50 Global Thought Leaders and Influencers on Blockchain and Sustainability. 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 world’s poverty problems. 33 Annual Report 2021 34 Diane Igal (left), Annartha Peter (right) We strive for continual improvement in the prosperity of our customers and communities. Senior Executive Team. Chetan Chopra Chief Financial Officer Chetan is the Chief Financial Officer, reporting to the CEO. He is a Chartered Accountant from India. Chetan joined Kina Bank in May 2016 and been part of the senior leadership group since listing on the ASX. A practising accountant by profession, Chetan worked earlier for nine years as a Papua New Guinea partner for KPMG (formerly Touche Ross & Co.) based in Lae, prior to returning to India as CFO for Dun and Bradstreet India and Cognizant Technology Solutions in 1993. He returned to PNG in 2013 as the CFO of PNG’s largest superannuation fund, Nambawan Super Ltd. His extensive knowledge of businesses and communities through working in provinces in PNG has helped develop critical banking relationships for the Bank. Chetan also holds a Bachelor of Chemical Sciences from Mumbai University and an MBA from Melbourne Business School, University of Melbourne. Chetan is a member of Certified Practising Accountants Australia and PNG. Lesieli Taviri Executive General Manager Banking & PNG Country Head 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. 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 BSP. Johnson played a central role in BSP’s acquisition of Westpac’s Pacific Island Nations 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 Practising Accountants PNG. Deepak Gupta Executive General Manager Business Partners and Wealth Deepak Gupta is Executive General Manager Business Partners and Wealth is responsible for Wealth management and Corporate banking at Kina. He has held a variety of senior positions with 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. 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. 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. 35 Annual Report 2021 36 Karen Mathers Chief Risk Officer Karen is our Group Chief Risk Officer and responsible for overseeing Kina’s strategy for holistic risk management and compliance*. This includes best practice governance and regulatory management from the various supervisory authorities. She is a member of the company’s executive management team. Karen has enjoyed a career in finance that spans over 25 years. She has held executive positions at ANZ Banking Group (Australia, and overseas) as Chief Finance, Chief Operating and Chief Risk Officer and is well versed in the multidisciplined divisions in Banking. With her unique skillset (accounting, law and risk management), she has had responsibilities that had oversight of all financial operations of the companies in a multitude of industries in Australia, Europe, Asia and the Pacific. Karen is degree qualified as an accountant with post-graduate qualifications in commercial law and forensic accounting. Samantha Miller Executive General Manager Investor Relations, Corporate Affairs and ESG Sam joined Kina Bank in February 2022*. In the role of Executive General Manager Investor Relations, Corporate Affairs and ESG, Sam is responsible for managing KSL investors, management of corporate affairs and the implementation of Kina’s ESG framework. Sam has 20 years’ experience across a diverse range of roles in financial services. Prior to her joining Kina she worked in Treasury, Investor Relations, Group Finance, Strategy Customer solutions at Suncorp and Heritage Bank. Sam holds a Bachelor of International Business from Queensland University of Technology, Masters of Applied Finance from Macquarie University and is a graduate of the Australian Institute of Company Directors. Judith Ugava-Taunao Chief of Staff Judith Ugava-Taunao was appointed Chief of Staff in June 2021. She is responsible for developing and delivering key strategic business priorities. For 18 years Jude has built a career that spans across international borders and sectors. She has worked in international development, organisational transformation, and human resource development and leadership. Prior to joining Kina Bank, she was at Oil Search where she served as the Vice President, Change Management Lead and as the General Manager for OSL’s Citizen Development Program. 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. *Karen Mathers started with Kina on 1 October 2021 and Samantha Miller on 1 February 2022 37 Annual Report 2021 38 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. Nathaniel Wingti Group Manager 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 a bachelor of business from the Queensland University of Technology. 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. 39 Annual Report 2021 40 Tara Uru We’re driven by the desire to provide customers with more choice and to deliver increased value for shareholders. Remuneration Report. Contents 1 2 3 Introduction and overview to shareholders Kina’s Key Management Personnel (KMP) Executive remuneration 4 Non-executive director arrangements 5 Related party transactions 6 Directors’ interests in shares 1. Introduction and overview to Shareholders The Remuneration Report is focused on providing information that the Board considers important for shareholders to understand the Company’s remuneration framework which is designed to support the delivery of targeted operating financial and non-financial results. This Remuneration Report has not been prepared in accordance with section 300A of the Australian Corporations Act 2001 (Cth) and the Company is not required to have this report audited. However, the expected level of disclosure of an Australian-incorporated company has been provided throughout. During the year, Kina reviewed its incentive plans to ensure they align 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 2021 financial year. 41 Annual Report 2021 42 2. Kina’s Key Management Personnel (KMP) This report covers the remuneration arrangements of Kina’s Key Management Personnel (KMP) who are the people with the authority and responsibility for planning, directing and controlling the activities of the Kina Group directly or indirectly. Kina’s KMP comprise the non-executive directors, the Managing Director and Chief Executive Officer (MD&CEO) and the direct reports to the MD&CEO, who are collectively called the Senior Executive Team. For the purposes of this report, ‘executive’ refers to the MD&CEO and the members of the Senior Executive Team (Senior Executives). The KMP disclosed in this Remuneration Report for 2021 were: Non-executive directors (refer to section 4 of this Remuneration Report) Name Isikeli Taureka Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Ila Temu Jane Thomason Position held during the financial year ended 31 December 2021*n Non-executive Chairman Non-executive director Non-executive director Non-executive director Non-executive director Non-executive director MD&CEO and Senior Executive Team (direct reports to the MD&CEO) Name Greg Pawson Chetan Chopra Deepak Gupta Position held during the financial year ended 31 December 2021* MD&CEO Chief Financial Officer (CFO) and Company Secretary Executive General Manager, Business Partners and Wealth Michael Van Dorssen1 Chief Risk Officer Gavin Heard Johnson Kalo Ivan Vidovich Nathan Wingti Lesieli Taviri Asi Nauna Judith Ugava-Taunao2 General Manager Corporate Affairs and Investor Relations Chief Information Officer Chief Transformation Officer Head of Treasury Executive General Manager, Banking Executive General Manager, Lending Chief of Staff * The term as KMP was for the full year unless otherwise indicated. 1 resigned 12 November 2021 2 appointed 26 May 2021 Remuneration and Nomination Committee The Board has established the Remuneration and Nomination Committee (RNC) to ensure 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 regarding its composition • has coherent remuneration policies and practices to attract and retain directors and Senior Executives who will create value for shareholders • observes those remuneration policies and practices; and • rewards executives fairly and responsibly having regard to the performance of both the Kina Group and its executives and the general external pay environment (including the level of fees for non-executive directors). The RNC assists the Board in the performance of its constitutional and regulatory duties by: • advising the Board on the remuneration of the MD&CEO, Senior Executive Team and employees holding Responsible Person position (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 non-executive directors’ fees • overseeing aspects of the ’Fit and Proper’ requirements of BPNG BPS310; and • identifying the mix of skills and individuals required to allow the Board to contribute to the successful oversight and stewardship of the Company. 43 To align remuneration, performance and strategy, the RNC regularly reviews: • 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. For more information on the RNC, refer to Kina’s Corporate Governance Statement – available on Kina’s website at investors.kinabank.com.pg/Investors/?page=corporate-governance 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. The RNC also engages external remuneration consultants to assist with this review as required. In particular, the RNC aims to ensure Kina’s remuneration practices are: • transparent, 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; and • acceptable to shareholders. Remuneration Policy The key tenets of Kina’s Remuneration Policy include that: • Remuneration should be set at levels that reflect the relative size of the position, the remuneration ranges for positions of equivalent ‘size’ in the relevant market, the performance of the person holding the position and any position-specific factors such as location or the strategic importance of the role. • Remuneration levels must reflect what the Group can afford. The Board through the RNC will provide the MD&CEO with advice on affordability and this must be factored into the MD&CEO’s annual review of remuneration. • 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. • Pay structures and levels may be reviewed based on the organisational growth and maturity over a period; and from time to time benchmarked against identified market participants. This survey cycle period shall typically be not more than once in any two years. • Remuneration packages may comprise a mix of base pay, performance-related pay and other benefits where this is consistent in the market with the structure of packages for similar sized roles, and must take into account the value of all such elements. • Remuneration packages, including any performance-based component, must not compromise the independence of any risk and financial control officers of the Group. • Where a remuneration 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 jeopardise 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 the Board’s judgment this is necessary to protect the financial soundness of the Group or address 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 prohibit 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. • 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 Executive Team and shareholders. Annual Report 2021 44 3. Executive remuneration (continued) Remuneration components, approach and mix To align the interests of Kina’s Senior Executive Team with Kina’s strategic goals and to assist in the attraction, motivation and retention of management and employees of Kina, the Board has determined that the remuneration packages of the MD&CEO and the Senior Executive Team should comprise the following components: Fixed remuneration Short-term incentive award (STI Award) Long-term incentive award (LTI Award) Retention Award 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. 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. The long-term incentive award (LTI Award) 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. 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 members may receive their fixed remuneration (FR) 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 respective member of the Senior Executive Team at or near the median for a corresponding role, with flexibility to take into account capability, experience, and value to the organisation and performance of the individual. STI Award Structure of STI Award FEATURES Eligibility STI Award components Performance measures DESCRIPTION The MD&CEO and Senior Executive Team are eligible to participate in the STI Award (STI Participants). Cash bonus: 65% of the STI Participant’s STI Award. STI Performance Rights: 35% of the STI Participant’s Award. 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 the Senior Executive 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 2021: • Minimum (85% of budget) • Threshold (85% – 100% budget): • Target (Budget 100%) 50% 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 STI participant (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. Period Financial Year (FY) ended 31 December 2018 FY ended 31 December 2019 FY ended 31 December 2020 FY ended 31 December 2021 Forfeiture of STI Performance Rights Payments and grants Target STI and maximum STI that can be awarded Date granted 01/04/2019 01/04/2020 01/04/2021 01/04/2022 Vesting date 01/04/2021 01/04/2022 01/04/2023 01/04/2024 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. Payment of the cash component under the STI Award will be made in April of each year after the release of the full year financial results to the ASX and PNGX. MD&CEO CFO Other Senior Executives Target 100% of base salary 40% of base salary 30% of base salary Maximum 150% of base salary 50% of base salary 45% of base salary 45 Annual Report 2021 46 3. Executive remuneration (continued) Long-term incentive Award (LTI 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 Award FEATURES Eligibility LTI components Performance measures 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. 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 Below 50th percentile of peer group At 50th percentile Between 50th – 75% percentile 75% and above Vesting outcome Nil 50% vesting Pro rata between 50% to 100% 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 < 5% compound annual growth 5% >5% and < 10% 10% Vesting outcome Nil 50% vesting Pro rata between 50% – 100% 100% vesting In 2021, the Board worked with an independent advisor to identify the comparator group companies and the advisor calculates 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). 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. The performance periods for the outstanding awards are as follows: Financial Year Date granted 2018 01/04/2019 2019 01/04/2020 2020 01/04/2021 2021 01/04/2022 Performance Period 01/04/2019 to 31/03/2022 01/04/2020 to 31/03/2023 01/04/2021 to 31/03/2024 01/04/2022 to 31/03/2025 Measures Vesting date (subject to performance testing) EPS assessment compound till FY 2020 – 50% Relative TSR assessment compounded to FY 2020 – 50% EPS assessment compound till FY 2021 – 50% Relative TSR assessment compounded to FY 2021 – 50% EPS assessment compound till FY 2021 – 50% Relative TSR assessment compounded to FY 2021 – 50% EPS assessment compound till FY 2021 – 50% Relative TSR assessment compounded to FY 2021 – 50% 01/04/2022 01/04/2023 01/04/2024 01/04/2025 Forfeiture of LTI Performance Rights Unvested LTI Performance Rights may be forfeited: Lapse of LTI Performance Rights • 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). 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 • if the LTI participant purports to deal in the LTI Performance Right in breach of any disposal or hedging restrictions in respect of the Performance Right. Target LTI and maximum LTI that can be awarded MD&CEO CFO Other Senior Executives Target 50% 40% 30% Maximum 50% 40% 30% 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 peer group • ranks simulated performances and the proportion of relative TSR award vested as calculated based on vesting schedule; and • records 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. EPS 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 conditions will be equal to the share price of the underlying asset if holders are entitled to receive future dividends. 47 Annual Report 2021 48 3. Executive remuneration (continued) Retention Rights FEATURES Eligibility Retention Rights Vesting conditions 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. 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 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 2021, 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 three years as follows; • 134,229 vested on 4 December 2019 • 134,227 vested on 4 December 2020; and • 134,227 vested on 4 December 2021. Forfeiture of Retention Rights Unvested Retention Rights may be forfeited: Lapse of Retention Rights • 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). 