Kina Securities Ltd
Annual Report 2022

Plain-text annual report

Innovation. Vision. Annual Report 2022 ARBN 606 168 594 Rt. Hon. Sir Rabbie Namaliu GLC KMCG PC 1947 - 2023 In memoriam We’re saddened to report the loss of six valued and beloved employees and a former board director and Chairman during 2022 and at the start of 2023. We thank all our people for the extraordinary effort that they have made to help their families rebuild their lives. Our support and sympathies are extended to the families of the late Madeline Gabiobu, Rai Gia, Jennifer Goma, Dessie Buka, Andrew Soro Mongagi and Brolin Kipma. We also mourn with the people of East New Britain and Papua New Guinea for the loss of Rt Hon. Sir Rabbie Langanai Namaliu GCL KCMG PC. Following his distinguished political career, the late Sir Rabbie served as a non-executive board member and eventually as Chairman for Kina Securities from 2000 to 2017. We are extremely grateful to have had the privilege of his leadership and guidance. He performed his duties with great energy and the utmost professionalism. His achievements include leading the renewal of the Board and Management Team and guiding Kina Bank’s growth and sustainable performance during his tenure as Chairman. Madeline Gabiobu Rai Gia Jennifer Goma Dessie Buka Andrew Soro Mongagi Brolin Kipma “Blessed are they that mourn: for they shall be comforted.” Matthew 5:4 Financial Snapshot Statutory NPAT PGK 116.5 million Deposits PGK 3,879 million Up 65%* Up 28% Revenue PGK 366.5 million Net Loan & Advances PGK 2,159 million Up 10% Up 11% Customers 207,946 Up 19% Return on Equity (ROE) FY22 FY21 12.3% 19.6% Capital Adequacy FY22 FY21 22.5% 23.3% 15.3% Market Share Lending 12.9^ Market Share Deposits *impact of 45% increase in DTA, hence decrease in ITE Contents. 01 About 04 Board Our Values About Kina 02 Message Chairman’s Message Managing Director and Chief Executive Officer Messages 03 Segments Our Segments Strategic Overview 5 8 11 13 16 17 Board of Directors 23 05 Executives Senior Executive Team 27 06 Remuneration Report 1 Introduction & overview to shareholders 33 2 Kina’s Key Management Personal (KMP) 33 3 Executive remuneration 4 Non-executive director arrangements 5 Related party transactions 6 Directors’ interest in shares 34 44 45 45 3 07 Corporate Governance 09 Shareholder Shareholder Information 140 Corporate Governance 48 08 Directors’ Report 10 Corporate Directory Directors’ Report 66 Corporate Directory 142 Directors’ Declaration Independent Auditors’ Report Statements of Comprehensive Income Statements of Financial Position Statements of Changes in Equity Statements of Cash Flows Notes to the Financial Statements 69 70 75 76 77 78 79 4 We believe in the power of together. We believe that bigger goals are possible when everyone is aligned. We believe that smarter banking products become better with clever technology. We believe that ideas come to life more easily when you work together. And, we believe that hard work and ambition are a sure path to home ownership. Thinking together is a fundamental part of how we make our values manifest. We’re committed to 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. We’re also about building a better future for PNG. A better future for hard working Papua New Guineans and the businesses – large and small – that are critical to our countries progress. Because at its heart, our nation’s progress is our own progress and that’s wonderful news for our shareholders. That’s what we mean by ‘together it’s possible’. 5 Potential. Realised. 7 01 About Kina Securities Limited. Kina Securities Limited and its related entities (KSL, Kina Securities Limited has two key divisions. Kina, the Kina Group, the Group, or the Company) Kina Bank and Kina Wealth. 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 Kina Bank delivers home, business and corporate loans, everyday banking transactions, credit cards, merchant and payment facilities and banking services to smaller institutions. loans, investments to mortgages, financial advice Kina Wealth encompasses Kina Investment and and investment management. We are committed to Superannuation Services, Kina Funds Management delivering exceptional service and this is what sets and Kina Nominees servicing funds administration, us apart in the market. Since our inception, we have wealth advice, stockbroking, funds management and grown to reach over 650,000 people, administering nominee custodial services. 880,000 superannuation accounts for beneficiaries and having a total asset base of PGK 4.7 billion. Kina’s Corporate Governance Statement is available on the Company’s website: investors.kinabank.com.pg/Investors/?page=corporate- governance Kina Funds Management Ltd Kina Securities Limited. Kina Nominees Ltd Kina Investment and Superannuation Services Ltd Kina Wealth Management Ltd 8 . ) t h g i r ( a k e r u a T ) i l e K ( i l e k i s I n a m r i a h C d n a ) t f e l ( n o s w a P y r o g e r G O E C / r o t c e r i i D g n g a n a M 9 10 02 Chairman’s Message. I am immensely proud of our people, who work hard on delivering on our purpose. We continue to provide competitive products and services to help improve the prosperity of our customers and our communities that we serve. Dear Shareholders, earnings back to the owners of our business when I am pleased to introduce Kina’s Annual Report for growth is achieved. the financial year ended 31 December 2022 (2022). Our total capital adequacy is 22.5% and this 2022 was a year of two halves. In the first half of the year, the national election slowed private sector demand as business and customers awaited the results. Post-election saw the private sector recover well and spending accelerating to support resources growth. In the second half, the economy recovered positions us well for future organic growth. In 2022, we managed our capital adequacy well in response to market conditions. Our prudent approach to managing capital has positioned us well for further growth opportunities in digital and the distribution network over 2023. well and grew by 4.6% in 2022 driven by the We are currently at the halfway mark on our resources sector, in particular income from mining 2025 strategy. I am proud of what we‘ve achieved activities, which grew by 13.5%. For the Kina Group, the underlying  net profit after tax increased by 10% to PGK 106.1 million (2021 PGK 96.2 million) underpinned by solid revenue growth in core banking products and digital services. The strong results demonstrate Kina’s ability to so far given the global pandemic and difficult economic conditions over this time. We have delivered market-leading digital products that make our customers’ lives easier. Our team members are engaged, and gender diversity is a benchmark amongst ASX listed companies. execute on its revenue diversification strategy with Kina is the challenger brand in a market where 50% of income now derived from non-interest- the leading bank has 65% market share. People in bearing products. Our foreign exchange (FX) PNG are looking for an alternative Bank and this is volumes increased by 19%, however the revenue reflected in our customer growth of 22% over the was reduced by 8% due to lower margin currency past three years. transactions. Our Funds Administration business continued to record growth in revenue, consistent with increased funds under management. Pleasingly, our ROE was 17.9% and is now restored to the level it was prior to the 2020 capital raising, demonstrating our ability to deliver quality returns. Looking ahead, the Board will steer a prudent course for growth opportunities while safeguarding our strong balance sheet. The growth agenda must be value accretive for all our stakeholders supported by our purpose to deliver prosperity to the communities, which we serve. Other priorities in 2023 include The bank’s financial strength allowed us to grow our utilising our digital capabilities alongside the diverse footings by 1% while investing to create a simpler range of experience and skills of our people. and better banking experience for our customers. I’m optimistic about the next two years in PNG and Looking back at the three years since we set out our what this means for Kina. Strong economic growth strategy, there is a strong track record of success. of 4% is predicted with approval for two key mining The Board is supportive of our strategy: building projects likely to be progressed in 2023 and several on the progress we have made; diversifying our LNG projects over the next 4-5 years will inject revenues to generate sustainable growth and returns much needed economic growth in regional areas. through the economic cycle. Kina’s commercial lending hub expansion to five We paid a dividend of PGK 18.5 toea (AUD 7.0 cents) per share (K53.1m) in April 2022 in relation to the regional areas will provide these growing communities with a customer centric Banking alternative. profit for the half year ended 31 December 2021. In The Board would like to thank all our staff at Kina. September 2022, we paid a dividend of PGK 10.3 The Board commends all our people for their toea (AUD 4.1 cents) per share (K29.6m) in relation to adaptability, passion and for bringing to life Kina’s the profit for the half year ended 30 June 2022. vision of becoming the most dynamic, forward- This demonstrates the Board’s commitment to return thinking financial services company in the Pan Pacific. e g a s s e M s ’ n a m r i a h C – e g a s s e M 11 We have an extremely skilled leadership team, and the Board is pleased with the progress that has been made over the three years and have confidence that Greg and his capable team will continue to deliver value to all our stakeholders. I would like to thank my Board of Directors for their ongoing support and solid leadership. Their excellent knowledge, diligence, and assistance in creating a strong, customer-focused organisation is paving the road for innovation and, in turn, improving the future of PNG. Finally, I have had the honour of serving as Chair of Kina for the past five years. In that time, we have grown to become PNG’s second largest Bank employing over 600 people and have reached nearly 650,000* customers. Kina is a business with significant potential for growth. The Board is confident that the 2025 strategy will support all of our stakeholders through challenges and opportunities in years to come. I’d like to thank our shareholders for their consistent support and commitment to Kina. As we head into the next phase of our strategy the value, we create for all communities confirms that ‘together it’s possible’. Isikeli Taureka Chairman 14 April 2022 *combined Kina and Mibank 12 Managing Director and Chief Executive Officer’s Message. We have reached the halfway point in our 2025 strategy. We have achieved significant growth in our balance sheet, customers and developed capable people. 2023 will be the year that our growth aspiration will expand into different sectors, while we drive the sustainability agenda in PNG and continue to deliver value for all our stakeholders. Steady, consistent and focused represents the Kina This demonstrates the progress we have made experience in 2022. Despite a challenging start to against our strategic pillars. Detailed information the year with a long-drawn-out election process about our progress can be found on page 19. impacting domestic business confidence, Kina was able to navigate through these constraints and deliver strong organic growth on our core banking products, execute on our digital solutions and focus on growth in targeted segments. Another material headwind for Kina is the announcement of the tax increase to corporate banks, creating negative investor sentiment. I would like to emphasise the growth momentum Kina has built over the past 3 years, and we will continue to deliver value to our shareholders despite this tax impediment. We launched several innovative products, new segments and partnerships in 2022. It’s a credit to the outstanding work of all our staff at Kina with their commitment to execute first in market digital products such as WhatsApp Banking, Xero Feeds for our SME customers and our payment gateway platform. Our Private Bank and Corporate advisory services were launched providing a much-needed alternative in the market. And finally, our agile approach to partnerships remains strong with growth in MiBank customers and a newly co-located branch In 2022, the Kina Group moved towards our 2025 and other digital innovations has established Kina as strategic Bank to Market Marker model with digital the bank of choice for financial services. revenues up 88%. Our digital footprint expansion with strategically aligned partners has enabled improved customer experiences and diversified revenue streams. Overall, revenue grew by 10% in a challenging market impacted by low business confidence in the first half of the year. Income grew to PGK 366 million (2021: PGK 334 million) with an increase in interest income of 8% and strong results in fees and commissions, up 30% reflecting growth in our digital channel fees. The digital channel growth In March 2023, we implemented a realigned structure that reflects our growth agenda and evolution of the 2025 strategy. We welcomed Rayeleene Elston as Executive General Manager of Lending to the team. Rayeleene brings over 30 years of experience in Business Banking and Retail lending. We have further enhanced our investment in our people, focusing on building leadership and execution capability with consistent KPI’s across the Group. continues to beat exceed our expectations due to In FY22, we implemented our Environmental, Social high customer demands for greater accessibility and and Governance (ESG) strategy. Embedded in the digital services for SME’s. Despite the headwinds of the first half, loan growth of 11% was achieved over the year. Total system growth in PNG was lower in 2022 at 5% compared to 2021, further demonstrating Kina’s solid performance and moving our Lending marketing share to 16% from 15% in 2021. On the deposit side, growth of 27.7% Kina Group strategy is our Sustainable communities pillar, and the inaugural Sustainability report outlines our aspirations to be a leader in Sustainability throughout PNG, focusing on Inclusion, Transparency and protecting our Environment. You can read our inaugural Sustainability Report at investors.kinabank. com.pg/Investors/?page=Reports-and-Presentations. was achieved due to a solid performance in low-cost At Kina our focus remains on building on the strong transaction accounts with customer acquisition up momentum across our business to deliver on our 19%. Our Net Interest Margin (NIM) was 6%, within strategic initiatives. I remain positive on the outlook the target range of 6% and 8%. We were at the lower for Kina in 2023. We are evolving our capabilities. end of the range due to strong corporate deposit Underpinned by the strong foundations of our growth and targeted corporate lending. strategy, we are investing in our technology and e g a s s e M s ’ O E C d n a r o t c e r i i D g n g a n a M – e g a s s e M 13 people so we can serve our customers in new ways that make their lives easier. A good example of this is our Electronic “Know your customer” identification (E-KYC) program which is a game changer in PNG. E-KYC will enable new customers to be 100% onboarded online with no need to visit a branch. We have proved our ability to deliver sustainable growth against a backdrop of economic uncertainty and challenging policy constraints. Our ambitious plans to expand Business Banking, develop an expertise in Agri business and create a customer obsessed workforce will define our success in 2023. We take a balanced approach to our investment profile. Our aim is to diligently manage costs while maintaining our growth aspiration through a measured approach to risk management. We know achieving this balance will underpin our strategy and in turn, the value we create for our stakeholders. I would like to thank our staff for all their hard work, resilience and passion in helping our customers and to our shareholders thank you for the support and confidence in Kina. I’m certain we are moving in the right direction to fulfilling our vision of being the most dynamic, progressive and accessible financial services organisation in the Pan Pacific region. Greg Pawson Managing Director and Chief Executive Officer 14 April 2022 14 Invest. Return. 15 03 Our Segments. SME Lending growth increased by 25% Underlying NPAT growth of 10% Personal account openings up 28% Retail customer growth of 15% Digital channel growth of 88% Home loan growth of 19% 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 2022, the focus was on delivering results in the Customer acquisition, Corporate and Home lending, SME and Digital. Kina Wealth Funds administration efficiency is the key 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 Growing Digital revenues under management, securing revenues in excess of During the year, we delivered on our objective of PGK 30 million. digital expansion with Digital channel growth up Funds under administration business has 88% year on year. This is a result of a consolidated delivered key strategic projects in 2022. A focus effort to expand our EFTPOS fleet supported by our on operational disciplines has led to an increase terminal of choice strategy. Currently, our market in Service Level performance supporting revenue share in EFTPOS terminals is 25%. growth. Alongside efficiency improvements, the Our investment in improving online functionality, “Single View” platform was launched for two of the website enhancements and ATM fleet has also major super funds. Single View allows a Kina Bank contributed to this result. customer to upload their Super account to their Kina Bank app enabling customers to view their Growing savings accounts and customers Super Balances. It was pleasing to see a 28% growth in our low-cost savings account during 2022. This growth contributed to strong customer acquisition in both Consumer, up 19%, and Commercial customers, up 17%. Growing the Loan Book by 11% The business loan book grew by 9% over the year – a milestone achievement to exceed PGK 2 billion in lending. Heading into 2023, we expect further growth in our Commercial loan book with the onboarding of 10 new Business Advisors in key strategic regional locations. The Home loan book also saw very positive growth of 19% with competitive offers, segmented offerings with Kina Private Bank and our Prime customer market. 16 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. 2020-21 Your trusted bank + Traditional banking + Digital banking 2022-24 Your trusted financial services partner + Traditional banking + Digital banking + Investment Banking Bank Services + Partnership Platform Retail Commercial Ecosystem Services Corporate SME Corporate Commercial Superannuation Partners Superannuation Partners Banking Partners Banking Partners InfrastructurePartner API enabled Sell, service, grow, digitise • Grow banking market share • Digitise core business • Digital customer solutions • Test and learn partnerships and innovative business models Digital Partners Partnering to create and capture value (B2B, B2C) • Maturing technology and infrastructure • Maturing partnerships capability • Targeted acquisitions • Selectively scale new business models 17 2025 Your trusted partner in the Pan Pacific Region + Pan Pacific diversified investment bank Markets Kina Bank Modules and Partners Digital Partners InfrastructurePartner API enabled Convene a marketplace of assets, capabilities and services (B2B, B2C) • Geographical reach; digital-only bank • Bank as a service – B2B • Customer and partnership marketplace • Diversified investment bank 18 Strategic Pillars. Growth & Prosperity Resilience Service Excellence Growth & Prosperity Resilience Over the past three years, growth in our core Kina has simplified its corporate structure over products and digital channel has been accelerated. the past two years and the completion of a With our Digital first strategy, core digital channels, Non-Renounceable Rights Issue back in 2020 further merchant payments, mobile banking and Visa fees strengthened the capital base. The total regulatory contribute to the impressive growth over the past few capital adequacy of 22.5% remains well above the years, growing revenues by 10%. The transition to the (regulatory) minimum of 12%. Bank to Market Marker model has enhanced growth in non-core digital segments. Partnerships with companies such as Pei Beta (bill payments), Pronto (integrated Point of Sale capability), YuTru (digital Identification) and Xero (Integrated Xero Bank feed for SME’s) have confirmed that these adjunct services provide customer and shareholder value. Partnering to create value is now seeing these services contribute to non-interest income revenue. Alongside our strong balance sheet, our Reimagining Risk program of work was launched with a focus on renewed governance processes and an establishment of a target risk maturity for 2025. This included the development of our Strategic Intelligence