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 • 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 who are executives are performance-based. Participant Greg Pawson Chetan Chopra Michael Van Dorssen Ivan Vidovich Deepak Gupta Johnson Kalo Nathan Wingti Gavin Heard Asi Nauna1* Lesieli Taviri2* Judith Ugava-Taunao3* * pro-rata based on start dates 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Cash salary/fees/short-term compensated absences $ Non-monetary benefits $ Total $ 591,300 591,300 400,000 400,000 398,549 398,549 375,000 375,000 350,000 350,000 309,680 324,162 290,325 303,901 220,000 220,000 226,454 65,942 310,488 71,049 124,195 - 206,709 183,800 126,431 163,296 61,976 150,816 61,748 42,546 174,977 161,270 22,602 13,777 112,468 108,999 23,736 12,764 15,924 4,076 20,713 3,020 8,839 - 798,009 775,100 526,431 563,296 460,525 549,365 436,748 417,546 524,977 511,270 332,282 337,939 402,793 412,900 243,736 232,764 242,378 70,018 331,201 74,069 133,033 - 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. It is proposed that this be reviewed in 2022. Holdings in Company Shares 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 Ivan Vidovich4 1 appointed 11 September 2020 2 appointed 11 September 2020 3 appointed 26 May 2021 4 aquried on market Current balance 630,803 273,745 191,404 291,055 51,127 46,704 49 Annual Report 2021 50 3. Executive remuneration (continued) Performance Rights holdings The table below sets out the current holdings of Performance Rights (PR) by KMP or former KMP. Employment agreements KMP employment contracts First Name Surname Award Year Grant Date Vesting date Value of PR granted (AUD) VWAP period VWAP $ applied FY2021 PR • All Senior Executive Team members’ employment contracts are over a period of three years with a notice period of three months. Gregory Pawson Chetan Chopra Michael Van Dorssen Deepak Gupta Nathan Wingti Gavin Heard Ivan Vidovich Adam Downie Wayne Beckley Johnson Kalo Lesieli Taviri Asi Nauna STI STI LTI LTI LTI STI STI LTI LTI LTI STI STI LTI LTI LTI STI STI LTI LTI LTI STI STI LTI LTI LTI STI STI LTI LTI STI STI LTI STI LTI LTI STI LTI STI LTI STI LTI 2019 2020 2018 2019 2020 2019 2020 2018 2019 2020 2019 2020 2018 2019 2020 2019 2020 2018 2019 2020 2019 2020 2018 2019 2020 2019 2020 2019 2020 2019 2020 2020 2019 2019 2018 2020 2020 2020 2020 2020 2020 19/05/2020 01/04/2021 01/04/2019 19/05/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2019 01/04/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2019 01/04/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2019 01/04/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2019 01/04/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2020 01/04/2021 01/04/2021 01/04/2020 01/04/2020 01/04/2019 01/04/2021 01/04/2021 01/04/2021 01/04/2021 01/04/2021 01/04/2021 19/05/2022 01/04/2023 01/04/2022 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2022 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2022 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2022 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2022 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2024 01/04/2022 01/04/2023 01/04/2022 01/04/2023 01/04/2024 01/04/2023 01/04/2024 01/04/2023 01/04/2024 268,197 288,189 295,641 294,722 274,466 70,000 105,225 144,000 160,000 148,009 42,000 48,566 107,882 120,000 111,006 43,750 48,566 91,499 105,000 97,131 49,000 56,660 48,000 48,000 83,255 23,100 25,902 66,000 61,053 38,500 64,754 138,758 42,000 90,000 104,999 24,282 61,053 38,852 88,805 16,189 88,805 31/12/2019 31/12/2021 31/12/2018 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2018 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2018 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2018 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2018 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2019 31/12/2021 31/12/2021 31/12/2019 31/12/2019 31/12/2018 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 1.4300 0.8233 0.9072 1.4300 0.8233 1.4300 0.8233 0.9072 1.4300 0.8233 1.4300 0.8233 0.9072 1.4300 0.8233 1.4300 0.8233 0.9072 1.4300 0.8233 1.4300 0.8233 0.9072 1.4300 0.8233 1.4300 0.8233 1.4300 0.8233 1.4300 0.8233 0.8233 1.4300 1.4300 0.9072 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 187,550 350,041 325,883 206,099 333,373 48,951 127,809 158,730 111,888 179,775 29,371 58,989 118,918 83,916 134,831 30,594 58,989 100,859 73,427 117,978 34,266 68,820 52,910 33,566 101,124 16,154 31,461 46,154 74,157 26,371 78,652 168,539 29,371 62,937 115,740 29,494 74,157 47,191 107,865 19,663 107,865 Subsequent to, and in relation to, the year ended 31 December 2021 (FY2021 Awards), the Board approved the following STI and LTI Awards for eligible participants. The STI Performance Rights and LTI Performance Rights components of the FY2021 STI and LTI Awards are subject to shareholder approval at the 2022 AGM to be held on 24 May 2022. First Name Surname Award Year Grant Date Vesting date Value of PR Granted (AUD) VWAP Period VWAP $ applied FY2021 PR Gregory Pawson Chetan Chopra Deepak Gupta Nathan Wingti Ivan Vidovich Johnson Kalo Lesieli Taviri Asi Judith Nauna Ugava- Taunao STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI STI LTI 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2022 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 01/04/2024 01/04/2025 294,911 280,868 108,063 152,000 49,875 99,750 58,188 85,500 66,500 142,500 39,900 91,200 39,900 91,200 24,938 62,700 16,625 62,700 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 31/12/2021 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 0.8233 358,206 341,149 131,255 184,623 60,579 121,159 70,676 103,850 80,773 173,084 48,464 110,774 48,464 110,774 30,290 76,157 20,193 76,157 MD&CEO employment agreement The MD&CEO’s employment agreement is for a term of five years with a notice period of six 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. Remuneration of employees During the year, the number of employees or former employees (not being directors of the Company), receiving remuneration in excess of PGK 100,000 per annum from the Group, stated in bands of PGK 10,000, were as follows: in PGK 330,000 - 340,000 320,000 - 330,000 310,000 - 320,000 300,000 - 310,000 280,000 - 290,000 270,000 - 280,000 260,000 - 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 *impact of foreign exchange conversion. 2021 2 2 1 1 1 1 - 2 - 3 1 1 4 7 5 8 9 6 11 6 16 21 2020 - 2 3 - 1 - 2 - 1 2 - 1 2 4 10 4 7 9 8 2 18 23 in PGK 1,530,000 - 1,540,000 1,450,000 - 1,460,000 1,030,000 - 1,040,000 980,000 - 990,000 920,000 - 930,000 900,000 - 910,000 860,000 - 870,000 800,000 - 810,000 770,000 - 780,000 750,000 - 760,000 740,000 - 750,000 710,000 - 720,000 640,000 - 650,000 610,000 - 620,000 600,000 - 610,000 580,000 - 590,000 570,000 - 580,000 550,000 - 560,000 540,000 - 550,000 510,000 - 520,000 500,000 - 510,000 490,000 - 500,000 470,000 - 480,000 460,000 - 470,000 450,000 - 460,000 440,000 - 450,000 420,000 - 430,000 400,000 - 410,000 390,000 - 400,000 380,000 - 390,000 360,000 - 370,000 2021 1* - 2 - - 1 - 1 1 1 1 1 1 - 1 2 1 1 - 2 1 1 1 - 1 1 1 - 1 1 - 2020 - 1* - 2 1 - 1 1 - 1 1 - - 1 - 2 - 1 1 - - 2 1 1 - 2 - 1 1 2 1 51 Annual Report 2021 52 4. Non-executive director arrangements Remuneration policy 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 awards or retirement allowances. The fees are exclusive of superannuation. Directors’ 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 2021 and increases were applied with effect from 1 October 2020. Remuneration components Kina’s Board and Committee fee structure as at 31 December 2021 was: Board fees Chairman Non-executive director/committee member Board Board Committee fees $180,000 (excluding superannuation entitlements) $90,000 (excluding any superannuation entitlements) Audit and Risk Committee Remuneration and Nomination Committee Committee Chair: $22,500 (excluding any superannuation entitlements) Committee Chair: $22,500 (excluding any superannuation entitlements) Members: $11,250 (excluding any superannuation entitlements) Members: $11,250 (excluding any superannuation entitlements) Disclosure Committee No additional fees are paid No additional fees are paid Fee pool Under the Company’s 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 a general meeting of shareholders. For the financial year ended 31 December 2021, this has been fixed at $1.28 million per annum (no change from the prior year, and the 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 a 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. Committee fees The Committee Chair fees are not duplicated for those directors who are appointed to the Chair of more than one Committee or the Board. Non-executive director remuneration details The following payments were made to non-executive directors in the 2021 and 2020 financial years. Director Isikeli Taureka Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Ila Temu Jane Thomason Year 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Fees $ 222,020 146,250 112,500 91,875 101,250 85,313 131,310 108,803 98,769 3,750 112,500 95,625 Short-term benefits Post-employment benefits Total Non-monetary benefits $ Superannuation contributions $ - - - - - - - - - - - - 18,650 36,001 7,560 6,615 7,560 6,615 - - 5,415 315 - 6,615 $ 240,669 182,251 120,060 98,490 108,810 91,928 131,310 108,803 104,184 4,065 112,500 99,300 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 the 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 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 (%) 65,000 630,803 125,000 80,299 90,000 35,000 - 0.02% 0.22% 0.04% 0.03% 0.03% 0.01% 0.00% 53 Annual Report 2021 54 Corporate Governance. The Board of Directors of Kina Securities Limited (the Board) is responsible for the Group’s overall corporate governance, including adopting appropriate policies and procedures designed to ensure it is properly managed to protect and enhance shareholders’ and stakeholders’ interests. The Board of Kina Securities Limited and its related entities places great emphasis on the continued development of a strong corporate governance, risk management and compliance culture. In an emerging marketplace, Kina seeks to be innovative as well as to provide a safe and secure environment for its customers and clients, which in turn brings value to shareholders. Kina’s governance practices and policies reflect, and are consistent with, each of the ASX and PNGX Listing Rules. The Board considers the governance practices we have adopted as following these principles for the year ended 31 December 2021. Ethical leadership for value creation The Board is committed to building long-term value for its shareholders, employees, communities and customers. We choose to honour this commitment by maintaining high standards of corporate governance that are, in turn, supported by skilled people as well as sound business practices and policies. This commitment also extends to maintaining high standards of business integrity and business ethics in all our activities. This section provides an overview of Kina’s corporate governance framework and discloses information on governance, the independence of directors and other relevant information in addition to that disclosed in the Director’s Report. For further details on our government structure, policies and practices, please refer to the full Kina Corporate Governance Statement 2021 available at investors.kinabank.com.pg/Investors/?page=corporate-governance Governance Framework The Board regularly reviews the Company’s governance structure, systems and processes to ensure that these support effective and ethical leadership and corporate governance, corporate citizenship and sustainability. Overseeing governance means the Board ensures that these principles apply in the best interests of Kina Bank and all our stakeholders. As the highest governing structure in the Company, the Board provides effective leadership in the best interests of Kina Bank and is responsible for its strategic direction and control. The Board is supported by three Board Committees, and together with these committees benchmarks our governance practices to best practice standards. The Board exercises its control through a governance framework which includes detailed reporting up to the Board and its committees, with effective delegation, robust risk management and a system of assurance regarding the veracity and efficacy of financial reporting and internal control systems. Kina’s Constitution and each of the charters, policies and codes are referred to in our full Corporate Government Statement 2021 available at www.kinabank.com.pg Board Composition The Company’s Constitution provides for a minimum of three and a maximum of ten directors. Board members have a diverse range of skills and experience which ensure they are able to contribute effectively to Board-level decisions and act in the best interests of shareholders. The Board Charter recognises the respective roles of the Board members and Kina executive management and distinguishes between Board-level strategic guidance and the work of executives. Director Appointment date Length of service Non-executive Independent Isikeli Taureka 19 April 2016 5 years, 0 months Karen Smith-Pomeroy 12 September 2016 5 years, 7 months Gregory Pawson 1 January 2018 4 years, 4 months Jane Thomason 27 April 2018 4 years, 0 months Andrew Carriline 16 August 2018 3 years, 8 months Paul Hutchinson 16 August 2018 3 years, 8 months Ila Temu 14 December 2020 1 year, 4 months Yes Yes No Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes More information about each director is available at www.kinabank.com.pg 55 Independence of the Board The Board considers each of the non-executive directors are independent of the Kina Group. An ‘independent’ director is a non-executive director who is not a member of Kina’s Senior Executive Team and who is free of any business or other relationship that could materially interfere with, or reasonably be perceived to materially interfere with, the independent exercise of their judgment. As at 31 December 2021, all directors are considered by the Board to be ‘independent’ directors, except for Mr Greg Pawson who is the Managing Director and Chief Executive Officer. The six non-executive directors are considered to be independent, having regard to (amongst other things) the following factors: • They are non-executive directors who are free of any interest, business or other relationship that could reasonably influence, or could reasonably be perceived to influence, in a material way, their capacity to bring an independent judgment to bear on issues before the Board, and to act in the best interests of the Company’s shareholders generally. • They have not been employed or retained, within the last three years, to provide material professional services to the Company. • Within the last 12 months they were not a partner, director, senior executive or material shareholder of a firm that provided material professional services to the Company . • They do not receive performance-based remuneration from, or participate in, any employee share scheme of the Company. At least once a year, the Board reviews the independence of each director in the light of interests the directors disclose. Determining directors’ conflicts of interest The Company’s Constitution, Board Charter and Code of Conduct provide clear procedures regarding the management of actual, potential or perceived conflicts of interest. Each director has a continuing obligation to keep the Board advised of any interest that has arisen that could potentially conflict with those of the Group. Where a director has an actual, potential or perceived conflict in a matter being considered by the Board, the director will: declare that conflict of interest, not receive the relevant Board papers, not be present when the matter is considered during a Board or Committee meeting, and not participate in any decision on the matter, unless the Board Chairman determines otherwise. Board Chair In accordance with the Board Charter, the Board Chair is an independent director. The roles and responsibilities of the Board Chair are contained within the Board Charter and the role of the Board Chair and that of Managing Director and Chief Executive Officer may not be exercised by the same individual. Board Committees The Board may establish and delegate powers to sub-committees that are formed to facilitate effective decision- making. The Board has established the following three Committees: • Audit and Risk Committee • Remuneration and Nomination Committee, and • Disclosure Committee. Each Committee has a separate Charter which details the membership and powers of the respective Committee including its roles