capability, enabling Kina Group to identify strategic disruption risks and emerging growth opportunities. Other enhancements to our risk maturity include the development of risk Our website and online banking portals at appetite statements that appropriately align with the kinabank.com.pg were significantly upgraded strategic goals while protecting the Bank’s assets over the course of the year to global standards and improved risk modelling techniques to predict with improved navigation, graphics, calculators, external factors on credit default. and provision of online account opening and loan origination, and new private bank and corporate advisory tabs. Technology serves as the foundation for Kina’s business strategy, which focuses on enhancing the customer experience. Over the past two years, Our Bank as a Service model is also expanding our we’ve made significant investment in our current 15% strategic investment in MiBank, establishing technology, modernising the core banking platform, a strong platform for Kina to expand into more the development of API middleware and the ability communities creating shared value throughout PNG. to automate manual processes. We remain alert and In July 2022, we launched our first Co-branded dedicated to cyber security and the ability to manage Branch with MiBank enabling Kina Bank customers security controls. Cyberattacks pose a constant to utilise a MiBank branch. Another addition to risk to our operations, both in relation to our own our service offering in 2022 was the launch of our digital platforms and indirectly to our supply chain. Business Advisory model, incorporating Lending, Further investment in software costs to strengthen Business Partners and Digital teams to offer a “all infrastructure are expected to continue over the of business” banking relationship from SME to medium term. commercial segments. We have experienced early success with this model onboarding the largest retailer in PNG and several significant Commercial customers who appreciate the high-quality service, advice and dedicated investment in technology. Our aspiration to increase our market share to 25% across PNG is in sight. Market share growth in Lending has increased by 3% in three years and in deposits by 2%, In 2023, we are further expanding our Business Banking footprint, with ten new Business Advisors and five new commercial lending hubs in regional PNG. Having experienced growth as a strong challenger brand in Home lending, we believe Kina will offer SME’s and Commercial sector a Banking alternative that will support growth throughout PNG. Service Excellence Customer obsession was the key theme in 2022 for our people at Kina. Our focus on listening to our customers and implementing change saw several key digital programs come to life to reduce our customers’ pain points. The “Insight to action” approach was supported by our first in-branch customer satisfaction surveys in the last quarter of the year. As at 31 December 2022, we have received over 12,000 surveys and a Customer Satisfaction rating of 86%. This a pleasing result and as we expected the main customer pain point is waiting times in Branch queues. Incorporating this feedback with our insights to action program has accelerated s r a l l i P c i g e t a r t S – s t n e m g e S 19 Dynamic People Sustainability our digitalisation program to enhance our customer Kina remains the most gender diverse Bank in PNG. service experience. In 2022, the digitalisation program of work was extensive. To address the relevant pain points, we launched What’s App banking, a well-used digital platform in PNG that allows greater access to financial services throughout PNG. We are in the final stages of our E-KYC program for superannuation customers to Gender balance has been 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. be onboarded digitally with no need to visit a branch. Sustainability Over the past year and half, we have embarked on a full review of our Environmental, Social and Governance (ESG) frameworks to formulate a Sustainability strategy that aligns with our purpose, to build prosperity for the communities that we serve. This rigorous assessment of Kina’s capabilities in ESG against the external frameworks of the UN Sustainable Development Goals (SGD) and the Task Force on Climate Related Financial Disclosure (TCFD) alongside a thorough stakeholder materiality assessment supports our sustainability pillars. The materiality assessment included 65 interviews with staff, shareholders, customers and community groups as well as a review of 460 complaints and over 10,000 Customer surveys. This work led to the creation of Kina’s sustainability pillars, which are embedded across our five key strategic goals, Growth, Resilience, Service Excellence and Sustainable Communities. We have sharply refined our activities to focus on our three sustainability pillars, Inclusion, Transparency and our Environment. This report will highlight how we will executive against these pillars and what we will measure to help deliver on our purpose. For further information please see the Kina sustainability report investors.kinabank.com.pg/ Investors/?page=asx-announcements. This is a game changer in PNG and will materially shift the market share dynamics over the medium term. For our SME and Commercial customers improvements in our Telegraphic transfer online module provided greater efficiency, the launch of the XERO Bank feed, improvements in our Corporate Online Banking resulting in an increase in online transaction of 12%. We now have nearly 40% of our customers actively using our online platforms for their banking needs. Dynamic People Our people are at the centre of our business. Their passion and drive help our customers with their financial security and prosperity. Investing in capability is critical to the success of our strategy and through our leadership programs will help create the performance we are seeking. In 2022, we placed 80 leaders and emerging talent through Kina’s leadership program. Our Senior Management cohort is the future of Kina and focusing on transformational leadership, diversity and inclusion will build a pipeline of Leaders that will amplify our five values. In conjunction with key leadership skills, commercial acumen is another capability that will set Kina apart from other Banks in PNG. Customers are looking for knowledgeable staff who provide transparent and clear information on our financial products. We launched the Financial Champions program in 2022 and have trained over 30 staff. This program will see our Financial Champions deliver financial literacy education to our staff and then to our customers. Supporting delivery on our purpose to constantly improve the prosperity of communities we serve. Our career pathways program was piloted in 2022. The Funds Administration team were the first group to experience the program, which provides a clear competency framework and a pathway for career advancement. This highly successful pilot will be delivered in 2023. 20 s n a o L e m o H - k n a B a n K i 21 22 04 Board of Directors. Isikeli (Keli) Taureka Non-exective Chairman Chair of the Disclosure Committee Gregory Pawson Managing Director/CEO Mr Isikeli Taureka was appointed as a Director of Kina Mr Greg Pawson was appointed Managing Director 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 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, Southeast Asia and the Pacific. supporting PNG LNG projects. Previously, he held the Before his appointment, Greg was Regional Head of position of Managing Director of Kumul Consolidated South Asia Pacific for the Westpac Group and held Holdings which is the trustee and shareholder for the senior executive roles in retail banking, corporate Government of PNG in major state-owned entities financial services, financial planning, and funds including Air Niugini, Water PNG, PNG Power Limited, management. His extensive banking experience Kumul Telikom Holdings, Ports PNG, Post PNG and includes more than 16 years at Westpac where he Motor Vehicles Insurance Limited. had accountability for Westpac’s Country/Institutional, Isikeli previously held several 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. 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 He holds a Bachelor of Economics degree from responsible for 1,500 employees. the University of Papua New Guinea and is a graduate member of the Australian Institute of Company Directors. 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. s r o t c e r i D f o d r a o B k n a B a n K – d r a o B i 23 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 2016. Karen is an experienced non-executive director, with involvement across numerous 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 several industry sectors, including energy, property and agribusiness. 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 Karen is currently a non-executive director of Bank and Bank of New Zealand. 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. 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 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. 24 Dr Jane Thomason Non-Executive Director Chair of the Remuneration and Nomination Committee Dr Ila Temu Non-Executive Director Member of the Remuneration and Nomination Committee Dr Ila Temu was appointed as a Director of Kina on Dr Jane Thomason was appointed as a Director of 14 December 2020. Kina on 27 April 2018. Ila was previously Country Manager for Barrick An entrepreneur and innovator, Jane has worked in (Niugini) Limited (BNL), a role he held for some time international development implementation in the Asia until his retirement in September 2022. Dr Temu has Pacific region for 30 years. Her international career held various senior roles with Placer Dome Niugini has included work for governments and donors since 2000 including General Manager Government including the Asian Development Bank, WHO, World Relations, Director Corporate Affairs and Country 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 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. and Frontier Technology Association, Chair, Kasei Ila has also held a number of board directorships/ Holdings Blockchain Securities), Aquis Stock memberships in PNG including the Employees Exchange, London, and is on the Editorial Board of Federation of PNG and Bank of South Pacific where 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 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. Top 50 Global Thought Leaders and Influencers on He is currently a Director of Kina Petroleum Ltd, Blockchain and Sustainability. Director of Kumul Petroleum Holdings Ltd, and a Council Member of the Divine Word University. s r o t c e r i D f o d r a o B k n a B a n K – d r a o B i 25 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 several 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 several senior legal and operational roles. Andrew holds bachelor’s degrees in law and commerce from UNSW and is a graduate member of the Australian Institute of Company Directors. 26 05 Senior Executive Team. Lesieli Taviri Chief Operation Officer, Country Head and Acting Chief Information Officer Lesieli joined Kina Bank in 2020 as Executive General as Trustee Director on the Board of Nambawan Super Manager for Banking distribution and operations. for 6 years succeeding into the Deputy Chair role and In her role as Chief Operating Officer, she is leading the Transformation Board Committee. responsible for running the operations of the Business, People and Culture teams and Payments functions. Lesieli holds a Bachelor of Science, Computer Science from the Papua New Guinea University of Prior to joining Kina Bank, Lesieli was the CEO of Technology, she also holds a Master of Business Origin Energy, and she is one of PNG’s most highly Administration from the Torrens University of regarded executive leaders. She has held a number Australia. She is also a graduate member of the of high-profile board roles including Founding Chair Australia and PNG Institute of Company Directors. of the Business Coalition for Women. She has served Rayeleene Elston Executive General Manager Business Banking Rayeleene joined Kina in February 2023 as Executive leading the Queensland central region Business General Manager for Business Banking and Prime. Banking team that covered, Commercial, Corporate, In her role, she is responsible for the distribution of SME and Agribusiness. Her previous role was General retail and business lending. Manager for Community Branches at Heritage. Prior to joining Kina Bank, Rayeleene had a 30-year Rayeleene brings a deep knowledge of Business and career in Banking in Australia. Her career began Corporate Banking across a multiple products, credit in Retail Banking and she spent over 20 years as and customer experience. She will be leading a key an Executive across Business Banking at National strategic project to Business Banking expansion into Australia Bank (NAB). Her last role at NAB was regional PNG over the next three years. Johnson Kalo Chief Financial Officer and Company Secretary Johnson Kalo was appointed acting Chief Financial Director of the Port Moresby Stock Exchange (PNGX). Officer and Company Secretary in September 2022. He is a fellow of the Financial Services Institute of He previously held the role of Chief Information Australasia and an associate member of Certified Officer. Johnson has substantial industry experience Practising Accountants PNG. He holds a Bachelor of in Papua New Guinea having previously held the Arts in Commerce from the University of Papua New positions of Deputy Chief Executive Officer and Chief Guinea and a Post Graduate Diploma in Applied Financial Officer for BSP. Financial Investment from the Financial Services His previous roles also include independent Director of the Board of Credit Corporation and Executive Institute of Australasia m a e T e v i t u c e x E r o n e S – i s e v i t u c e x E 27 Deepak Gupta Executive General Manager Wealth Deepak Gupta is Executive General Manager Business financial services including successful development of Partners and Wealth and is responsible for Wealth New Zealand’s first institutional private equity fund for management and Corporate banking at Kina. He has retail investors. held a variety of senior positions with Westpac, AMP and domestic New Zealand institutions. Deepak holds a Bachelor of Commerce and Administration from Victoria University, New Zealand, In addition, Deepak has strong governance and an MBA from Massey University, New Zealand. experience having held non-executive director He has a Certificate of Investment Analysis from the roles on the boards of NZX and ASX-listed companies. University of Otago, New Zealand and is a Fellow of He brings substantial experience and a track record of the Institute of Finance Professionals New Zealand. success and innovation across various areas in Karen Mathers Chief Risk Officer Karen is Group Chief Risk Officer and is responsible well versed in the multidisciplined divisions for overseeing Kina’s strategy for holistic risk in Banking. With her unique skillset (accounting, law management and compliance. This includes best and risk management), she has had responsibilities practice governance and regulatory management that had oversight of all financial operations of the complying with the standards of the various companies in a multitude of industries in Australia, supervisory authorities. Europe, Asia and the Pacific. Karen has enjoyed a career in finance spanning over Karen is degree qualified as an accountant with 25 years. She has held executive positions at ANZ post-graduate qualifications in commercial law and Banking Group (Australia, and overseas) as Chief forensic accounting. Finance, Chief Operating and Chief Risk Officer and is Asi Nauna Chief of Staff Asi joined Kina Bank in 2018 to assist with the Prior to joining Kina Bank, Asi was ANZ’s Associate acquisition of ANZ’s Retail, SME and Commercial Director, Institutional Banking. 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, Asi was appointed Chief of Staff in March 2023 and establishing herself as a dynamic and successful is responsible for developing and delivering key leader with a track record of delivering exceptional strategic business priorities, the Environment, Social results. and Governance Strategy and Real estate divisions. She previously held the role of EGM Lending. 28 Judith Ugava-Taunao Executive General Manager Banking Judith Ugava-Taunao joined Kina in June 2021 as For 18 years, Judith has built a career that spans Chief of Staff. She was appointed Executive General across international borders and sectors. She has Manager Banking in March 2023. She is responsible worked in international development, organisational for running the national branch network and a transformation, and human resource development seamless banking experience to personal and small and leadership. business customers. In her role, Judith 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, 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. Ivan Vidovich Chief Transformation Officer Ivan joined Kina Bank in 2019. In the role of Chief strategy, customer experience, innovation and multi- Transformation Officer Ivan is responsible for Group country integration and transformation programs. Strategy and Planning, People and Culture, Digital Channels, Innovation, Design, Product and Marketing. He brings significant experience in people and culture transformational change and is a strong Ivan has 20 years senior leadership experience in advocate of diversity and inclusion in the workplace. 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, 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 Nathan holds a Bachelor of Business from the and Financial Markets. Prior to joining Kina, he spent Queensland University of Technology. He has also 15 years at ANZ Bank where his last role was Head completed the AFMA Dealer Accreditation Program of Global Markets PNG and Balance Sheet Manager and the PNG Institute of Directors Program. 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. m a e T e v i t u c e x E r o n e S – i s e v i t u c e x E 29 30 Focus. Energy. 31 06 Remuneration Report. 1 Introduction and overview to shareholders 2 Kina’s Key Management Personal (KMP) 3 Executive remuneration 4 Non-executive director arrangements 5 Related party transactions 6 Directors’ interest in shares 32 1. Introduction and overview to shareholders The Remuneration Report is focused on providing information to Kina Securities Limited shareholders about the Company’s remuneration framework which is designed to support the delivery of targeted operating financial and non-financial results. Although Kina is not required to have the Remuneration Report audited and prepared in accordance with section 300A of the Australian Corporations Act 2001 (Cth), the level of disclosure meets the requirements of an Australian-incorporated company. During the year, Kina reviewed its incentive plans to ensure that they align with market best practice and continue to attract, motivate and retain high calibre management and employees. As part of this review, it was determined that for all key management personnel except the CEO, the deferred component of Short Term Incentives (STIs) would be removed, and the total STI would be payable in cash. The Board will continue to evaluate the structure, eligibility, granting and vesting of fixed and variable remuneration arrangements for the company, including exercising provisions that exist to defer the payment of STIs. 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 2022 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 2022* 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 Chopra1 Deepak Gupta Karen Mathers2 Samantha Miller3 Johnson Kalo4 Ivan Vidovich Nathan Wingti Lesieli Taviri Asi Nauna Position held during the financial year ended 31 December 2022* MD&CEO Chief Financial Officer (CFO) and Company Secretary Executive General Manager, Business Partners and Wealth Chief Risk Officer General Manager Corporate Affairs and Investor Relations Chief Information Officer Chief Transformation Officer Head of Treasury Executive General Manager, Banking Executive General Manager, Lending Judith Ugava-Taunao Chief of Staff * The term as KMP was for the full year unless otherwise indicated. 1 resigned 3 September 2022 2 appointed 1 January 2022 3 appointed 14 March 2022 4 appointed Acting CFO and Company Secretary 1 September 2022 t r o p e R n o i t a r e n u m e R 33 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 positions (as defined in accordance with Banking Prudential Standard BPS310 Corporate Governance – Fit and Proper Requirements (BPS310), issued by the Bank of Papua New Guinea (BPNG) • providing an objective, non-executive review of the effectiveness of Kina’s remuneration policies and practices • recommending to the Board for approval by shareholders, the amount and structure of 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. 