and responsibilities. However, the Board ultimately has full accountability for matters it delegates to those Committees. The Board reviews the Charters of the Committees at least annually. These documents are available on the Company’s website at: investors.kinabank.com.pg Audit and Risk Committee The Board has established an Audit and Risk Committee to fulfil its responsibilities with respect to financial policies and financial processes, including internal and external audit matters, and risk management and compliance within the Company and its subsidiaries. As set out in its Charter, the Audit and Risk Committee must comprise: • at least three directors, and • all non-executive directors. The Chair of the Audit and Risk Committee is appointed by the Board and must be an independent director. The Chair of the Board may be a member of the Committee but must not be the Committee Chair. When appointing members of the Audit and Risk Committee, the Board shall have regard to the need for: • at least one member to hold a recognised qualification in a finance-related discipline • all members to be financially literate • all members to have a sound understanding of the concept of risk and the principles of managing risk. Annual Report 2021 56 Corporate Governance (continued) The Audit and Risk Committee met eight times during the year ended 31 December 2021. Remuneration and Nomination Committee The Board has established a Remuneration and Nomination Committee to ensure that the Company has a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties and to bring transparency, focus and independent judgment to decisions regarding the composition of the Board, and remuneration policies and practices. In its function as a Nomination Committee, the Remuneration and Nomination Committee assists the Board in fulfilling its corporate governance responsibilities in regard to: • Board appointments, re-elections and performance • Board and Committee membership • directors’ induction, continuing development and succession planning, and • strategies to address Board diversity. As set out in its Charter, the Remuneration and Nomination Committee must comprise at least three directors and all non- executive directors. The Board has regard to diversity in constituting the Remuneration and Nomination Committee. This Committee may obtain information from, and consult with, management and external advisers, as it considers appropriate. The Remuneration and Nomination Committee met six times during the year ended 31 December 2021. Disclosure Committee and Continuous Disclosure The Board has established a Disclosure Committee, the purpose of which is to assist the Board in the performance of its statutory and regulatory obligations by ensuring market sensitive and/or Company information is disclosed through the appropriate channel promptly and without delay. The Disclosure Committee has absolute right of access to any information held by the Kina Group. The Disclosure Committee meets regularly, and is engaged between scheduled meetings as required, to consider matters that may require disclosure, and to review and approve the content of proposed material for lodgement with the ASX/PNGX. The Disclosure Committee met two times during the year ended 31December 2021. The Disclosure Committee is to comprise at least three members appointed by the Board. Members include the Chair of the Board, the Managing Director and Chief Executive Officer and the Chair of the Audit and Risk Committee. The Disclosure Committee Chair shall be appointed by the Chair of the Board. Kina’s Continuous Disclosure Policy and associated procedures set out our approach to ensure awareness and compliance with the continuous disclosure obligations of the ASX and PNGX. This includes the disclosure of required material information about Kina’s activities in a timely and balanced manner to all market participants equally, through lodgement with the ASX/PNGX. This policy is available on the Company’s website at: investors.kinabank.com.pg Board skills matrix The Board seeks an appropriate mix of skills, experience, expertise and diversity to enable it to effectively discharge its responsibilities and add value to the Company. As at 14 April 2022, the directors collectively contribute the following key skills and experience: Skills and experience Banking and/or financial services experience Explanation Extent present among directors Experience outside Kina in, with global business perspectives of, significant components of the financial services industry, including retail and commercial banking services and adjacent sectors, equity and debt capital markets, with strong knowledge of their economic drivers and the regulatory environment. Customer focus and outcomes Experience in developing and overseeing the embedding of a strong customer-focused culture in large complex organisations, and a demonstrable commitment to achieving customer outcomes. Environment, social and sustainability Understanding the potential risks and opportunities from an environmental and social perspective, and experience in developing and monitoring sustainability frameworks and related practices. Financial acumen Good understanding of financial statements and drivers of financial performance for a business of significant size, including ability to assess the effectiveness of financial controls. Governance Publicly listed company experience, extensive experience in and commitment to the highest standards of governance, experience in the establishment and oversight of governance frameworks, policies and processes. International experience Senior leadership experience involving responsibility for operations across borders, and exposure to a range of political, cultural, regulatory and business environments in that position. Leadership and commercial acumen Skills gained whilst performing at a senior executive level for a considerable length of time. Includes delivering superior results, running complex businesses, leading complex projects and issues, and leading workplace culture. People, culture and conduct Risk and compliance Stakeholder engagement Strategy Experience at a senior executive level in people matters including building workforce capability, workplace cultures, management development, succession and setting a remuneration framework that attracts and retains a high calibre of executives, and promotion of diversity and inclusion. An understanding of compliance and experience in anticipating and evaluating macro, strategic, operational, financial, social, technological including digital disruption and cyber security risks that could impact the business. Recognising and managing these risks by developing sound risk management frameworks and providing oversight. Includes experience in managing compliance risks and regulatory relationships. Demonstrated ability to build and maintain key relationships with industry, government or regulators. Experience in leading, developing, setting and executing strategic direction. Experience in driving growth and transformation, executing against a clear strategy. Technology and digital Experience in businesses of a significant size with major technology focus, including adaptation to digital change and innovation, with knowledge of developments in Decentralised Finance (DeFi). 83% 74% 66% 86% 77% 71% 97% 86% 74% 91% 86% 66% 57 Annual Report 2021 58 Corporate Governance (continued) Membership of the Committees Membership of the Committees during the reporting period, the number of Board and Committee meetings and the attendance at those meetings are set out below and also in the Directors’ Report. Diversity (continued) The Board comprises seven members (2020: seven), five of whom are male and two female.The numbers of females within Kina’s workforce, including the Board, Senior Executive Team and Team Leaders are set out below: Director Board Meetings Audit & Risk Committee Meetings Remuneration & Nomination Committee meetings Disclosure Committee Meetings A B A B A Isikeli Taureka 212 201 Greg Pawson Andrew Carriline Paul Hutchinson 20 21 21 Karen Smith-Pomeroy 21 Ila Temu Jane Thomason 21 21 20 21 21 21 191 191 8 8 82 8 8 8 6 6 6 5 62 A Meetings held that the director was eligible to attend B Meetings attended 1 These absences were known and approved prior to the meeting 2 Chair A 2222 2 2 2 B 2 2 2 2 B 6 6 5 6 Senior Executive Team Senior executives are those individuals who report directly to the Managing Director and Chief Executive Officer. Our strong Senior Executive team, who are all experts in their respective fields, is accountable for implementing Kina’s strategy which is aligned to our vision to be the most dynamic, progressive and accessible financial services organisation in the Pan Pacific region, proudly domiciled in PNG. More information about our executive team is at: investors.kinabank.com.pg/Investors Diversity The Company’s Diversity Policy emphasises Kina’s commitment to the maintenance and promotion of a workplace that ensures equity and fairness and is free from discrimination, harassment, bullying and victimisation. Kina recognises the importance of embracing diversity, specifically in valuing the unique qualities, attributes, skills and experiences each employee brings to the workplace. The Company’s vision for diversity incorporates a number of different factors, including but not limited to: gender, ethnicity and cultural background, disability, age and educational experience. The Diversity Policy provides a framework to help Kina achieve its diversity goals, while creating a commitment to a diverse work environment where staff are treated fairly and with respect and have equal access to workplace opportunities. The Board has been focused on the improvement of diversity reporting, which is regularly provided to the Board, and through the Remuneration and Nomination Committee plans to set measurable objectives for achieving gender diversity in the composition of its Board, Senior Executive Team and workforce generally. This is also disclosed in relation to each reporting period: the measurable objectives set for that period to achieve gender diversity; the entity’s progress towards achieving those objectives; and the respective proportions of men and women on the Board, in senior executive positions and across the whole workforce (including how the Company has defined ‘senior executive’ for these purposes). Board Senior Executive Team* Team Leaders Other employees Total employees 31 December 2021 31 December 2020 Females Males Total Females Males Total 2 4 40 344 390 5 5 34 257 301 7 9 74 601 691 2 2 47 348 399 5 7 39 251 302 7 9 86 599 701 * The Company defines a senior executive as a person who is a direct report to the Managing Director and Chief Executive Officer. The ratio of women to men at Kina is 56% female to 44% male. Since December 2020, Kina has achieved a 40:40:20 gender balance in the executive team. As at February 2022 there is now 50% female on the executive, and 50% of the executives are Papua New Guinean. Kina was an inaugural member of the PNG Business Coalition for Women and through the year, has provided specialist training to female team leaders to assist with their career development. Kina is a strong advocate for gender smart policies in the workplace and provides both maternity and paternity leave for its workers. This is complemented by the opportunity of flexible working arrangement when returning to work. Also, within the first six months of a child’s life, new parents are provided with paid leave to enable time out of the workplace. In 2021, Kina renewed its subscription to the Bel isi PNG program, which provides safe housing and case management services for employees and family members who are survivors of domestic violence. Kina also trained 21 employees as family and sexual violence Contact Persons, providing more opportunities for survivors of violence to safely and confidentially reach out for assistance. Company Secretary The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board and providing advice and support to the Board for all corporate governance matters relating to the Board’s efficient functioning. The Company Secretary is appointed and removed by the Board, and each director can communicate directly and freely with the Company Secretary. Mr Chetan Chopra was appointed Company Secretary and Chief Financial Officer on 21 June 2016. Chetan holds a Bachelor of Chemical Sciences from Mumbai University and an MBA from Melbourne Business School, University of Melbourne. Chetan is a member of Certified Practising Accountants Australia and PNG. Indemnity insurance In accordance with section 140 of the PNG Companies Act 1997 (‘Act’) and the constitution of the Company, Kina Group has indemnified, and has either directly or indirectly effected insurance for, the directors and executives of the Company and its related companies. Except for some specific matters that are expressly excluded, the indemnities and insurance indemnify and insure directors and executives for any costs incurred or liability, to another person for any act or omission in their capacity as a director or employee, or costs incurred by that director or employee in defending or settling any claim or proceeding relating to any such liability, not being criminal liability or liability in respect of a breach, in the case of a director, of the duty specified in Section 112 of the Act, or, in the case of an employee, of any fiduciary duty owed to the company or related company. 59 Annual Report 2021 60 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 2021. 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. 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 PGK 70.8 million compared with PGK 76.0 million in 2020. The profit includes the following items: • net interest income of PGK 177.3 million, compared with PGK 169.7 million in the prior year to 31 December 2020 • net fee and commission income of PGK 89.3 million compared with PGK 76.2 million in the prior year • operating income before impairment losses and other operating income of PGK 334.4 million, up from PGK 314.8 million in the prior year • expected credit losses on financial instruments at amortised cost of PGK 6.5 million, compared with PGK 22.0 million in the prior year • other operating expenses of PGK 194.1 million, compared with PGK 182.9 million in the prior year. Dividends The Company paid a dividend of PGK 16.9 toea (AUD 6.0 cents) per share (PGK 48.3 million) in April 2021 in relation to the profit for the half year ended 31 December 2020. In September 2021, the Company paid a dividend of PGK 8.25 toea (AUD 3.0 cents) per share (PGK 23.7 million) in relation to the profit for the half year ended 30 June 2021. After balance sheet date events Subsequent to the balance sheet date, the directors declared a final dividend of PGK 18.5 toea (AUD 7.0 cents) per share (PGK 53.1 million) on underlying NPAT for the second half of the financial year ended 31 December 2021. See also note 40 for other subsequent events. Donations During the year the Group made donations totalling PGK 401,718 (2020: PGK 258,491). Auditor’s fees Fees paid to the auditor during the year for professional services are shown in note 37 to the financial statements. The external auditor is Deloitte Touche Tohmatsu Ltd. Remuneration of employees 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 was as follows: in PGK 250,001 - 260,000 240,001 - 250,000 220,001 - 230,000 210,001 - 220,000 200,001 - 210,000 190,001 - 200,000 180,001 - 190,000 170,001 - 180,000 160,001 - 170,000 150,001 - 160,000 140,001 - 150,000 130,001 - 140,000 120,001 - 130,000 110,001 - 120,000 100,000 - 110,000 2021 2 - 3 1 1 4 7 5 8 9 6 11 6 16 21 2020 - 1 2 - 1 2 4 10 4 7 9 8 2 18 23 The company’s Renumeration Report is set out on pages 41 to 54. in PGK 1,530,001 - 1,540,000 1,450,001 - 1,460,000 1,030,001 - 1,040,000 980,001 - 990,000 920,001 - 930,000 900,001 - 910,000 860,001 - 870,000 800,001 - 810,000 770,001 - 780,000 750,001 - 760,000 740,001 - 750,000 710,001 - 720,000 640,001 - 650,000 610,001 - 620,000 600,001 - 610,000 580,001 - 590,000 570,001 - 580,000 550,001 - 560,000 540,001 - 550,000 510,001 - 520,000 500,001 - 510,000 490,001 - 500,000 470,001 - 480,000 460,001 - 470,000 450,001 - 460,000 440,001 - 450,000 420,001 - 430,000 400,001 - 410,000 390,001 - 400,000 380,001 - 390,000 360,001 - 370,000 330,001 - 340,000 320,001 - 330,000 310,001 - 320,000 300,001 - 310,000 280,001 - 290,000 270,001 - 280,000 260,001 - 270,000 *impact of foreign exchange conversion 2021 1* - 2 - - 1 - 1 1 1 1 1 1 - 1 2 1 1 - 2 1 1 1 - 1 1 1 - 1 1 - 2 2 1 1 1 1 - 2020 - 1* - 2 1 - 1 1 - 1 1 - - 1 - 2 - 1 1 - - 2 1 1 - 2 - 1 1 2 1 - 2 3 - 1 - 2 61 Annual Report 2021 62 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 2021. Signed in accordance with a resolution of the Board of Directors. On behalf of