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. 34 3. Executive remuneration (continued) 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. The Board maintains complete discretion to award equity rights to employees, including the determination of vesting conditions and whether the equity rights vest and/or are awarded. • 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. t r o p e R n o i t a r e n u m e R 35 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 Fixed Remuneration (FR) Total fixed remuneration comprises base salary, other non-cash benefits and includes superannuation. 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 group and individual key performance indicators (KPIs) which may consist of financial and, if applicable non-financial performance measures For all participants, except the MD&CEO, the incentive earned will be paid 100% in cash. – MD&CEO 65% in cash and 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. For the MD&CEO, 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. Retention Awards are no longer applicable or awarded in the ordinary course of Kina’s business. The Senior Executive Team members may receive their fixed remuneration as cash, or cash with non-monetary benefits such as insurance, allowances and tax advisory services. FR is reviewed annually, or on promotion. It is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. The RNC aims to recommend to the Board a remuneration package that would position the 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. 36 3. Executive remuneration (continued) STI Award Structure of LTI Award Features Eligibility STI Award components Performance measures Calculation of STI Performance Rights Vesting of STI Performance Rights Description The MD&CEO and Senior Executive Team are eligible to participate in the STI Award (STI Participants). Cash bonus: 100% of the STI Participant’s STI Award, except for MD&CEO with 65% of STI Award. STI Performance Rights: 35% of MD&CEO’s STI Award. Individual KPIs specific to each STI Participant are agreed at the start of each year. These KPIs consist of both financial and non-financial performance measures. 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 2022: Minimum (85% of budget) Threshold (85% – 100% budget): 50% Target (Budget 100%) 90% Stretch (100+ to 110%+) 100% Stretch (120%+) up to 120% The pool is then allocated in accordance with the maximum and target STI Award for each STI participant (which is detailed later) as a percentage of gross pay. The Board has the absolute discretion to vary the STI Award. 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). 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 2019 FY ended 31 December 2020 FY ended 31 December 2021 FY ended 31 December 2022 Date granted 01/04/2020 01/04/2021 01/04/2022 01/04/2023 Vesting date 01/04/2022 01/04/2023 01/04/2024 01/04/2025 Forfeiture of STI Performance Rights STI Performance Rights are subject to Kina’s clawback policy. Under the clawback policy, unvested STI Performance Rights may be forfeited if the Board determines that adverse events or outcomes arise that should impact on the grant of STI Performance Rights to a STI Participant. Payments and grants 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. Target STI and maximum STI that can be awarded MD&CEO CFO Target 100% of base salary 40% of base salary Maximum 150% of base salary 50% of base salary Other Senior Executives 30% of base salary 45% of base salary t r o p e R n o i t a r e n u m e R 37 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 Features Eligibility LTI components Performance measures Calculation of LTI Performance Rights Vesting and exercise of LTI Performance Rights 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 Vesting outcome Nil 50% vesting Pro rata between 50% to 100% 75% and above 100% vesting • Meeting Earnings Per Share (EPS) target level based on peer group – 50% weighting • Compound Annual Growth rate over a three-year period, whereby: EPS performance < 5% compound annual growth 5% >5% and < 10% 10% Vesting Outcome Nil 50% vesting Pro rata between 50% to 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. 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). 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 Performance Period Measures Vesting date (subject to performance testing) 2019 01/04/2020 01/04/2020 to 31/03/2023 EPS assessment compound till FY 2022 – 50% Relative TSR assessment compounded to FY 2022 – 50% 01/04/2023 2020 01/04/2021 01/04/2021 to 31/03/2024 EPS assessment compound till FY 2023 – 50% Relative TSR assessment compounded to FY 2023 – 50% 01/04/2024 2021 01/04/2022 01/04/2022 to 31/03/2025 EPS assessment compound till FY 2024 – 50% Relative TSR assessment compounded to FY 2024 – 50% 01/04/2025 2022 01/04/2023 01/04/2023 to 31/03/2026 EPS assessment compound till FY 2025 – 50% Relative TSR assessment compounded to FY 2025 – 50% 01/04/2026 38 3. Executive remuneration (continued) Forfeiture of LTI Performance Rights Unvested LTI Performance Rights may be forfeited: • if the Board determines that any vesting condition applicable to the LTI Performance Right has not been satisfied in accordance with its terms or is not capable of being satisfied • in certain circumstances if the LTI Participant’s employment is terminated; or • in other circumstances specified in the LTI Award under the Plan (for example, if the Board determines that the LTI Participant has committed an act of fraud or gross misconduct in relation to the affairs of Kina) Lapse of LTI Performance Rights Unless otherwise specified in the vesting conditions or otherwise determined by the Board, a LTI Performance Right lapses on the earliest of: • if the Board determines that any vesting condition applicable to the LTI Performance Right has not been satisfied in accordance with its terms or is not capable of being satisfied • the expiry of the exercise period (if any) • in circumstances of cessation of employment, i.e. either resignation or termination • in other circumstances specified in the LTI Award under the Plan (for example, if the Board determines that the LTI Participant has committed an act of fraud or gross misconduct in relation to the affairs of Kina); or • 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. t r o p e R n o i t a r e n u m e R 39 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 Chopra1* Ivan Vidovich Deepak Gupta Johnson Kalo Nathan Wingti Asi Nauna Lesieli Taviri Karen Mathers Judith Ugava-Taunao Samantha Miller2* 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Cash salary/fees/short-term compensated absences $ Non-monetary benefits $ Total $ 603,508 591,300 276,923 400,000 385,577 375,000 360,577 350,000 323,360 309,680 338,129 290,325 240,654 226,454 323,599 310,488 400,000 - 222,310 124,195 288,462 - 189,407 206,709 135,727 126,431 16,356 61,748 142,140 174,977 31,655 22,602 117,585 112,468 26,814 15,924 115,923 20,713 15,546 - 24,418 8,839 14,575 - 792,914 798,009 412,650 526,431 401,933 436,748 502,717 524,977 355,015 332,282 455,714 402,793 267,468 242,378 439,522 331,201 415,546 - 246,728 133,033 303,036 - 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. 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 Nathan Wingti Ivan Vidovich * pro-rata based on start dates 1 resigned 3 September 2022 2 appointed 14 March 2022 Current Balance 865,373 352,720 244,708 51,127 26,923 40 3. Executive remuneration (continued) Performance Rights holdings The table below sets out the current holdings of Performance Rights (PR) by KMP. First Name Last Name Award Year Grant Date Vesting date Value of PR granted (AUD) VWAP period VWAP $ applied PR 3 1/12/2022 Gregory Pawson Chetan Chopra Michael Van Dorssen Deepak Gupta Nathan Wingti Gavin Heard Ivan Vidovich Adam Downie Asi Nauna Johnson Kalo Lesieli Taviri Judith Ugava- Taunao STI STI LTI LTI LTI STI STI LTI LTI LTI STI LTI LTI STI STI LTI LTI LTI STI STI LTI LTI LTI STI LTI LTI STI STI LTI LTI LTI STI STI LTI LTI STI STI LTI LTI STI STI LTI LTI STI LTI 2020 2021 2019 2020 2021 2020 2021 2019 2020 2021 2020 2019 2020 2020 2021 2019 2020 2021 2020 2021 2019 2020 2021 2020 2019 2020 2020 2021 2020 2021 01/04/2021 01/04/2022 19/05/2020 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2020 01/04/2021 01/04/2022 01/04/2023 01/04/2024 01/04/2023 01/04/2024 01/04/2025 01/04/2023 01/04/2024 01/04/2023 01/04/2024 01/04/2025 01/04/2021 01/04/2020 01/04/2021 01/04/2023 01/04/2023 01/04/2024 01/04/2021 01/04/2022 01/04/2020 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2020 01/04/2021 01/04/2022 01/04/2023 01/04/2024 01/04/2023 01/04/2024 01/04/2025 01/04/2023 01/04/2024 01/04/2023 01/04/2024 01/04/2025 01/04/2021 01/04/2020 01/04/2021 01/04/2023 01/04/2023 01/04/2024 288,189 277,825 294,722 274,466 264,595 105,225 101,801 160,000 148,009 143,194 48,566 120,000 111,006 48,566 46,985 105,000 97,131 93,971 56,660 54,816 48,000 83,255 80,546 25,902 66,000 61,053 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2023 01/04/2024 01/04/2024 01/04/2025 64,754 62,648 138,758 134,244 31/12/2021 31/12/2022 31/12/2019 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2019 31/12/2021 31/12/2022 31/12/2021 31/12/2019 31/12/2021 31/12/2021 31/12/2022 31/12/2019 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2019 31/12/2021 31/12/2022 31/12/2021 31/12/2019 31/12/2021 31/12/2021 31/12/2022 31/12/2021 31/12/2022 0.8233 0.7756 1.4300 0.8233 0.7756 0.8233 0.7756 1.4300 0.8233 0.7756 0.8233 1.4300 0.8233 0.8233 0.7756 1.4300 0.8233 0.7756 0.8233 0.7756 1.4300 0.8233 0.7756 0.8233 1.4300 0.8233 0.8233 0.7756 0.8233 0.7756 2019 01/04/2020 01/04/2023 90,000 31/12/2019 1.4300 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2021 2021 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2021 01/04/2022 01/04/2023 01/04/2024 01/04/2024 01/04/2025 01/04/2023 01/04/2024 01/04/2024 01/04/2025 01/04/2023 01/04/2024 01/04/2024 01/04/2025 01/04/2022 01/04/2022 01/04/2024 01/04/2025 24,282 23,493 61,053 59,067 38,852 37,589 88,805 85,916 16,189 37,589 88,805 85,916 15,662 59,067 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2021 31/12/2022 31/12/2022 31/12/2022 0.8233 0.7756 0.8233 0.7756 0.8233 0.7756 0.8233 0.7756 0.8233 0.7756 0.8233 0.7756 0.7756 0.7756 350,041 358,207 206,099 333,373 341,149 127,809 131,255 111,888 179,775 184,623 58,989 83,916 134,831 58,989 60,579 73,427 117,978 121,159 68,820 70,676 33,566 101,124 103,850 31,461 46,154 74,157 78,652 80,773 168,539 173,084 62,937 29,494 30,290 74,157 76,157 47,191 48,464 107,865 110,774 19,663 48,464 107,865 110,774 20,193 76,157 t r o p e R n o i t a r e n u m e R 41 Subsequent to, and in relation to, the year ended 31 December 2022 (FY2022 Awards), the Board approved the following STI and LTI Awards for eligible participants. The STI Performance Rights and LTI Performance Rights components of the FY2022 STI and LTI Awards for the MD&CEO are subject to shareholder approval at the 2023 AGM to be held on 9 June 2023. First Name Last Name Award Year Grant Date Vesting date Value of PR granted (AUD) VWAP period VWAP $ applied PR 3 1/12/2022 Gregory Pawson Johnson Kalo Deepak Gupta Nathan Wingti Ivan Vidovich Lesieli Taviri Asi Nauna Judith Ugava- Taunao STI LTI LTI LTI LTI LTI LTI LTI LTI 2022 2022 01/04/2023 01/04/2023 01/04/2025 01/04/2026 262,500 250,000 31/12/2022 31/12/2022 2022 01/04/2023 01/04/2025 81,600 31/12/2022 2022 01/04/2023 01/04/2025 95,000 31/12/2022 2022 01/04/2023 01/04/2025 90,000 31/12/2022 2022 01/04/2023 01/04/2025 135,000 31/12/2022 2022 01/04/2023 01/04/2025 115,600 31/12/2022 2022 01/04/2023 01/04/2025 60,000 31/12/2022 2022 01/04/2023 01/04/2025 56,000 31/12/2022 0.7756 0.7756 0.7756 0.7756 0.7756 0.7756 0.7756 0.7756 0.7756 338,448 322,331 105,209 122,486 116,039 174,059 149,046 77,359 72,202 Karen Mathers LTI 2022 01/04/2023 01/04/2025 105,000 31/12/2022 0.7756 135,379 Employment agreements KMP employment contracts • All Senior Executive Team members’ employment contracts are over a period of three years with a notice period of three months. 