the directors Mr. Isikeli Taureka Director and Chairman Port Moresby, 30 March 2022 Mr. Greg Pawson Managing Director and Chief Executive Officer Port Moresby, 30 March 2022 Directors’ remuneration amounts for 2021 and 2020 were as follows: 2021 PGK’000 2020 PGK’000 451 360 309 278 306 274 1,978 362 269 236 211 227 -** 1,305 1,533* 1,460* 454 1,987 3,965 454 1,914 3,219 Non-Executive Directors I. Taureka K. Smith-Pomeroy J. Thomason P. Hutchinson A. Carriline I. Temu Total Managing Director G. Pawson - Salaries - Other benefits including leave entitlements Total *impact of foreign exchange conversion **payment made in 2021 Signed at Port Moresby on behalf of the Board on 30 March 2022 Mr. Isikeli Taureka Director and Chairman Mr. Greg Pawson Managing Director and Chief Executive Officer 63 Annual Report 2021 64 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 IInnddeeppeennddeenntt AAuuddiittoorr’’ss RReeppoorrtt ttoo tthhee sshhaarreehhoollddeerrss ooff KKiinnaa SSeeccuurriittiieess LLiimmiitteedd RReeppoorrtt oonn tthhee AAuuddiitt ooff tthhee CCoonnssoolliiddaatteedd FFiinnaanncciiaall SSttaatteemmeennttss 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 2021, 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 2021 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. KKeeyy AAuuddiitt MMaatttteerr HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr IImmppaaiirrmmeenntt ooff llooaannss aanndd aaddvvaanncceess As at 31 December 2021, the Group has recognised provisions amounting to K38.10m 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 audit procedures, in conjunction with our specialists, included, but were not limited to: CCoonnttrrooll ddeessiiggnn aanndd iimmpplleemmeennttaattiioonn:: We tested the design and implementation of controls over the impairment provision including: • The accuracy of data input into the system used for determining the past due status and approval of credit Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 65 KKeeyy AAuuddiitt MMaatttteerr HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr judgement was KKeeyy AAuuddiitt MMaatttteerr using the ECL model include the residential lending portfolio, personal loan portfolio and loan commitments. using the ECL model include the residential in Significant lending portfolio, personal loan portfolio and determining the provision for credit impairment loan commitments. (including the timing of recognition and the in Significant amount of the provision). determining the provision for credit impairment Key areas of the judgement include: (including the timing of recognition and the amount of the provision). • Key areas of the judgement include: impairment under judgement was involved involved impairment under The application of the requirements to determine IFRS 9 Financial Instruments, which is reflected in The application of the requirements to the Company’s and the Group’s expected IFRS 9 determine credit loss model; Financial Instruments, which is reflected in Identification of exposures with a significant the Company’s and the Group’s expected movement in credit quality to determine credit loss model; whether 12-month or lifetime expected Identification of exposures with a significant credit loss should be recognised; and movement in credit quality to determine Assumptions used in the expected credit whether 12-month or lifetime expected loss model such as the financial condition of credit loss should be recognised; and the counterparty, repayment capacity and Assumptions used in the expected credit forward-looking macroeconomic factors as loss model such as the financial condition of disclosed in Note 3. the counterparty, repayment capacity and forward-looking macroeconomic factors as disclosed in Note 3. • • • • • IImmppaaiirrmmeenntt ooff nnoonn--ccuurrrreenntt aasssseettss As at 31 December 2021 the Group has recognised goodwill amounting to K92.7m, IImmppaaiirrmmeenntt ooff nnoonn--ccuurrrreenntt aasssseettss arising from the acquisitions of Maybank (PNG) As at 31 December 2021 the Group has Limited and Maybank Property (PNG) Limited as recognised goodwill amounting to K92.7m, disclosed in Note 38. arising from the acquisitions of Maybank (PNG) In accordance with IAS 36 Impairment of Assets, Limited and Maybank Property (PNG) Limited as Cash Generating Units (CGUs) including goodwill disclosed in Note 38. must be tested for impairment at least annually. In accordance with IAS 36 Impairment of Assets, The significant Cash Generating Units (CGUs) including goodwill judgement due to assumptions required in must be tested for impairment at least annually. preparing a discounted cash flow model (‘value significant impairment The in use’), including: judgement due to assumptions required in • Identification of appropriate CGUs to which preparing a discounted cash flow model (‘value goodwill is allocated for the purpose of in use’), including: impairment testing Identification of appropriate CGUs to which goodwill is allocated for the purpose of impairment testing impairment requires requires test test • • • • facilities; and HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr • The ongoing monitoring and identification of loans displaying indicators of impairment and whether they facilities; and are migrating on timely basis to appropriate default The ongoing monitoring and identification of loans stages including generation of days past due reports. displaying indicators of impairment and whether they are migrating on timely basis to appropriate default stages including generation of days past due reports. AAsssseessssiinngg iimmppaaiirrmmeenntt mmooddeell aaddeeqquuaaccyy:: We assessed the appropriateness of management’s internally developed model in determining the impairment AAsssseessssiinngg iimmppaaiirrmmeenntt mmooddeell aaddeeqquuaaccyy:: loss provision. Our procedures included, but were not We assessed the appropriateness of management’s limited to: internally developed model in determining the impairment • Assessing whether the impairment model adequately loss provision. Our procedures included, but were not addresses the requirements of the relevant accounting limited to: standard Assessing whether the impairment model adequately Assessing, on a sample basis, the individual exposures addresses the requirements of the relevant accounting to determine if they are classified into appropriate standard default stages and aging categories for the purpose of Assessing, on a sample basis, the individual exposures determining the impairment loss provision to determine if they are classified into appropriate Assessing the reasonableness of the assumptions default stages and aging categories for the purpose of driving Probabilities of Default (PD), Loss Given Default determining the impairment loss provision (LGD) and Exposure at Default (EAD); and Assessing the reasonableness of the assumptions Assessing the adequacy of management overlays to driving Probabilities of Default (PD), Loss Given Default the modelled collective provision by recalculating the (LGD) and Exposure at Default (EAD); and coverage provided by the collective impairment Assessing the adequacy of management overlays to provision (including overlays) to the loan book, taking the modelled collective provision by recalculating the into account recent history, performance and de- coverage provided by the collective impairment risking of the relevant portfolios. provision (including overlays) to the loan book, taking We also assessed appropriateness of the disclosures in into account recent history, performance and de- Note 3 to the consolidated financial statements. risking of the relevant portfolios. • • • • • We also assessed appropriateness of the disclosures in In conjunction with our valuation specialists, our Note 3 to the consolidated financial statements. procedures included, but were not limited to: • • including • Evaluating the appropriateness of management’s In conjunction with our valuation specialists, our identification of the Group’s CGUs and testing of procedures included, but were not limited to: design and implementation of key controls over the Evaluating the appropriateness of management’s the impairment assessment process, identification of the Group’s CGUs and testing of identification of indicators of impairment design and implementation of key controls over the Assessing the reasonableness of cash flow projections the impairment assessment process, and growth rates against external economic and identification of indicators of impairment financial data, the Group’s own historical performance Assessing the reasonableness of cash flow projections and historical forecasting accuracy and growth rates against external economic and Assessing the key assumptions and methodology used financial data, the Group’s own historical performance by management in the impairment model, in particular and historical forecasting accuracy the weighted average cost of capital, the cost of debt Assessing the key assumptions and methodology used and the terminal growth rate by management in the impairment model, in particular Evaluating the value in use estimate determined by the weighted average cost of capital, the cost of debt and the terminal growth rate including • • • • • Evaluating the value in use estimate determined by Annual Report 2021 66 KKeeyy AAuuddiitt MMaatttteerr HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr • • • Future cash flows for the Cash Generating Unit (‘CGU’) management capitalisation; and against the Company’s market 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 38 to the consolidated financial statements. IInnffoorrmmaattiioonn tteecchhnnoollooggyy Our procedures included, but were not limited to: IT systems for processing The Group’s banking operations are heavily reliant on large volumes of transactions as well as automated calculations supporting both internal and external financial reporting. These systems are vital to the ongoing operations of the business and to the integrity of the financial reporting process and as a result, the assessment of IT systems forms a key component of our audit. • • • Obtaining understanding of the IT environment and identification of the key systems relevant to financial reporting Testing the design and implementation of IT controls including but not limited to access administration, change management and segregation of duties; and Responding to deficiencies identified by designing and performing additional procedures which included the identification and testing of compensating controls and varying the nature, timing and extent of the substantive procedures performed. 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 our auditor’s 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 and the Company 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 the Company 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. 67 Annual Report 2021 68 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. RReeppoorrtt oonn OOtthheerr LLeeggaall aanndd RReegguullaattoorryy RReeqquuiirreemmeennttss In accordance with section 200 of the Companies Act 1997 (amended 2014), in our opinion: • We obtained all information and explanations that were required; and • Proper accounting records have been kept by the Group and the Company for the year ended 31 December 2021. 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. DDEELLOOIITTTTEE TTOOUUCCHHEE TTOOHHMMAATTSSUU DDEELLOOIITTTTEE TTOOUUCCHHEE TTOOHHMMAATTSSUU BBeennjjaammiinn LLeeee Partner Chartered Accountants Registered under the Accountants Act 1996 DDaavviidd RRooddggeerrss Partner Chartered Accountants Registered Company Auditor in Australia Port Moresby, 30 March 2022 Brisbane, 30 March 2022 69 Annual Report 2021 70 Statements of Comprehensive Income. For the year ended 31 December 2021 Statements of Financial Position. As at 31 December 2021 Note Consolidated Parent Note Consolidated Parent Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Foreign exchange income Dividend income Net gains 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 Administrative and operating expenses Other one-off expenses Profit before tax Income tax expense z 5 5 6 6 7 15 8 3b 9 31 10 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 206,935 (29,623) 177,312 199,687 (29,964) 169,723 206,842 (29,533) 177,309 89,176 (13,719) 75,457 89,391 (55) 89,336 76,352 (134) 76,218 58,459 (69) 58,390 65,632 562 55,239 136 817 2,510 66,316 50 467 20,960 (122) 20,838 25,772 - 2,666 703 10,968 4,117 25,097 334,362 314,794 306,649 149,830 (6,519) (22,018) (6,665) (11,828) (194,127) (27,700) 106,016 (35,206) (182,870) - 109,906 (33,932) (186,127) (27,700) 86,157 (29,634) (83,309) - 54,693 (17,226) Net profit for the year attributable to the equity holders of the Company 70,810 75,974 56,523 37,467 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 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 408,334 795,362 212,874 11,652 1,950,447 112,107 - 31 16,988 - 90,467 92,786 48,663 45,947 3,785,658 4,701 3,036,921 11,697 - 10,906 48,851 95,959 3,209,035 335,147 647,874 185,711 10,682 1,614,731 114,519 - 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 2,722,517 366,302 795,362 212,874 6,771 1,944,273 112,107 65,518 - 16,474 248 90,467 92,786 48,364 42,393 3,793,939 4,701 3,079,454 11,493 9,612 9,802 48,851 94,917 3,258,830 361,614 647,874 185,711 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 2,767,036 12 13 14 15 16 17 29 23 11 18 19 38 20 21 22 23 29 24 25 26 Other comprehensive income - - - - Net assets 576,623 577,034 535,109 549,807 Total comprehensive income for the year attributable to the equity holders of the Company 70,810 75,974 56,523 37,467 Earnings per share – basic (toea) Earnings per share – diluted (toea) 27 b 27 b 2021 24.68 24.39 2020 37.25 37.06 The notes on pages 75 to 130 are an integral part of these consolidated financial statements. Shareholders’ equity Issued and fully paid ordinary shares Share-based payment reserve Retained earnings 27 a 27 c 394,693 3,587 178,343 394,693 2,774 179,567 394,693 3,587 136,829 394,693 2,774 152,340 Total equity 576,623 577,034 535,109 549,807 The notes on pages 75 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: 71 Annual Report 2021 72 Mr Isikeli Taureka Director and Chairman Mr Greg Pawson Managing Director and Chief Executive Officer Statements of Changes in Equity. For the year ended 31 December 2021 Statements of Cash Flows. For the year ended 31 December 2021 Consolidated Attributable to the equity holders of the Group 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 Balance as at 31 December 2020 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 2021 Share Capital Share-Based Payment Reserve PGK ‘000 176,970 - - 217,723 - - - 394,693 - - - - - - 394,693 PGK ‘000 2,063 - - - (2,297) 3,008 - 2,774 - - - (3,476) 4,289 - 3,587 Retained Earnings PGK ‘000 148,243 75,974 - - - - (44,650) 179,567 70,810 - - - - (72,034) 178,343 Parent Attributable to the equity holders of the Parent Balance as at 31 December 2019 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 Balance as at 31 December 2020 Profit for the year Additional shares issued Other comprehensive income Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid Share Capital Share-Based Payment Reserve Retained Earnings PGK ‘000 176,970 - 217,723 - - - - - 394,693 - - - - - - PGK ‘000 2,063 - - - (2,297) 3,008 - - 2,774 - - - (3,476) 4,289 - PGK ‘000 52,029 37,467 - - - - 107,494 (44,650) 152,340 56,523 - - - - (72,034) Balance as at 31 December 2021 394,693 3,587 136,829 Total PGK ‘000 327,276 75,974 - 217,723 (2,297) 3,008 (44,650) 577,034 70,810 - - (3,476) 4,289 (72,034) 576,623 Total PGK ‘000 231,062 37,467 217,723 - (2,297) 3,008 107,494 (44,650) 549,807 56,523 - - (3,476) 4,289 (72,034) 535,109 Cash flows from operating activities Interest received Interest paid Foreign exchange gain 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: - net (increase)/decrease in regulatory deposits - net increase in loans and advances to customers - net decrease/(increase) in other assets - net increase in due to customers - net (decrease)/increase due to other banks - net (decrease)/increase in other liabilities Net cash inflow/(outflow) generated from/(used in) operating activities Cash flows from investing activities Purchase of property, equipment and software Proceeds from sale of property and equipment Cash acquired on amalgamation Net movement in investment securities Other one-off expenses Refund of deposit from Westpac 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 in cash and cash equivalents Effect of exchange rate movements on cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 206,779 (33,943) 65,632 562 87,978 (55) 1,415 1,750 - (179,188) (28,918) 202,364 (27,376) 55,239 136 78,271 (134) 13,256 1,943 - (169,183) (36,195) 206,686 (33,853) 66,316 50 58,459 (69) 2,588 1,750 1,890 (239,076) (22,419) 85,218 (3,704) 25,772 - 20,960 (123) 25,791 1,943 1,751 (32,784) (32,394) 122,012 118,321 42,322 92,430 (27,163) (336,052) 14,904 476,206 (684) (2,201) 64,002 (217,160) (82,487) 99,748 4,814 (60,110) (27,163) (336,053) 17,850 479,979 (684) (2,164) (14,687) (138,215) (111,488) 51,011 5,364 1,025 28c 247,022 (72,872) 174,087 (114,560) (28,431) 148 - (50,494) (8,407) 84,567 (22,924) 264 - 52,355 - - (28,431) 148 - (50,144) (8,407) 84,567 (22,924) 264 243,321 103,088 - - (2,617) 29,695 (2,267) 323,749 31 32 (72,034) - (44,650) 217,723 (72,034) - (44,650) 217,723 (72,034) 173,073 (72,034) 173,073 172,371 129,896 99,786 382,262 (4,184) 400,147 568,334 549 (98) 515 269,702 400,147 426,614 526,302 43,837 426,614 28a The notes on pages 75 to 130 are an integral part of these consolidated financial statements. The notes on pages 75 to 130 are an integral part of these consolidated financial statements. 73 Annual Report 2021 74 Notes to the Financial Statements. For the year ended 31 December 2021 1. Summary of significant accounting policies 1.1 General information The Company and its subsidiaries are incorporated in Papua New Guinea. The Group’s business activities include the 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 2021 were authorised for issue by the Board of Directors on 30 March 2022. 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 the: • impact of the initial application of Interest Rate Benchmark Reform • impact of the initial application of COVID-19-Related Rent Concessions beyond 30 June 2021—Amendment to IFRS 16 Impact of the initial application of Interest Rate Benchmark Reform The Group has adopted the Phase 2 amendments Interest Rate Benchmark Reform—Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. Adopting these amendments enables the Group to reflect the effects of transitioning from interbank offered rates (IBOR) to alternative benchmark interest rates (also referred to as ‘risk-free rates’ or RFRs) without giving rise to accounting impacts that would not provide useful information to users of financial statements. The Group has not restated the prior period. Instead, the amendments have been applied retrospectively with any adjustments recognised in the appropriate components of equity as at 1 January 2021. The Group determined that there is no material impact. Impact of the initial application of COVID-19-Related Rent Concessions beyond 30 June 2021— Amendment to IFRS 16 The Group has applied the amendment to IFRS 16 (as issued by the Board in May 2021) that extends practical expedient to apply to reduction in lease payments originally due on or before 30 June 2022. The practical expedient permits a lessee to elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the COVID-19-related rent concession applying IFRS 16 as if the change were not a lease modification. The practical expedient applies only to rent concessions occurring as a direct consequence of COVID-19 and only if all of the following conditions are met: • the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change • any reduction in lease payments affects only payments originally due on or before 30 June 2022 (a rent concession meets this condition if it results in reduced lease payments on or before 30 June 2022 and increased lease payments that extend beyond 30 June 2022) • there is no substantive change to other terms and conditions of the lease. The Group determined that there is no material impact. 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 (including the June 2020 amendments to IFRS 17) Insurance Contracts Amendments to IFRS 10 and IAS 28 Amendments to IAS 1 Amendments to IFRS 3 Amendments to IAS 16 Amendments to IAS 37 Annual Improvements to IFRS Standards 2018-2020 Cycle Amendments to IAS 1 and IFRS Practice Statement 2 Amendments to IAS 8 Amendments to IAS 12 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 Property, Plant and Equipment—Proceeds before Intended Use Onerous Contracts—Cost of Fulfilling a Contract Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture Disclosure of Accounting Policies Definition of Accounting Estimates Deferred Tax related to Assets and Liabilities arising from a Single Transaction 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. 75 Annual Report 2021 76 1. Summary of significant accounting policies (continued) 1. Summary of significant accounting policies (continued) 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. 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 • 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. • 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. • 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. 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. • digital banking fees – The Group increases the services it provides through digital access solutions giving customers convenient ways to do transactions. The services include online banking, utility top ups, cashless transactions using payment platforms and card transactions. 1.10 Leases 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. 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. 77 Annual Report 2021 78 1. Summary of significant accounting policies (continued) 1.11 Taxation (continued) 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 realised 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 utilise 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 realise 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. 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 timeframe 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. 79 Annual Report 2021 80 1. Summary of significant accounting policies (continued) 1.14 Financial instruments (continued) Financial assets at FVTPL Financial assets at FVTPL are: • assets with contractual cash flows that are not SPPI; or/and 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 • assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or • the borrower is unlikely to pay its credit obligations to the Group in full. • 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. 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. Irrespective of the outcome of the this assessment, the Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Group has reasonable and supportable information that demonstrates otherwise. 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). Irrespective of the above analysis, the Group considers that default has occurred when a financial asset is more than 90 days past due unless the Group has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. 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. 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. 81 Annual Report 2021 82 1. Summary of significant accounting policies (continued) 1.14 Financial instruments (continued) 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. 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 Motor vehicles Office equipment 11.25% to 15% 10% 30% 15% to 30% 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. 1.16 Intangible assets and other non-financial assets Goodwill Goodwill is measured as described in note 38 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. Customer deposits relationship / intangible A customer deposit relationship asset was recognised 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 recognised 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 recognised as a capital improvement and added to the original cost of the software. Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives, not exceeding a period of five years. 1.17 Provisions Provisions are recognised 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. 1.18 Employee benefits 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 recognised 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 recognised as an expense with a corresponding increase in equity. The fair value is measured at grant date and is recognised 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. 83 Annual Report 2021 84 1. Summary of significant accounting policies (continued) 1.18 Employee benefits (continued) 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. 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)). Diluted earnings per share 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. 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 • Estimated allowance for loans and advances to customers – note 16 and 3(b) • Estimated goodwill impairment – note 38 • 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). 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: PGK ‘000 USD AUD SGD GBP EUR NZD JPY Others 31 December 2021 Cash balance Due from other banks 31 December 2020 Cash balance Due from /(to) other banks 264 92,485 92,749 303 62,546 62,849 71 212 283 32 203 235 193 1,739 1,932 630 532 1,162 206 215 421 77 2,266 2,343 288 90,405 90,693 492 3,926 4,418 95 1,820 1,915 42 665 707 199 517 716 660 541 1,201 233 - 233 86 (265) (179) There were no material liabilities denominated in foreign currency. Sensitivity As shown in the table above, 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% (2020:10%) USD/PGK – exchange rate – decrease 10% (2020:10%) Impact on statement of comprehensive income in 2021 2020 PGK’000 PGK’000 (8,408) 10,276 (8,219) 10,045 85 Annual Report 2021 86 3. Financial risk management (continued) a. Market Risk (continued) (ii) Interest rate risk 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. 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. 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. (i) Credit risk management The Group’s credit committee is responsible for managing the Group’s credit risk by: The following table risks summarises the Group’s exposure to interest rate risks: Year ended 31 December 2021 • Identifying, assessing and measuring credit risk across the Group, from an individual instrument to a portfolio level. • 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. 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 Carrying amount Average Interest rate (% p.a.) PGK ‘000 408,334 795,362 1,950,447 112,107 3,036,921 0.03% 5.86% 8.40% 11.48% 0.91% Year ended 31 December 2020 Carrying amount Average Interest rate (% p.a.) PGK ‘000 335,147 647,874 1,614,731 114,519 2,560,715 0.03% 6.27% 9.45% 12.11% 1.03% Sensitivity Given the profile of assets and liabilities at 31 December 2021 and prevailing interest rates, a 100 basis points increase/ decrease in market rates in relation to lending will result in a maximum possibility of PGK2,293,292 (2020: PGK1,407,752) 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 2021 and net assets as of balance date would have been affected by K582,621 (2020: K534,112). The Group’s sensitivity to equity prices has changed relative to asset balance from the prior year. • 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. (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. (iii) Incorporation of forward-looking information The Group uses forward-looking information that is available without undue cost or effort in its assessment of significant increase of credit risk as well as in its measurement of ECL. The Group’s credit risk management function uses external and internal information to generate a ‘base case’ scenario of future forecast of relevant economic variables along with a representative range of other possible forecast scenarios. The external information used includes economic data and forecasts published by governmental bodies and monetary authorities. The Group applies probabilities to the forecast scenarios identified. The base case scenario is the single most-likely outcome and consists of information used by the Group for strategic planning and budgeting. The Group has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using a statistical analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. (iv) 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). These figures are generally derived from internally developed statistical models and other historical data and they are adjusted to reflect probability-weighted forward-looking information. 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. Equity prices – increase 5% (2020: 5%) Equity prices – decrease 5% (2020: 5%) 87 Impact on statement of comprehensive income in 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. 2021 2020 PGK’000 PGK’000 583 (583) 534 (534) 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’s modelling approach for EAD reflects expected changes in the balance outstanding over the lifetime of the loan exposure that are permitted by the current contractual terms, such as amortisation profiles, early repayment or overpayment, changes in utilisation of undrawn commitments and credit mitigation actions taken before default. Annual Report 2021 88 3. Financial risk management (continued) b. Credit risk (continued) (v) 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. The groupings are reviewed on a regular basis to ensure that each group is comprised of homogenous exposures. (vi) Credit quality The Group monitors credit risk per class of financial instrument. The table below outlines the classes identified, as well as the financial statement line item and the note that provides an analysis of the items included in the financial statement line for each class of financial instrument: 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 Regulatory deposits at amortised cost Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Bank guarantees Other financial assets Central bank bills Regulatory deposits Loans and advances to customers Investments in government inscribed stocks Contingent liabilities 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. 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 Consolidated 31 December 2021 31 December 2020 PGK‘000 PGK‘000 115,451 123,895 168,988 408,334 243,502 164,832 408,334 118,811 112,024 104,312 335,147 237,539 97,608 335,147 *bank accounts maintained in Australia, New Zealand, Great Britain, Singapore, Malaysia, Philippines, 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 Parent 31 December 2021 31 December 2020 PGK‘000 PGK‘000 115,451 123,895 126,956 366,302 273,241 93,061 366,302 118,811 112,024 130,779 361,614 273,279 88,335 361,614 *bank accounts maintained in Australia, New Zealand, Great Britain, Singapore, Malaysia, Philippines, Japan, India and Turkey Treasury and central bank bills at amortised cost Concentration by sector With central banks Total Concentration by region Papua New Guinea Total Treasury and central bank bills 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 Consolidated 31 December 2021 31 December 2020 PGK‘000 795,362 795,362 795,362 795,362 PGK‘000 647,874 647,874 647,874 647,874 Parent 31 December 2021 31 December 2020 PGK‘000 795,362 795,362 795,362 795,362 PGK‘000 647,874 647,874 647,874 647,874 Consolidated 31 December 2021 31 December 2020 PGK‘000 212,874 212,874 212,874 212,874 PGK‘000 185,711 185,711 185,711 185,711 89 Annual Report 2021 90 3. Financial risk management (continued) b. Credit risk (continued) Regulatory deposits at amortised cost Concentration by sector With central banks Total Concentration by region Papua New Guinea Total Loans and advances to customers at amortised cost Concentration by sector Individuals: Mortgages Unsecured lending Corporate entities: Agriculture, Forestry & Fishing Mining Manufacturing Electrical, Gas & Water Building & Construction Wholesale & Retail Hotels & Restaurants Transport & Storage Financial Intermediation Real Estate/Renting/Business Services Equipment Hire Other Business Personal Banking Total Concentration by region Papua New Guinea Total Parent 31 December 2021 31 December 2020 PGK‘000 212,874 212,874 212,874 212,874 PGK‘000 185,711 185,711 185,711 185,711 Consolidated 31 December 2021 31 December 2020 PGK‘000 PGK‘000 547,260 30,158 16,159 14,859 15,937 7,272 93,107 597,854 93,877 10,218 - 336,717 27,900 191,543 5,685 1,988,547 1,988,547 1,988,547 481,492 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 1,650,076 1,650,076 1,650,076 Loans and advances to customers at amortised cost Concentration by sector Individuals: Mortgages Unsecured lending Corporate entities: Agriculture, Forestry & Fishing Mining Manufacturing Electrical, Gas & Water Building & Construction Wholesale & Retail Hotels & Restaurants Transport & Storage Financial Intermediation Real Estate/Renting/Business Services Equipment Hire Other Business Personal Banking Total Concentration by region Papua New Guinea Total Parent 31 December 2021 31 December 2020 PGK‘000 PGK‘000 547,260 30,158 16,159 14,859 15,937 7,272 93,107 597,854 93,877 10,218 - 336,717 27,900 185,016 5,685 1,982,019 1,982,019 1,982,019 481,492 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 Investments in government inscribed stocks at amortised cost PGK‘000 PGK‘000 Consolidated 31 December 2021 31 December 2020 Concentration by sector Sovereign Total Concentration by region Papua New Guinea Total 113,746 113,746 113,746 113,746 116,193 116,193 116,193 116,193 Parent 31 December 2021 31 December 2020 Investments in government inscribed stocks at amortised cost PGK‘000 PGK‘000 Concentration by sector Sovereign Total Concentration by region Papua New Guinea Total 113,746 113,746 113,746 113,746 116,193 116,193 116,193 116,193 91 Annual Report 2021 92 3. Financial risk management (continued) b. Credit risk (continued) Bank guarantees Concentration by sector Corporate entities: Agriculture, Forestry & Fishing Mining Wholesale & Retail 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 Building and Construction Transport & Storage Electrical, Gas & Water Other Business Total Concentration by region Papua New Guinea Total Consolidated 31 December 2021 31 December 2020 PGK‘000 PGK‘000 An analysis of the Group’s credit risk exposure per class of financial asset and “stage” without taking into account the effects of any collateral or other credit enhancements is provided in the following table. 