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. 42 3. Executive remuneration (continued) 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, were as follows: In PGK 1,820,000 - 1,830,000 1,530,000 - 1,540,000 1,030,000 - 1,040,000 970,000 - 980,000 910,000 - 920,000 900,000 - 910,000 870,000 - 880,000 800,000 - 810,000 790,000 - 800,000 770,000 - 780,000 750,000 - 760,000 740,000 - 750,000 720,000 - 730,000 710,000 - 720,000 640,000 - 650,000 600,000 - 610,000 580,000 - 590,000 570,000 - 580,000 550,000 - 560,000 530,000 - 540,000 510,000 - 520,000 500,000 - 510,000 490,000 - 500,000 480,000 - 490,000 470,000 - 480,000 450,000 - 460,000 440,000 - 450,000 2022 1* - - 2 1 - 2 1 1 1 - - 1 - - 2 2 - 1 1 1 1 - 1 1 1 - 2021 In PGK 2022 2021 - 1* 2 - - 1 - 1 - 1 1 1 - 1 1 1 2 1 1 - 2 1 1 - 1 1 1 420,000 - 430,000 400,000 - 410,000 390,000 - 400,000 380,000 - 390,000 360,000 - 370,000 350,000 - 360,000 330,000 - 340,000 320,000 - 330,000 310,000 - 320,000 300,000 - 310,000 280,000 - 290,000 270,000 - 280,000 250,000 - 260,000 220,000 - 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. - 1 - - 1 1 1 1 2 2 2 - 1 1 1 4 4 5 2 11 10 10 6 9 16 16 1 - 1 1 - - 2 2 1 1 1 1 2 3 1 1 4 7 5 8 9 6 11 6 16 21 t r o p e R n o i t a r e n u m e R 43 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. Remuneration components Kina’s Board and Committee fee structure as at 31 December 2022 was: Board fees Board Board Committee fees Audit and Risk Committee Remuneration and Nomination Committee Disclosure Committee Fee pool Chairman Non-executive director/committee member $180,000 (excluding superannuation entitlements) $90,000 (excluding any superannuation entitlements) Committee Chair: $22,500 (excluding any superannuation entitlements) Members: $11,250 (excluding any superannuation entitlements) Committee Chair: $22,500 (excluding any superannuation entitlements) Members: $11,250 (excluding any superannuation entitlements) No additional fees are paid No additional fees are paid 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 2022, 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 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. 44 Director Year Short-term benefits Post-employment benefits Fees $ Non-monetary benefits $ Superannuation contributions $ Isikeli Taureka Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Ila Temu Jane Thomason 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 180,000 180,000 112,500 112,500 101,250 101,250 131,310 131,310 101,250 98,769 112,500 112,500 Variable remuneration Special remuneration - - - - - - - - - - - - 15,110 15,120 7,560 7,560 7,560 7,560 - - 9,012 5,415 - - Total $ 195,110 195,120 120,060 120,060 108,810 108,810 131,310 131,310 110,262 104,184 112,500 112,500 Directors may be paid such special or additional remuneration as the Board determines for performing extra services or making any special exertions for the benefit of Kina which, in the Board’s opinion, are outside of the scope of ordinary duties of a director. Reimbursement for out-of-pocket expenses Directors may be reimbursed for travel and other expenses incurred in attending and returning from any Board, Board Committee or general meetings of Kina shareholders, or otherwise in connection with the business or affairs of the Kina Group. Retirement benefits There are no retirement benefit schemes for directors, other than statutory superannuation contributions. Participation in incentive schemes The non-executive directors are not entitled to participate in any Kina Group employee incentive scheme. 5. Related party transactions Please refer to Note 29 to the financial statements, for further comments on related party transactions. 6. Directors’ interests in shares Directors are not required under the Constitution to hold any shares in the Company. As at the date of this Remuneration Report, t he Directors have the following interests in the shares in Kina (either directly or through beneficial interests or entities associated with the director). Director Isikeli Taureka Greg Pawson Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Jane Thomason Ila Temu t r o p e R n o i t a r e n u m e R 45 Number of Shares Shareholding as at the date of this Remuneration Report (%) 65,000 865,373 125,000 80,299 90,000 35,000 - 0.02% 0.30% 0.04% 0.03% 0.03% 0.01% 0.00% 46 Future. Proof. 47 07 Corporate Governance Statement. Introduction Kina Securities Limited and its related entities (Kina, the Kina Group, the Group, or the Company) places great emphasis on the continued development of a The Board considers and applies the ASX Principles and Recommendations, considering the circumstances of Kina. Unless otherwise noted, the strong corporate governance, risk management and Company has followed during the reporting period, compliance culture. In an emerging marketplace, all of the best practice recommendations set out in Kina seeks to be innovative as well as provide a safe the ASX Principles and Recommendations. Where and secure environment for its customers and clients, Kina’s practices depart from a Recommendation, this Statement identifies the area of divergence and reasons for it, or any alternative practices adopted by Kina. Governance framework The core of Kina’s corporate governance framework is the Company’s Constitution and the Charters and Policies (Governance Documents), which are referenced in this Statement, and copies of which are available on the Company’s website at: investors.kinabank.com.pg/ Investors/?page=corporate-governance. The Governance Documents are reviewed regularly by the Board to ensure they comply with any updated laws or regulations, that they meet high governance standards and that they remain relevant to the Group and its operations. which in turn brings value to shareholders. The Board of Directors of Kina Securities Limited (the Board) is responsible for the overall corporate governance of the Kina Group, including adopting appropriate policies and procedures designed to ensure that Kina is properly managed to protect and enhance shareholder interests. The Board monitors the operational and financial position and performance of Kina and oversees its business strategy, including approving the Company’s strategic goals and considering and approving business plans, key governance, risk and operational policies and the annual budget. Kina has a well-developed corporate governance framework and practices, for the operation and management of Kina, which incorporates resilient internal controls, risk management processes and governance policies and practices. The Board monitors adherence to this framework which enables the Group to comply with relevant laws, regulations and standards set down by the Bank of Papua New Guinea (BPNG), the Australian Securities Exchange (ASX), PNG’s National Stock Exchange (PNGX), the PNG Companies Act 1997 (Companies Act), PNG Securities Act, Capital Markets Act 2015, and the Australian Corporations Act 2001 (Cth) (Corporations Act). This Corporate Governance Statement (Statement) sets out the key features of Kina’s current corporate governance framework and reports against the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (4th Edition) (ASX Principles and Recommendations). The Statement is current as at 21 April 2023 and has been Board approved. 48 Principle 1: Lay solid foundations for management and oversight A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance. Board of Directors The Role of the Board The Board is committed to maximising performance, generating shareholder value and financial returns, and sustaining the growth and success of Kina. In conducting Kina’s business in accordance with these objectives, the Board seeks to ensure that Kina is properly managed to protect and enhance shareholders’ interests, and that Kina, its directors, officers and employees operate in a well governed environment. The Board has adopted a Board Charter. The Board Charter sets out, amongst other things, the: • role and responsibilities of the Board, including those matters specifically reserved to the Board; • role and responsibilities of the Managing Director and Chief Executive Officer (MD&CEO), who is primarily responsible for the day-to-day management of Kina; • procedures for management of potential and actual conflicts of interest; and • guidance on Board performance evaluation, ethical standards and taking independent professional advice. Board Responsibilities The Board’s first responsibility is to govern the Company in the interest of its shareholders; to protect and grow the value of its stakeholders’ interests. The Board Charter establishes that the primary goal of the Board is to add value to the Company by: • ensuring the long-term viability and sustainability of the Company; • protecting the interests of shareholders by exercising effective control over the Company; • providing strategic direction and leadership; • bringing independent and informed judgment to bear on material decisions of the Company; • setting the standards of behaviour and ethical values for the