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. 18,199 - 13,210 9,857 129 - 5,433 46,829 46,829 46,829 26,285 22,003 13,300 20,106 4,510 1,470 1,030 88,704 88,704 88,704 Parent 31 December 2021 31 December 2020 PGK‘000 PGK‘000 18,199 - 13,210 9,857 129 - 5,433 46,829 46,829 46,829 26,285 22,003 13,300 20,106 4,510 1,470 1,030 88,704 88,704 88,704 Consolidated 31 December 2021 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL Cash and due from banks Treasury and central bank bills Regulatory deposits Loans and advances Investment in government inscribed stocks Other financial assets Bank guarantees Total gross carrying amount Loss allowance Net carrying amount PGK‘000 408,334 795,362 212,874 1,749,548 113,746 49,937 46,829 3,376,630 (25,680) 3,350,950 PGK‘000 - - - 152,442 PGK‘000 - - - 71,667 POCI Total PGK‘000 - - - 14,890 PGK‘000 408,334 795,362 212,874 1,988,547 - - - 113,746 - - 152,442 (10,447) 141,995 - - 71,667 (7,602) 64,065 - - 14,890 - 49,937 46,829 3,615,629 (43,729) 14,890 3,571,900 Consolidated 31 December 2020 Cash and due from banks Treasury and central bank bills Regulatory deposits Loans and advances Investment in government inscribed stocks Other financial assets Bank guarantees Total gross carrying amount Loss allowance Net carrying amount Stage 1 12-month ECL PGK‘000 335,147 647,874 185,711 1,417,091 Stage 2 Lifetime ECL PGK‘000 - - - 184,262 Stage 3 Lifetime ECL PGK‘000 - - - 29,673 POCI Total PGK‘000 - - - 19,050 PGK‘000 335,147 647,874 185,711 1,650,076 116,193 - - - 116,193 149,851 88,704 2,940,571 (17,770) 2,922,801 - - 184,262 (19,777) 164,485 - - 29,673 (3,510) 26,163 - - 19,050 - 149,851 88,704 3,173,556 (41,057) 19,050 3,132,499 The amount of bank guarantees disclosed above represent notional amounts guaranteed being the maximum exposure to credit risk. 93 Annual Report 2021 94 3. Financial risk management (continued) b. Credit risk (continued) Parent 31 December 2021 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total PGK‘000 366,302 795,362 212,874 1,745,860 113,746 46,383 46,829 3,327,356 (25,680) 3,301,676 PGK‘000 - - - 151,457 PGK‘000 - - - 69,812 PGK‘000 - - - 14,890 PGK‘000 366,302 795,362 212,874 1,982,019 - - - 113,746 - - 151,457 (10,443) 141,014 - - 69,812 (7,252) 62,560 - - 14,890 - 46,383 46,829 3,563,515 (43,375) 14,890 3,520,140 Parent 31 December 2020 Stage 1 12-month ECL PGK‘000 361,614 647,874 185,711 1,414,258 Stage 2 Lifetime ECL PGK‘000 - - - 183,885 Stage 3 Lifetime ECL PGK‘000 - - - 27,621 POCI Total PGK‘000 - - - 19,050 PGK‘000 361,614 647,874 185,711 1,644,814 116,193 - - - 116,193 149,242 88,704 2,963,596 (17,770) 2,945,826 - - 183,885 (19,718) 164,167 - - 27,621 (3,069) 24,552 - - 19,050 - 149,242 88,704 3,194,152 (40,557) 19,050 3,153,595 Cash and due from banks Treasury and central bank bills Regulatory deposits Loans and advances Investment in government inscribed stocks Other financial assets Bank guarantees Total gross carrying amount Loss allowance Net carrying amount Cash and due from banks Treasury and central bank bills Regulatory deposits Loans and advances Investment in government inscribed stocks Other financial assets Bank guarantees Total gross carrying amount Loss allowance Net carrying amount This table summarises the loss allowance as of the year end by class of exposure/asset. 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 2021 31 December 2020 PGK‘000 38,100 1,639 3,990 43,729 PGK‘000 35,345 1,674 4,038 41,057 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 2021 31 December 2020 PGK‘000 37,746 1,639 3,990 43,375 PGK‘000 34,845 1,674 4,038 40,557 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 collateralised by high quality liquid assets. The table below summarises the movement in ECL during the year by class of financial assets: Consolidated Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total Balance at 01 January 2021 Additional ECL recognised Write-offs Bad debt Recoveries Balance at 31 December 2021 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 35,345 6,555 (5,550) 1,750 38,100 1,674 4,038 41,057 9 - 6,564 (44) (48) (5,642) - - 1,750 1,639 3,990 43,729 Consolidated Balance at 01 January 2020 Additional ECL recognised Write-offs Bad debt Recoveries Provision derecognised in respect of sales of loan book Balance at 31 December 2020 PGK‘000 PGK‘000 PGK‘000 PG K‘000 PGK‘000 PGK‘000 20,525 20,832 (7,096) 1,943 (859) 35,345 489 1,185 4,038 25,052 - 22,017 - - (7,096) - - 1,943 - 1,674 - (859) 4,038 41,057 Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total 95 Annual Report 2021 96 3. Financial risk management (continued) b. Credit risk (continued) Parent Loss allowance by classes Loans and advances to customers at amortised cost Investments in government inscribed stocks at amortised cost Other financial assets Total Balance at 01 January 2021 Additional ECL recognised Write-offs Bad debt Recoveries Balance at 31 December 2021 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 34,845 6,701 (5,550) 1,750 37,746 1,674 4,038 40,557 9 - 6,710 (44) (48) (5,642) - - 1,750 1,639 3,990 43,375 Parent Balance at 01 January 2020 Amalgamation adjustment Additional ECL recognised Write-offs Bad debt Recoveries Provision derecognised in respect of sales of loan book Balance at 31 December 2020 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 20,029 11,828 (7,096) 1,943 (859) 34,845 1,674 - 101 101 3,937 34,640 - 11,828 - - (7,096) - - - 1,943 - (859) 1,674 4,038 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 31 December 2021 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 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 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total PGK‘000 12,058 PGK‘000 19,777 PGK‘000 3,510 637 (3,436) (209) - 22,052 (616) 3,453 (4,240) (4,703) 8,751 (21) (17) 4,449 (766) 3,547 PGK‘000 - - - - - - PGK‘000 35,345 - - - (5,469) 34,350 (11,119) (11,895) (3,112) - (26,126) 19,983 10,527 7,590 - 38,100 Consolidated 31 December 2020 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total PGK‘000 12,102 PGK‘000 6,698 PGK‘000 1,725 84 (811) (6) - 4,716 (4,027) (84) 812 (404) (4,406) 17,972 (811) 12,058 19,777 - (1) 410 (747) 2,245 (122) 3,510 PGK‘000 - - - - - - - PGK‘000 20,525 - - - (5,153) 24,933 (4,960) - 35,345 97 Annual Report 2021 98 3. Financial risk management (continued) b. Credit risk (continued) 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 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 Parent 31 December 2021 Consolidated 31 December 2021 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total PGK‘000 12,058 PGK‘000 19,718 PGK‘000 3,069 637 (3,436) (209) - 22,054 (616) 3,453 (4,224) (4,704) 8,751 (21) (17) 4,433 (766) 3,451 PGK‘000 - - - - - - PGK‘000 34,845 - - - (5,470) 34,256 (11,119) (11,853) (2,913) - (25,885) 19,985 10,525 7,236 - 37,746 Parent 31 December 2020 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total PGK‘000 12,102 PGK‘000 6,648 PGK‘000 1,483 PGK‘000 - PGK‘000 20,233 84 (811) (6) - (84) 812 (404) (4,406) - (1) 410 (747) 4,716 17,963 2,046 (4,027) (811) (122) 12,058 19,718 3,069 - - - - - - - - - - (5,153) 24,725 (4,960) 34,845 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 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Gross carrying amount as at 31 December PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 1,417,091 184,262 29,673 19,050 1,650,076 39,492 (70,073) (6,279) - 646,922 (39,106) 70,901 (34,912) (4,704) 22,163 (277,604) (46,163) (386) (828) 41,191 (766) 5,009 (2,226) - - - - - - - (5,470) 912 675,006 (5,072) (331,065) 1,749,549 152,441 71,667 14,890 1,988,547 Consolidated 31 December 2020 Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total 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 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Gross carrying amount as at 31 December PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 1,324,738 73,818 7,894 15,508 1,421,958 8,602 (114,785) (5,728) - 536,918 (8,363) 115,628 (12,964) (4,406) 36,610 (239) (843) 18,692 (747) 5,357 - - - - - - - (5,153) 6,718 585,603 (332,654) (16,061) (441) (3,176) (352,332) 1,417,091 184,262 29,673 19,050 1,650,076 99 Annual Report 2021 100 3. Financial risk management (continued) b. Credit risk (continued) Parent 31 December 2021 Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 1,414,258 183,885 27,621 19,050 1,644,814 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 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Gross carrying amount as at 31 December 39,492 (70,073) (6,204) - 643,231 (39,106) 70,901 (34,756) (4,704) 21,181 (274,846) (45,942) (386) (828) 40,960 (766) 4,464 (1,253) - - - - - - - (5,470) 912 669,788 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 PGK ‘000 1,724,250 54,053 32,057 61,209 110,449 1,982,018 Collateral held as security and other credit enhancements. Parent Year ended 2021 Year ended 2020 Loss allowance Gross carrying amount PGK ‘000 1,384,515 53,153 47,834 59,968 99,344 1,644,814 PGK ’000 17,082 5,127 2,288 4,857 8,392 37,746 Loss allowance PGK ‘000 14,427 799 1,673 9,163 8,783 34,845 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. (5,072) (327,113) Exposure type 1,745,858 151,459 69,812 14,890 1,982,019 Parent 31 December 2020 Mortgage lending Personal lending Corporate lending Investment securities Lease receivables Bank guarantee and documentary letters of credit 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 Charge over cash deposit Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total 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 - Write-offs New financial assets originated or purchased Financial assets that have been derecognised Gross carrying amount as at 31 December PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 1,319,158 72,883 7,438 15,508 1,414,987 8,602 (114,785) (5,573) - 534,092 (8,363) 115,628 (12,767) (4,406) 36,234 (327,236) (15,324) (239) (843) 18,340 (747) 4,777 (1,105) - - - - - - - (5,153) 6,718 581,821 (3,176) (346,841) 1,414,258 183,885 27,621 19,050 1,644,814 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. Consolidated Year ended 2021 Year ended 2020 Gross carrying amount PGK ‘000 1,727,938 54,961 32,132 61,225 112,292 1,988,547 Loss allowance Gross carrying amount PGK ‘000 1,387,203 53,222 47,868 60,345 101,438 1,650,076 PGK ’000 17,082 5,127 2,288 4,861 8,742 38,100 Loss allowance PGK ‘000 14,427 799 1,673 9,222 9,224 35,345 Loans and advances to customers 0-29 days 30-59 days 60-89 days 90-180 days More than 181 days Total 101 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. Mortgage lending 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. Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Fully cash covered Total Consolidated Year ended 2021 Year ended 2020 Gross carrying amount PGK ‘000 Gross carrying amount PGK ‘000 67,153 79,259 47,391 185,421 168,040 - 547,264 60,938 68,368 43,021 174,952 133,892 253 481,424 Annual Report 2021 102 3. Financial risk management (continued) b. Credit risk (continued) 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 Credit impaired – Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Total Parent Year ended 2021 Year ended 2020 Gross carrying amount PGK ‘000 Gross carrying amount PGK ‘000 67,153 79,259 47,391 185,421 168,040 - 547,264 Consolidated 60,938 68,368 43,021 174,952 133,892 253 481,424 Year ended 2021 Year ended 2020 Gross carrying amount PGK ‘000 Gross carrying amount PGK ‘000 3,502 7,161 1,077 3,182 9,314 24,236 Parent 2,427 7,310 2,362 3,307 7,150 22,556 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 2021, 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 2021, the portfolio of the corporate lending is fully collateralized by eligible collateral. Investment securities The Group holds investment in government inscribed stocks measured at amortised cost with a carrying amount of PGK 112,107,469 (2020: PGK 114,519,320) 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 2020: K1m). Details of the intercompany lending are disclosed in note 29 to the financial statements. Year ended 2021 Year ended 2020 c) Liquidity risk Gross carrying amount PGK ‘000 Gross carrying amount PGK ‘000 3,502 7,161 1,077 3,182 9,314 24,236 2,427 7,310 2,362 3,307 7,150 22,556 Personal lending The Group’s personal lending portfolio consists of secured and unsecured loans as follows: Secured Unsecured Total Consolidated Year ended 2021 Year ended 2020 PGK ‘000 PGK ‘000 547,260 30,158 577,418 481,492 33,436 514,928 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 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. 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. 103 Annual Report 2021 104 3. Financial risk management (continued) b. Liquidity risk (continued) Consolidated 1 to 5 years Over 5 years 31 December 2021 Cash and due from banks Central bank bills Regulatory deposits Total financial assets Due to other banks Due to customers Other liabilities Total financial liabilities Issued financial guarantee contracts Issued loan commitments Total 31 December 2020 Cash and due from banks Central bank bills Regulatory deposits Total financial assets Due to other banks Due to customers Other liabilities Up to 1 month PGK‘000 408,334 95,000 212,874 716,209 4,701 2,451,325 72,311 2,528,337 1 to 3 months PGK‘000 - 65,000 - 65,000 - 335,136 - 335,136 4 to 12 months PGK‘000 - 670,000 - 670,000 - 250,131 - 250,131 PGK‘000 - - - - - 11,725 - 11,725 450 7,696 24,591 14,092 160,667 161,117 7,252 14,948 704 25,295 - 14,092 335,147 65,000 185,711 585,858 5,385 2,026,766 57,228 - 35,000 - 35,000 - 286,671 - - 575,000 - 575,000 - 282,025 - 282,025 - - - - - 20,189 - 20,189 Total financial liabilities 2,089,379 286,671 Issued financial guarantee contracts Issued loan commitments Total 250 32,339 49,861 6,254 177,528 177,778 27,396 59,735 - - 49,861 6,254 Total contract value PGK‘000 408,334 830,000 212,874 1,451,209 Total carrying value PGK‘000 408,334 795,362 212,874 1,416,507 4,701 3,048,317 72,311 3,125,329 4,701 3,036,921 72,311 3,113,933 46,829 168,623 215,452 N/A N/A N/A 335,147 675,000 185,711 335,147 647,874 185,711 1,195,858 1,168,732 5,385 2,615,651 57,228 5,385 2,560,715 57,228 2,678,264 2,623,328 88,704 204,924 293,628 N/A N/A N/A PGK‘000 - - - - - - - - - - - - - - - - - - - - - - Parent 1 to 5 years Over 5 years 31 December 2021 Cash and due from banks 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 31 December 2020 Cash and due from banks Central bank bills Regulatory deposits Due from subsidiaries Total financial assets Up to 1 month PGK‘000 366,302 95,000 212,874 65,518 739,695 4,701 2,493,857 71,326 9,612 2,579,496 1 to 3 months PGK‘000 - 65,000 - - 65,000 4 to 12 months PGK‘000 - 670,000 - - 670,000 PGK‘000 - - - - - - 335,136 - 250,131 - 11,725 - - - - - - 335,136 250,131 11,725 361,614 65,000 185,711 1,387 613,712 - 35,000 - - - 575,000 - - 35,000 575,000 Due to other banks Due to customers Other liabilities Due to subsidiaries 5,385 2,065,525 56,197 8,988 - 286,671 - - - 282,025 - - Total financial liabilities 2,136,095 286,671 282,025 - - - - - - 20,189 - - 20,189 Total contract value PGK‘000 366,302 830,000 212,874 65,518 1,474,695 4,701 3,090,849 71,326 9,612 3,176,488 Total carrying value PGK‘000 366,302 795,362 212,874 65,518 1,440,057 4,701 3,079,454 71,326 9,612 3,165,093 361,614 675,000 185,711 1,387 361,614 647,874 185,711 1,387 1,223,712 1,196,586 5,385 2,654,410 56,197 8,988 5,385 2,599,474 56,197 8,988 2,724,980 2,670,044 PGK‘000 - - - - - - - - - - - - - - - - - - - - The liquidity gap in ‘up to 1 month bucket’ is due to assumption that current and saving deposits amounting to PGK1,667m (31 December 2020: PGK1,330m) included within ‘due to customers’ mature within one month since these are on demand and do not have any fixed or determinable maturity. 