Company; • establishing strong internal control and compliance systems; • monitoring the effectiveness of the Company’s overall risk management and control framework; and • accounting to shareholders for the overall performance of the Company. t n e m e t a t S e c n a n r e v o G e t a r o p r o C 49 Under the terms of its Charter, the Board will: • approve the Company’s strategy, business plans and policy; • establish the risk appetite within which management will implement the strategic direction; • monitor the implementation of strategic plans against pre-determined performance indicators; • identify key business risks and ensure measures are taken to mitigate those risks; • ensure that effective internal control systems are in place to safeguard the Company’s assets; • establish and monitor terms of reference and procedures of all Board Committees; • ensure compliance with all relevant laws, regulations and standards; • approve the external auditor’s fees; • approve and monitor the progress of material capital investment decisions, including new products and services; • appoint the MD&CEO, set executive remuneration and establish performance objectives; • appoint the Company Secretary; • review the compensation of directors and recommend changes to the non-executive directors’ fee pool to shareholders; • ensure succession plans are in place for all key positions in the Company; • adopt a comprehensive suite of prudential and administrative policies; • verify independently that the prudential and administrative policies are operating effectively; • maintain effective and timely communications with shareholders; • ensure the annual financial statements of the Company and other published reports and announcements are prepared according to the relevant standard; • resolve that the financial statements and other published reports and announcements (where relevant) accurately represent the financial position of the Company; • approve the annual report including the financial statements, dividend proposals and notices to shareholders for consideration at the Annual General Meeting; and • assess applications for new and increased loan exposures where the amount or nature of the lending requires referral to the Board as set out in the Group’s Credit Risk Management Framework and the Delegated Lending Authority Framework. Delegations to Management Day-to-day management and operations of the Company are delegated to Management. The MD&CEO has the authority to exercise all necessary powers, discretions and delegations authorised from time to time by the Board. The Board has delegated to the MD&CEO responsibility for the following matters: • selecting the senior management team; • setting the terms and conditions of employment within Remuneration Policy parameters; • evaluating the performance of management; • implementing the strategic direction established by the Board; • drafting the annual budget in consultation with the Audit and Risk Committee; • managing the Group’s day-to-day operations on time and within budget; • maintaining effective internal risk controls; and • managing the daily operations of the business in accordance with social, ethical and environmental policies set by the Board. The MD&CEO’s responsibilities are set out in the Board Charter. The MD&CEO is supported by the Group Executives, all of whom are listed on the Company’s website at: investors.kinabank.com.pg/Investors/?page=board-management. The Board Charter, Charters of each Board Committee, and the Constitution are available on the Company’s website at: investors.kinabank.com. pg/Investors/?page=corporate-governance. 50 Director Appointment As required by BPNG’s Prudential Standards (Standards), Kina undertakes ‘Fit and Proper’ testing for candidates who will hold ‘Responsible Person’ positions on initial appointment, which includes directors and the Senior Executive Team. This rigorous testing, in accordance with the Standards, is also carried out on an annual basis for all Responsible Persons including thorough background checks. When directors are proposed for election, or re-election at General Meetings of shareholders, the Notice of Meeting provides the following information about a candidate standing for election or re-election: • biographical details; • details of other directorships held by the candidate; • a statement as to the independence of the candidate; • details of any adverse information revealed as part of the checks performed about the director; • details of any interest, position association or relationship that might impact on the ability of the director to be independent; • the term of office currently served by the director; and • a statement by the Board as to whether it supports the election or re-election of the candidate. Prior to appointing a director, the Remuneration and Nomination Committee undertakes appropriate background checks on their qualifications, experience, education, character, bankruptcy history and criminal record. Prior to appointment, candidates are required to provide the Chairman with details of other commitments and an indication of time involved, and to acknowledge that they will have adequate time to fulfil his or her responsibilities as a non-executive director of Kina. Written Agreements with Directors and Senior Executives Each non-executive director is provided with a Letter of Appointment, which sets out: • the term of appointment; • the time commitment envisaged, including any expectations regarding involvement with Committee work and any other special duties attaching to the position; • remuneration, including superannuation entitlements; • the requirement to disclose the director’s interests and any matters which may affect the director’s independence; • the requirement to comply with key corporate policies, including Kina’s Code of Ethics and Business Conduct and its Securities Trading Policy; • the Company’s policy on when directors may seek independent professional advice at the expense of the Company (which generally should be whenever directors, especially non-executive directors, judge such advice necessary for them to discharge their responsibilities as directors); • the circumstances in which the director’s office becomes vacant; • indemnity and insurance arrangements; • ongoing rights of access to corporate information; and • ongoing confidentiality obligations. The MD&CEO and each Senior Executive Team member are also provided with a Letter of Appointment which sets out the information above (to the extent applicable), as well as: • a description of their position, duties and responsibilities; • the person or body to whom they report; • the circumstances in which their service may be terminated (with or without notice); • any entitlements on termination; and • any circumstances in which their remuneration may be clawed back. t n e m e t a t S e c n a n r e v o G e t a r o p r o C 51 Company Secretary The Company Secretary is accountable directly to the Board, through the Chairman, on all matters to do with the proper functioning of the Board. Mr. Johnson Kalo was appointed acting Company Secretary and Chief Financial Officer on 1 September 2022. Mr. Kalo holds a Bachelor of Arts in Commerce from University of Papua New Guinea and a Post Grad Diploma in Applied Financial Investment from FINSIA. Mr Kalo is a member of Certified Practising Accountants PNG. The acting appointment was made permanent on 1 April 2023 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, and disclose in relation to each reporting period: (a) the measurable objectives set for that period to achieve gender diversity; (b) the entity’s progress towards achieving those objectives; and (c) the respective proportions of men and women on the Board, in senior executive positions and across the whole workforce (including how the entity has defined “senior executive” for these purposes). The numbers of females within Kina’s workforce as at 31 December 2022 and 31 December 2021, including the Board and Senior Executive Team is set out below: Board Senior Executive Team Team Leaders Other employees Total employees 31 December 2022 31 December 2021 Females Males Total Females Males Total 2 5 64 292 363 5 4 46 230 285 7 9 110 522 648 2 4 40 344 390 5 5 34 257 301 7 9 74 601 691 52 The Senior Executive Team are those individuals who report directly to the MD&CEO. Team Leaders are those individuals who have been appointed as Supervisors and Managers. 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 employees. 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 to feed babies. In 2022, 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. The management has incorporated and launched FSVU on the common learning platform to allow for an extended participation by the entire Kina employees. The ratio of women to men at Kina is 56% female to 44% male (2021: 56% to 44%). The Group will continue to promote awareness and understanding of workplace diversity principles and develop policies to help employees balance work, family and cultural responsibilities while at the same time removing barriers to career development. The Remuneration and Nomination Committee reviews and oversees the implementation of the Diversity Policy and will regularly consider the need to set specific gender diversity objectives. Performance Evaluation In accordance with the Standards, and as set out in the Board Charter, the performance of the Board, the directors and its Committees are assessed each year. The Board undertook a performance evaluation during 2022 in the form of a self-assessment survey. As in prior years, the Board undertook an internal skills analysis during the year. The findings were used to further refine the ongoing Board succession and renewal plan. The Board will continue to review individual, Committee and collective Board performance and ensure that composition,skills and experience of the directors is appropriate. Performance evaluations, overseen by the Chairman and the Chair of the Remuneration and Nomination Committee in the case of the MD&CEO, and the Remuneration and Nomination Committee in the case of the Senior Executive Team, are carried out on an annual basis and were completed in 2022 t n e m e t a t S e c n a n r e v o G e t a r o p r o C 53 Principle 2: Structure the board to be effective and add value The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value Board Composition The Board currently comprises six non-executive directors (NEDs) and one executive director. The Company’s Constitution provides for a minimum of three and a maximum of ten directors. The Board members have a diverse range of skills and experience which ensure they are able to add value to the Board’s decisions, contribute effectively and act in the best interests of its shareholders. The Company’s current executive director is Mr. Gregory Pawson, the MD&CEO of the Company. Board Committees The Board has the power to establish and delegate powers to Committees that are formed to facilitate effective decision-making. The Board, however, ultimately has full accountability for matters delegated by it to those Committees. The Board has established an Audit and Risk Committee, a Remuneration and Nomination Committee and a Disclosure Committee. Each Committee has a separate Charter which sets out, in detail, the membership and powers of the Committee including its roles and responsibilities. The Charters are reviewed at least annually, and copies are available on the Company’s website at: investors.kinabank.com.pg/ Investors/?page=corporate-governance. Other Committees may be established by the Board as and when required. Membership of Board Committees is based on the needs of Kina, relevant legislative and other requirements and the skills and experience of individual directors. 