105 Annual Report 2021 106 4. Capital adequacy Kina Securities Limited (“KSL”) as the consolidated 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: Is adequate to protect the interest of depositors and creditors, Is commensurate with risk profile and activities of KSL, and 1. 2. 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%, and 3. Leverage capital of 6%. As at 31 December 2021, KSL’s capital ratios were in compliance with the BPNG Minimum capital adequacy requirements as follows: 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 2021 2020 PGK ‘000 PGK ‘000 1,900,018 340,265 94,560 434,825 1,670,142 370,986 58,344 429,330 18.3% 22.9% 9.2% 22.2% 25.4% 11.2% 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. 5. Net interest income Interest income Cash and short-term funds Investment in government inscribed stocks Loans and advances to customers Interest expense Banks and customers Net interest income 6. Net fee and commission income Fees and commission income Investment and portfolio management Fund administration Shares brokerage Loans fees and bank commissions Digital banking fees ATM and other transaction fees Fee and commission expenses Net fee and commission income 7. Dividend income Dividend income from investments Financial assets at fair value through profit or loss Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 44,243 13,013 149,679 206,935 44,937 8,990 145,760 199,687 (29,623) (29,623) 177,312 (29,964) (29,964) 169,723 44,150 13,013 149,679 206,842 (29,533) (29,533) 177,309 17,259 5,471 66,446 89,176 (13,719) (13,719) 75,457 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 9,628 21,161 1,667 21,950 23,550 11,435 89,391 (55) 89,336 9,279 19,669 1,197 24,469 14,267 7,471 76,352 (134) 76,218 - - 1,199 21,950 23,550 11,760 58,459 (69) 58,390 - - 690 9,360 3,725 7,185 20,960 (122) 20,838 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 562 562 136 136 50 50 - - 107 Annual Report 2021 108 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 9. Other operating expenses Staff costs Acquisition costs relating to business combination Administrative expenses Depreciation and amortization Operating lease Software maintenance and support charges Auditor’s remuneration (note 37) Other Break-up of staff costs: Salaries, wages and other benefits Superannuation costs Cost of employee share based incentive plan Total staff costs Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 105 297 - - - - - 301 703 221 4,004 - - - 3,025 - 3,718 10,968 105 (70) 1,890 1,529 378 - - 285 4,117 221 952 1,751 1,699 350 3,025 16,536 563 25,097 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 75,607 30 56,350 36,398 5,325 4,910 1,590 13,918 194,127 67,360 4,055 4,192 75,607 75,186 - 48,900 35,065 3,353 3,562 1,248 15,556 182,870 68,233 3,944 3,009 75,186 70,658 30 53,582 36,398 5,289 4,831 1,452 13,885 186,127 62,622 3,844 4,192 70,658 35,067 - 19,006 18,653 511 1,741 1,144 7,187 83,309 29,990 1,879 3,198 35,067 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% (2020: 30%) Tax effect of: Permanent differences Prior year adjustment Income tax expense Represented by: Current tax Deferred taxes Income tax expense 11. Deferred taxes a. Net deferred tax assets where there is a right to offset: Allowance for losses Employee benefit provision Lease liability Depreciation and amortisation Others Net deferred tax asset Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 106,016 31,805 109,906 32,972 5,569 (2,168) 35,206 35,712 (506) 35,206 (2,834) 3,794 33,932 39,923 (5,991) 33,932 86,157 25,847 5,935 (2,148) 29,634 30,153 (519) 29,634 54,693 16,408 (1,929) 2,747 17,226 23,243 (6,017) 17,226 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 16,167 3,272 14,655 34,094 (16,500) (606) (17,106) 16,988 16,158 3,526 14,202 33,886 (17,388) (16) (17,404) 16,482 16,060 2,941 14,655 33,656 (16,500) (682) (17,182) 16,474 15,978 3,179 14,202 33,359 (17,388) (15) (17,403) 15,956 As at 31 December 2021, the Group had 685 (2020: 691) employees and 4 (2020: 2) consultants. The Parent had 633 (2020:626) employees and 4 (2020: 2) consultants. 109 Annual Report 2021 110 11. Deferred taxes (continued) b. The movement on deferred tax account is as follows: 15. Financial assets at fair value through profit or loss Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Balance at beginning of year Statement of comprehensive income credit/(charge) Balance at end of year 16,482 506 16,988 10,491 5,991 16,482 15,956 518 16,474 3,226 12,730 15,956 Equity securities - Listed - Unlisted Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 5,036 6,616 11,652 4,680 6,002 10,682 183 6,588 6,771 177 5,974 6,151 Represented by: Deferred tax assets (note 11(a)) Deferred tax liabilities (note 11(a)) 34,094 (17,106) 16,988 33,886 (17,404) 16,482 33,656 (17,182) 16,474 33,359 (17,403) 15,596 12. Cash and due from banks Cash on hand Exchange settlement accounts Due from other banks 13. Central bank bills Central bank and treasury bills Less than 90 days Over 90 days Unearned discount Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 115,451 123,895 168,988 408,334 118,811 112,024 104,312 335,147 115,451 123,895 126,956 366,302 118,811 112,024 130,779 361,614 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 160,000 670,000 (34,638) 795,362 65,000 610,000 (27,126) 647,874 160,000 670,000 (34,638) 795,362 65,000 610,000 (27,126) 647,874 Central bank bills are debt securities issued by the Bank of Papua New Guinea (BPNG). Central bank bills amounting to PGK160m (2020: PGK65m) 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 2021 amounted to PGK 212,874,480 (2020: PGK 185,711,050). 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 2021 amounted to PGK 212,874,480 (2020: PGK 185,711,050). Overdrafts Property mortgage Asset financing Insurance premium funding Business and other loans The movement in financial assets at fair value through profit or loss is reconciled as follows: Balance at beginning of year Gains from changes in fair value Additions Balance at end of year Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 10,682 817 153 11,652 7,635 2,510 537 10,682 6,151 467 153 6,771 339 2,666 3,146 6,151 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. 16. Loans and advances to customers 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: Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 577,417 1,411,130 1,988,547 (38,100) 1,950,447 514,928 1,135,148 1,650,076 (35,345) 1,614,731 577,417 1,404,602 1,982,019 (37,746) 1,944,273 514,928 1,129,886 1,644,814 (34,845) 1,609,969 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 78,489 547,260 30,293 - 1,332,503 1,988,547 83,611 481,424 17,653 1,949 1,065,439 1,650,076 78,489 547,260 30,293 - 1,325,977 1,982,019 83,611 481,424 17,653 1,949 1,060,177 1,644,814 111 Annual Report 2021 112 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)** Kina Securities (Fiji) PTE Limited Total Investment at cost Provision for impairment Balance as at 31 December 2021 % 100 100 100 100 100 Shareholdings* 2020 2021 2020 % Amount (PGK) Amount (PGK) 100 100 100 100 - 2 2 2 500,002 197 500,205 (251,677) 248,528 2 2 2 500,002 - 500,008 (251,677) 248,331 *All the subsidiaries are incorporated in Papua New Guinea and in Fiji. 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 PGK nil for the year ended 31 December 2021 (2020: PGK nil). 16. Loans and advances to customers (continued) 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 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 35,345 - 6,555 (5,550) 1,750 - 38,100 20,525 (859) 20,833 (7,096) 1,943 - 35,345 34,845 - 6,701 (5,550) 1,750 - 37,746 - (859) 11,828 (7,096) 1,943 29,029 34,845 In the prior year, the Group divested the Esiloan portfolio to Nationwide Microbank Limited (MiBank) for an amount of PGK34.2m. 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. 17. Investments in government inscribed stocks Government inscribed stocks principal balance Unamortised premium Unamortised discount Accrued interest Gross investments in government inscribed stocks Expected credit losses Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 115,000 170 (4,048) 2,624 113,746 (1,639) 112,107 118,000 301 (4,777) 2,669 116,193 (1,674) 114,519 115,000 170 (4,048) 2,624 113,746 (1,639) 112,107 118,000 301 (4,777) 2,669 116,193 (1,674) 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 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 114,519 (3,000) 598 (45) 35 - 112,107 34,003 85,000 (4,906) 1,607 (1,185) - 114,519 114,519 (3,000) 598 (45) 35 - 112,107 - 85,000 (4,906) 1,607 (1,185) 34,003 114,519 Investments in government inscribed stocks are measured at amortized cost. Included within the balance is an amount of PGK nil (31 December 2020: PGK nil) which has been pledged with a third party against repurchase agreement transaction. 113 Annual Report 2021 114 19. Property plant and equipment Consolidated Furniture & Fittings Building improvements Motor Vehicles Office Equipment Land & Building Work in Progress Right-of-use assets Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Cost Balance 31 December 2019 Additions Disposals Balance 31 December 2020 Additions Transfer in (out) Disposals Balance 31 December 2021 Accumulated depreciation Balance 31 December 2019 Charge during the year Disposals Balance 31 December 2020 Charge during the year Disposals Balance 31 December 2021 Book value Balance 31 December 2021 Balance 31 December 2020 4,810 17,685 5,785 37,979 2,129 - 62,799 131,187 - - 893 - 1,168 (1,326) 5,055 - - - 1,074 - 1,976 (1,272) 10,166 (2,598) 4,810 18,578 5,627 43,034 2,129 1,074 63,503 138,755 - - - 4,214 - - 164 - (951) 8,158 72 - - - - 1,229 12,060 25,825 (72) - - - (4,056) (5,007) 4,810 22,792 4,840 51,264 2,129 2,231 71,507 159,573 (1,402) (3,398) (3,714) (15,897) (1,087) (2,314) (1,083) (4,821) - - 1,283 - (2,489) (5,712) (3,514) (20,718) (667) - (2,300) (1,159) (5,262) - 908 - (3,156) (8,012) (3,765) (25,980) - - - - - - - - - - - - - - (9,854) (34,265) (11,228) (20,533) 1,034 2,317 (20,048) (52,481) (11,187) (20,575) 3,042 3,950 (28,193) (69,106) 1,654 14,780 1,075 25,284 2,129 2,231 43,314 90,467 2,321 12,866 2,114 22,316 2,129 1,074 44,454 86,274 Parent Furniture & Fittings Building improvements Motor Vehicles Office Equipment Land & Building Work in Progress Right-of-use assets Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Cost Balance 31 December 2019 Amalgamation adjustment Additions Disposals Balance 31 December 2020 Additions Transfer in (out) Disposals Balance 31 December 2021 Balance 31 December 2019 Amalgamation adjustment Charge during the year Disposals Balance 31 December 2020 Charge during the year Disposals Balance 31 December 2021 Book value Balance 31 December 2021 Balance 31 December 2020 688 3,671 3,654 11,909 2,129 4,122 14,014 2,131 26,070 - - 893 - 1,168 (1,326) 5,055 - - - - - - 14,108 36,159 48,691 95,028 1,074 - 1,976 (1,272) 10,166 (2,598) 4,810 18,578 5,627 43,034 2,129 1,074 63,503 138,755 - - - 4,214 - - 164 - (951) 8,158 72 - - - - 1,229 12,060 25,825 (72) - - - (4,056) (5,007) 4,810 22,792 4,840 51,264 2,129 2,231 71,507 159,573 (566) (753) (2,310) (10,490) (1,480) (3,815) (1,642) (7,914) (443) - (1,144) - (844) 1,283 (2,314) - (2,489) (5,712) (3,513) (20,718) (667) - (2,300) (1,159) (5,262) - 908 - (3,156) (8,012) (3,765) (25,980) - - - - - - - - - - - - - - - - (5,396) (19,515) (9,240) (24,091) (6,447) (11,192) 1,034 2,317 (20,049) (52,481) (11,559) (20,947) 3,414 4,322 (28,194) (69,106) 1,654 14,780 1,076 25,284 2,129 2,231 43,313 90,467 2,321 12,866 2,114 22,316 2,129 1,074 43,454 86,274 115 Annual Report 2021 116 Parent Software Customer deposit relationship/intangible Work in Progress Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 20. Intangible assets 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. Consolidated Software Customer deposit relationship/intangible Work in Progress Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Cost Balance 31 December 2019 Additions Transfer in (out) Balance 31 December 2020 Additions Transfer in (out) 37,521 5,058 206 42,785 1,154 15,136 22,468 - - 22,468 - - Balance 31 December 2021 59,075 22,468 1,502 9,676 (206) 10,972 13,512 (15,136) 9,348 61,491 14,734 - 76,225 14,666 - 90,891 - - - - - (12,244) (14,532) (26,776) (15,452) (42,228) (4,884) (6,821) (11,705) (6,229) (17,934) Accumulated depreciation Balance 31 December 2019 Charge during the year Balance 31 December 2020 Charge during the year Balance 31 December 2021 Book value Balance 31 December 2021 Balance 31 December 2020 (7,360) (7,711) (15,071) (9,223) (24,294) 34,781 27,714 Cost Balance 31 December 2019 Amalgamation adjustment Additions Transfer in (out) Balance 31 December 2020 Additions Transfer in (out) Balance 31 December 2021 Accumulated depreciation Balance 31 December 2019 Amalgamation adjustment Charge during the year Disposals Balance 31 December 2020 Charge during the year Disposals Balance 31 December 2021 Book value Balance 31 December 2021 Balance 31 December 2020 8,353 29,168 5,058 206 42,785 1,154 15,136 59,075 (2,877) (7,959) (4,235) - (15,071) (9,223) - (24,294) 34,781 27,714 4,534 10,763 9,348 10,972 48,663 49,449 21. Other assets 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 Write-off Balance at end of year - 22,468 - - 22,468 - - 22,468 - (8,479) (3,226) - (11,705) (6,229) - (17,934) 1,056 446 9,377 (206) 10,673 13,512 (15,136) 9,049 - - - - - - - - 9,409 52,082 14,435 - 75,926 14,666 - 90,592 (2,877) (16,438) (7,461) - (26,776) (15,452) - (42,228) 4,534 10,763 9,049 10,673 48,364 49,150 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 5,684 5,545 38,708 49,937 (3,990) 45,947 4,038 - (48) (3,990) 1,550 5,435 142,866 149,851 (4,038) 145,813 4,038 - - 4,038 5,673 5,497 35,213 46,383 (3,990) 42,393 4,038 - (48) (3,990) 1,512 5,387 142,343 149,242 (4,038) 145,204 101 3,937 - 4,038 117 Annual Report 2021 118 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 2,356,300 680,621 3,036,921 1,925,006 635,709 2,560,715 2,398,833 680,621 3,079,454 1,963,765 635,709 2,599,474 2021 Represented by: Short term provisions Long term provisions Total employee provision Consolidated Parent 8,655 2,251 10,906 7,900 1,902 9,802 Consolidated 2020 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 Opening balance PGK ‘000 Additions Payments PGK ‘000 PGK ‘000 Closing balance PGK ‘000 3,156 2,065 67 3,780 9,068 3,706 619 49,508 5,116 58,949 (2,164) (590) (49,537) (4,188) 4,698 2,094 38 4,708 (56,479) 11,538 2020 Opening balance PGK ‘000 Additions Payments PGK ‘000 PGK ‘000 Closing balance PGK ‘000 1,607 635 71 2,107 4,420 3,387 503 45,599 4,955 54,444 (628) 580 (45,633) (2,590) 4,366 1,718 37 4,472 (48,271) 10,593 Consolidated Parent 9,445 2,093 3,785 6,808 11,538 10,593 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 24. Employee provisions Consolidated Parent 2021 2020 2021 2020 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 4,883 (28,918) 37,862 - (2,160) 11,666 3,696 (36,195) 39,923 - (2,541) 4,883 3,761 (22,419) 32,300 - (2,148) 11,494 (317) (32,394) 23,243 13,448 (219) 3,761 (31) 11,697 11,666 (83) 4,966 4,883 - 11,494 11,494 - 3,761 3,761 Consolidated 2021 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 Opening balance PGK ‘000 Additions Payments PGK ‘000 PGK ‘000 Closing balance PGK ‘000 4,698 2,093 37 4,709 2,351 511 48,539 7,110 (2,743) (353) (48,576) (7,470) 4,306 2,251 - 4,349 11,538 58,511 (59,142) 10,906 2021 Opening balance PGK ‘000 Additions Payments PGK ‘000 PGK ‘000 Closing balance PGK ‘000 4,366 1,719 37 4,470 2,165 533 44,807 6,644 (2,587) (350) (44,844) (7,158) 10,593 54,149 (54,940) 3,944 1,902 - 3,956 9,802 119 Annual Report 2021 120 25. Lease liabilities Details of associated lease liabilities recognised in respect of the right of use assets are presented below: 26. Other liabilities 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 Amounts recognised in statement of cash flows Total cash outflow for leases 31 Dec 31 Dec 2021 2020 PGK’000 PGK’000 14,365 34,327 10,430 59,122 11,724 31,434 16,161 59,319 14,408 34,442 48,851 3,752 7,061 10,813 11,834 35,508 47,342 3,841 6,552 10,393 20,130 19,986 Total cashflows for leases is recorded under Cash payments to employees and suppliers in the statement of cash flows. 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 Amounts recognised in statement of cash flows Total cash outflow for leases 31 Dec 31 Dec 2021 2020 PGK’000 PGK’000 14,365 34,327 10,430 59,122 11,724 31,434 16,161 59,319 14,408 34,442 48,851 3,752 7,061 10,813 11,834 35,508 47,342 3,841 6,552 10,393 20,130 19,986 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 2021 PGK ‘000 13,971 13,380 7,943 2,324 1,309 4,083 31,528 21,421 95,959 2020 PGK ‘000 14,497 9,028 20,044 6,271 1,676 4,783 22,902 13,370 92,571 2021 PGK ‘000 13,877 13,380 7,943 2,267 1,309 4,083 31,528 20,530 94,917 2020 PGK ‘000 13,894 9,028 20,044 6,223 1,676 4,783 22,902 12,943 91,493 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. 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 PGK 217.7 million. Balances as at 31 December 2019 Share issued during the year Balance as at 31 December 2020 Share issued during the year Balance as at 31 December 2021 b. Earnings per share Number of shares Number of shares Share capital PGK ‘000 174,745 112,191 286,936 - 286,936 PGK ‘000 176,970 217,723 394,693 - 394,693 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. Net profit attributable to shareholders – PGK’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) c. Share-based payment reserve Consolidated 2021 70,813 286,936 290,339 24.68 24.39 2020 75,974 203,941 205,024 37.25 37.06 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 in the next page: Total cashflows for leases is recorded under Cash payments to employees and suppliers in the statement of cash flows. 121 Annual Report 2021 122 27. Issued and paid ordinary shares (continued) 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 2021: Date of grant Number of share rights granted Market value at grant date Vesting date Vesting conditions 1 April 2021 1 April 2020 871,109 AUD 717,185 1 April 2023 Continued Service 403,180 AUD 576,547 1 April 2022 Continued Service Brought forward from previous year Expense arising from share incentive plans Rights vested Rights forfeited or lapsed Total The fair value at grant date of share rights awarded under the incentive schemes is recognised as an expense over t he 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: 28. Statements of cash flows a) For the purposes of the statements of cash flow, cash and cash equivalents comprises the following: Date of grant 1 April 2021 1 April 2020 1 April 2019 b) Movement in investment securities is as follows: Consolidated 2021 PGK’000 2,774 4,192 (3,379) - 3,587 2020 PGK’000 2,063 3,008 (2,297) - 2,774 Consolidated Parent 2021 2020 2021 2020 PGK ‘000 408,334 160,000 568,334 PGK ‘000 335,147 65,000 400,147 PGK ‘000 336,302 160,000 526,302 PGK ‘000 361,614 65,000 426,614 Consolidated 2021 PGK’000 635,362 160,000 112,107 11,652 919,121 2020 PGK’000 582,874 65,000 114,519 10,682 773,075 Movement PGK’000 52,488 95,000 (2,412) 970 146,046 Cash and due from banks (note 12) Central bank bills (note 13) Central bank bills (note 13) Central bank bills & other eligible bills (less than 3 months) Government inscribed stocks (note 17) Financial assets at FVTPL Total 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 amortisation (note 17) Share-based payment expense Net (losses)/gains from changes in fair values of financial assets (note 15) Increase in income tax payable Decrease in deferred income tax (note 11b) Other one-off expenses (note 31) Foreign translation loss/(gain) on Nostro bank account Changes in net assets and liabilities: Increase in assets Increase in liabilities Net cash inflow/(outflow) from operating activities Consolidated Parent 2021 PGK ‘000 70,810 (105) 36,398 598 813 (817) 6,783 (506) 8,407 4,184 2020 PGK ‘000 75,974 (221) 35,065 (4,906) 711 2,510 1,186 (5,991) - - 2021 PGK ‘000 56,523 (105) 36,398 598 813 (467) 7,733 (519) 8,407 98 2020 PGK ‘000 37,467 (221) 18,653 (4,906) 711 2,666 4,077 (12,730) - - (347,913) 468,370 247,022 (226,709) 49,509 (72,872) (407,413) 472,021 174,087 (233,347) 73,070 (114,560) Long term incentive plan (LTI plan) 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 2021: Number of share rights granted Market value at grant date Fair value at grant date Vesting date Vesting conditions 1,399,664 AUD 1,152,341 AUD 811,805 1 April 2024 Continued Service 50% Target TSR 50% target EPS growth 617,987 AUD 883,722 AUD 349,163 1 April 2023 Continued Service 50% target TSR 50% target EPS growth 1,069,800 AUD 970,523 AUD 543,493 1 April 2022 Continued Service 50% target TSR 50% target EPS growth The estimated fair value of share rights issued on 1 April 2021 under the LTI plan was AUD 0.58, compared to the grant date market value per share of AUD 0.8233. 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. 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 2021 Number 3,661,485 2,270,773 (1,767,278) - 4,164,980 2020 Number 3,586,169 1,021,167 (945,851) - 3,661,485 123 Annual Report 2021 124 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 2021, 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 2021, the total remuneration of the Directors was PGK3,965,065 (2020: PGK3,219,047). 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 PGK’000). No of KMP Salary Bonus Super Super Equity options Equity options Other benefits Other benefits Total 2021 2020 11* 10 8,305 7,650 3,707 2,093 - - 813 711 2,083 2,084 14,908 12,538 *2 resigned as of 12 November 2021, 1 position replaced as of 22 November 2021 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 (2020: 12.50) basis points, unsecured and with no fixed term of repayment. Details as follows: Transactions Balance outstanding Income 2021 PGK’000 784 3,254 - - - 4,038 Expenses 2021 PGK’000 - 150 - - - 150 Income 2020 PGK’000 860 2,869 - - - 3,729 Expenses 2020 PGK’000 - 170 - - - 170 2021 PGK’000 62,349 - 224 64 - 62,637 Due from 2020 PGK’000 1,323 - - 64 - 1,387 2021 PGK’000 - (9,612) - - - (9,612) Due to 2020 PGK’000 - (8,880) (108) - - (8,988) KFM KISS KWM KNL KSL Fiji 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 2021 PGK’000 4,200 4,200 2020 PGK’000 2,202 2,202 2021 PGK’000 4,200 4,200 2020 PGK’000 2,138 2,138 31. Other one-off expenses In September 2021, the PNG Independent Consumer and Competition Commission (ICCC) did not approve the acquisition of the Pacific business from Westpac. In accordance with the requirements of IFRS, the Group has expensed relevant associated costs to the Statement of Comprehensive Income. A total of PGK 27.7m, comprising costs incurred directly by Kina (PGK 8.4m) and the costs incurred by Westpac (PGK 19.3m), has been charged to the Statement of Comprehensive Income. 32. Refund of deposit from Westpac As part of the supposed purchase price, the Group made an advance payment of PGK 111m (AUD 42m) to Westpac in 2020 and it refunded PGK 84.6m (AUD 32m) to Kina and retained PGK 26.4m (AUD 10m) as a cost reimbursement. 33. Segmented reporting The segment information provided to the Chief Executive Officer for the reportable segments for the year ended 31 December 2021 is as follows: Banking & Finance Wealth Management Total PGK ‘000 PGK ‘000 PGK ‘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 expense Profit before tax Income tax expense Profit after tax Total assets Total assets include: 206,932 (29,623) 66,316 58,389 837 302,851 (177,428) (6,665) (36,398) (220,491) 82,360 3,797 - 86,157 (29,634) 56,523 3,706,504 3 - (683) 30,946 1,246 31,512 (8,002) 146 - (7,856) 23,656 - (3,797) 19,859 (5,572) 14,287 79,154 206,935 (29,623) 65,633 89,335 2,083 334,363 (185,430) (6,519) (36,398) (228,347) 106,016 3,797 (3,797) 106,016 (35,206) 70,810 3,785,658 Additions to non-current assets Total liabilities (28,431) (3,206,686) - (2,349) (28,431) (3,209,035) Banking and finance segments includes the operations of the Kina Bank while Wealth Management includes fund management and fund administration business. 125 Annual Report 2021 126 33. Segmented reporting (continued) The segment information provided to the Chief Executive Officer for the reportable segments for the year ended 31 December 2020 is as follows: Banking & Finance Wealth Management Total PGK ‘000 PGK ‘000 PGK ‘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 expense Profit before tax Income tax expense Profit after tax Total assets Total assets include: Additions to non-current assets Total liabilities 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 (22,924) (2,719,289) 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 - (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) There is only one segment for the Parent entity and the information is the same as the primary statements. 34. 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 2021, 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. Bank guarantee 127 2021 2020 PGK‘000 PGK‘000 46,829 46,829 88,704 88,704 35. Commitments Capital commitments There was a total of PGK3,822,580 relating to commitments under contracts for capital expenditure at balance sheet date (31 December 2020: PGK4,927,290). Loan commitments There was a total of PGK168,623k relating loan commitment at balance sheet date (31 December 2020: PGK204,924k). 36. 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 2021. Consolidated Level 1 PGK’000 Level 2 PGK’000 Level 3 PGK’000 Total PGK’000 Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets 5,036 - 5,036 - 6,616 6,616 5,036 6,616 11,652 - - - Parent Level 1 PGK’000 Level 2 PGK’000 Level 3 PGK’000 Total PGK’000 Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets 183 - 183 - - - - 6,588 6,588 183 6,588 6,771 Annual Report 2021 128 36. Fair value of financial assets and liabilities (continued) 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 Level 1 PGK’000 Level 2 PGK’000 Level 3 PGK’000 Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets 4,680 - 4,680 - 6,002 6,002 - - - Parent Total PGK’000 4,680 6,002 10,682 Level 1 PGK’000 Level 2 PGK’000 Level 3 PGK’000 Total PGK’000 Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets 177 - 177 - - - - 5,974 5,974 177 5,974 6,151 Reconciliation of level 3 fair value measurements of financial assets and financial liabilities The group holds investment in unlisted securities amounting to PGK6,616,782 (31 December 2020: PGK6,002,718) 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 PGK6,588,495 (31 December 2020: PGK5,974,431) 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 2021 and 2020, there is no material difference between the fair value and carrying value of the Group’s and the Parent’s financial assets and liabilities. 37. Auditors’ remuneration Consolidated Consolidated Parent Audit and audit related Other services 2021 PGK‘000 1,590 - 1,590 2020 PGK‘000 909 339 1,248 2021 PGK‘000 1,452 - 1,452 2020 PGK‘000 819 325 1,144 38. 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 PGK92,786,000. 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 2021 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 2020: 3.0%). The estimated cash flows are discounted using a discount rate of 4.4% (31 December 2020: 4.7%). The fair value calculation includes future maintainable earnings of PGK 116.6 million (31 December 2020: PGK 128.5 million) 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. 39. Group reorganisation During the prior 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. 40.Events after the statements of financial reporting date Declaration of dividend Subsequent to the financial reporting date, the directors declared a final dividend of PGK 18.5 toea (AUD 7.0 cents) per share (PGK 53.1 million). Impact of coronavirus (COVID-19) The spread of Novel Coronavirus (COVID-19) continues to impact businesses globally given the duration of the pandemic, severity of the economic downturn and the speed of economic recovery. In accordance with IAS 10 ‘Events after the Reporting Period’. the Group considered whether events after the reporting period confirmed conditions existing before the reporting date. Consideration was given to the macro-economic impact of lockdowns, closure of international borders and the government support measures. The Group did not identify any subsequent events arising from the COVID-19 related developments, which would require adjustment to the amounts or disclosures in the financial statements. Further, no other material non-adjusting subsequent events relating to COVID-19 were identified requiring disclosure in the financial statements. Given the evolving nature of the current situation, the Group will continue to regularly review the forward-looking assumptions and forecast economic scenarios. 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. 129 Annual Report 2021 130 Shareholder Information. 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 of 14 March 2022. h. 20 largest holders of quoted securities (fully paid ordinary shares) Range Name Number of Shares % of Total Shares Issued a. The distribution of holders of quoted securities (fully paid ordinary shares) Range 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Securities % No. of holders % 502,412 4,116,294 7,982,024 86,281,973 188,053,197 286,935,900 0.18 1.43 2.78 30.07 65.54 100.00 878 1,435 991 2,644 348 6,296 b. The distribution of holders of unquoted securities (performance rights) Range 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Securities % No. of holders % 0 0 0 202,183 4,072,672 4,274,855 0 0 0 4.73 95.27 100.00 0 0 0 3 11 14 c. The distribution of holders of unquoted securities (performance rights) 13.95 22.79 15.74 41.99 5.53 100.00 0 0 0 21.43 78.57 100.00 Class of equity security Quoted securities (fully paid ordinary shares) Unquoted securities (performance rights) d. Unmarketable Parcel of Shares Securities No. of holders 286,935,900 4,274,855 878 14 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 COMRADE TRUSTEE SERVICES LIMITED CITICORP NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED MINERAL RESOURCES CMCA HOLDINGS LIMITED AIRWOLF LIMITED NATIONAL NOMINEES LIMITED GAS RESOURCES PNGLNG PLANT LIMITED COLUMBUS ASSET MANAGEMENT PTY LTD GARMARAL PTY LTD MR IVAN LU GEAT INCORPORATED MS MICHELLE MANSFIELD JOYCE GOLDING MS RENEE YIN LAE GOLDING MR STEPHEN WAYNE WILLIAM GOLDING BNP PARIBAS NOMINEES PTY LTD KINA ASSET MANAGEMENT NO 1 LIMITED HITSUMA SDN BHD PERPETUAL SHIPPING LIMITED Total Top 20 Balance of Register Total fully paid ordinary shares on issue i. On-market buy-back There is no current on-market buy-back. 48,040,178 10,751,916 7,951,328 5,800,176 5,465,652 5,312,834 2,885,390 2,710,754 2,139,037 2,030,000 1,832,615 1,825,172 1,570,500 1,363,654 1,363,654 1,363,654 1,328,314 1,272,500 1,250,000 1,250,000 107,507,328 179,428,572 286,935,900 16.74 3.75 2.77 2.02 1.90 1.85 1.01 0.94 0.75 0.71 0.64 0.64 0.55 0.48 0.48 0.48 0.46 0.44 0.44 0.44 37.47 62.53 100.00 The number of shareholders holding less than a marketable parcel of ordinary shares is 234, holding 66,496 securities. j. Securities purchased on-market during the reporting period e. Substantial Shareholders Number of shares purchased Average purchase price Name Number of shares % of total shares issued HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 48,040,178 16.74 To satisfy the entitlements of holders of performance rights under the Kina Performance Rights Plan 1,087,444 $0.99 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. 131 Annual Report 2021 132 Corporate Directory. Directors Isikeli Taureka (Chairman) Greg Pawson (MID) Karen Smith-Pomeroy Dr Jane Thomason Paul Hutchinson Andrew Carriline Dr Ila Temu Company Secretary Chetan Chopra Share Registry Papua New Guinea PNG Registries Ltd Level 4, Cuthbertson Haus PO Box 1265, Port Moresby Papua New Guinea Telephone: (675) 321 6377 Facsimile: (675) 321 6379 Email: brenda.igo@linkgroup.com Australia Link Market Services Limited Level 21, 10 Eagle St Brisbane QLD 4000 Telephone: 1300 554 474 (within Australia) +61 1300 544 474 (outside Australia) Auditor Deloitte Touche Tohmatsu Ltd Level 9 Deloitte Haus MacGregor St 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 Pictured on Front Cover: Tamika Sisione Registered Office Head Office Level 9, Kina Bank Haus Douglas St PO Box 1141, Port Moresby National Capital District 121 Papua New Guinea Telephone: +675 308 3888 or +675 308 3800 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 Papua New Guinea Habour City Branch Portion 13 Section 44 Allotment 30 Off Poreporena Freeway PO Box 1141, Port Moresby 121 National Capital District Papua New Guinea Hides Branch Block 8 – HGDC Para Camp, Tari, 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 Kina Bank Centre Level 1, Kada Gunan Building Habour City PO Box 1141, Port Moresby National Capital District Papua New Guinea Kokopo Branch Peter Torot Street, Tabubar Kokopo, PO Box 419, Kokopo East New Britain Province Papua New Guinea 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 Block 830, Wide Rd Londolovit PO Box 223, Lihir New Ireland Province 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 Drive PO Box 1141, National Capital District 121 Papua New Guinea Waigani Cameron Rd Branch Cnr Waigani Dr and Cameron Rd PO Box 252, Waigani 131 National Capital District 121 Papua New Guinea Waigani Drive Branch Cnr Waigani and Islander Dr PO Box 1141, Port Moresby National Capital District 121 Papua New Guinea Wewak Branch Centre St PO Box 1069, Wewak 531 East Sepik Province Papua New Guinea 133 Annual Report 2021 134 A digital version of this report can be accessed via investors.kinabank.com.pg/investors 

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