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. The objective of the Audit and Risk Committee is to assist the Board in the performance of its statutory and prudential duties and obligations and to satisfy itself that the Company: • has effective policies and practices in place for the management and reporting of its financial information and results in compliance with relevant statutory and regulatory frameworks; • has in place effective financial and other operational controls which assure the accuracy of financial information produced and reported; • commissions and appropriately considers well researched advice on financial, taxation, insurance and other matters; and • has in place an effective risk management framework, covering both financial and non-financial risks and that Kina’s operations fall within the Board-approved risk appetite and tolerances; and undertakes a regular and objective review of the effectiveness of Kina’s overall enterprise risk management framework. 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. In accordance with the Standards, the Chair of the Board must not be a member of any Board Committee. 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; and • all members to have a sound understanding of the concept of risk and the principles of managing risk. The Audit and Risk Committee met eight times during the year ended 31 December 2022. 54 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; • 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 • fairly and responsibly rewards Group Executives having regard to the performance of the Group, the performance of the Group Executives and the general external pay environment. In its function as a Nominations 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 and continuing development; • 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. The Remuneration and Nomination Committee may obtain information from, and consult with, Management and external advisers, as it considers appropriate. The Committee met seven times during the year ended 31 December 2022. Disclosure Committee 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; and • providing assurance to the Board that all potentially market sensitive information has been considered for compliance with the Company’s continuous disclosure obligations. The duties and responsibilities of the Disclosure Committee include to: • assess whether information concerning the Company should be disclosed to the market; • determine the substance of the market disclosure and when it must be made; • where necessary, review market disclosures for accuracy and completeness and approve or recommend to the Board for approval; • determine whether a trading halt or voluntary suspension of trading is required; • respond to any request from ASX or PNGX to disclose market sensitive information to correct or prevent a false market; • ensure that breaches of BPNG’s Standards are communicated, where appropriate, to BPNG or other regulators in compliance with the relevant listing rules and/or continuous disclosure requirements; and • oversee the Disclosure Officer’s administration of the Continuous Disclosure Policy. The Disclosure Committee has the power to: • determine whether information should be disclosed to the market or any public forum; and • authorise the disclosure of any information to the market or any public forum. The Disclosure Committee has absolute right of access to any information held by the Kina Group. The Disclosure Committee shall comprise at least three members appointed by the Board. Members shall include the Chairman of the Board, the MD&CEO and the Chair of the Audit and Risk Committee. The Committee Chair shall be appointed by the Chair of the Board. The Committee met twice during the year ended 31 December 2022. t n e m e t a t S e c n a n r e v o G e t a r o p r o C 55 Membership of and attendance at Board and Committee meetings Membership of the Committees during the reporting period, the number of Board and Committee meetings held and the attendance at those meetings are set out in the table below. All directors are invited to and regularly attend all Committee meetings. Director Board Meetings Audit & Risk Committee Meetings Remuneration & Nomination Committee meetings Disclosure Committee Meetings Isikeli Taureka Gregory Pawson Andrew Carriline Paul Hutchinson Karen Smith-Pomeroy Ila Temu Jane Thomason A 8 8 82 B 8 8 8 A 82 8 8 8 8 8 8 B 8 8 8 8 8 71 8 A 7 7 7 72 B 7 7 6 7 A 22 2 2 2 B 2 2 2 2 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 56 Board Skills Matrix The Board seeks to have an appropriate mix of skills, experience, expertise and diversity to enable it to discharge its responsibilities and add value to the Company. As of 21 April 2023, the directors collectively contribute the following key skills and experience: Skills and experience Explanation Extent present among directors Banking and/or financial services experience 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 83% 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 74% 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 66% sustainability frameworks and related practices. Financial acumen performance for a business of significant size, including ability to assess the 86% Good understanding of financial statements and drivers of financial 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 77% and processes. International experience borders, and exposure to a range of political, cultural, regulatory and 71% Senior leadership experience involving responsibility for operations across business environments in that position. Skills gained whilst performing at a senior executive level for a Leadership and commercial acumen considerable length of time. Includes delivering superior results, running complex businesses, leading complex projects and issues, and leading workplace culture. Experience at a senior executive level in people matters including building People, culture and workforce capability, workplace cultures, management development, conduct succession and setting a remuneration framework that attracts and retains a high calibre of executives, and promotion of diversity and inclusion. Risk and compliance 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. Stakeholder engagement Demonstrated ability to build and maintain key relationships with industry, government or regulators. 97% 86% 74% 91% Strategy direction. Experience in driving growth and transformation, executing 86% Experience in leading, developing, setting and executing strategic against a clear strategy. Technology and digital including adaptation to digital change and innovation, with knowledge of 66% Experience in businesses of a significant size with major technology focus, developments in Decentralised Finance (DeFi). t n e m e t a t S e c n a n r e v o G e t a r o p r o C 57 Composition of the Board and details of directors The Kina Board currently comprises seven directors, one of whom is Gregory Pawson, the MD&CEO. The remaining six directors are considered by the Board to be independent non-executive directors, comprising Isikeli Taureka (Chairman of the Board), Karen Smith-Pomeroy (Chair, Audit and Risk Committee), Jane Thomason (Chair, Remuneration and Nomination Committee), Andrew Carriline, Paul Hutchinson and Ila Temu. The Board considers that each of the non-executive directors are ‘independent’ of the Company. Throughout the year, the Board therefore had a majority of independent non-executive directors. Directors’ Details Name Isikeli Taureka 19 April 2016 Karen Smith-Pomeroy 12 September 2016 Gregory Pawson Jane Thomason Andrew Carriline Paul Hutchinson Ila Temu 1 January 2018 27 April 2018 16 August 2018 16 August 2018 14 December 2020 Appointment date Length of service Non-executive Independent 6 years, 0 months 6 years, 7 months 5 years, 4 months 5 years, 0 months 4 years, 8 months 3 years, 8 months 2 year, 4 months Yes Yes No Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes The Board considers an independent director to be 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. At least annually, the Board reviews the independence of each director in light of their interests disclosed to the Board at each Board meeting and considers examples of interests, positions, associations and relationships that might cause doubts about the independence of a director including if the director: • is, or has been, employed in an executive capacity by the entity or any of its child entities and there has not been a period of at least three years between ceasing such employment and serving on the Board; • receives performance-based remuneration (including options or performance rights) from, or participates in an employee incentive scheme of, the entity; • is, or has been within the last three years, in a material business relationship (e.g. as a supplier, professional adviser, consultant or customer) with the entity or any of its child entities, or is an officer of, or otherwise associated with, someone with such a relationship; • is, represents, or has been within the last three years an officer or employee of, or professional adviser to, a substantial shareholder of the Company’s securities; • has close personal ties with any person who falls within any of the categories described above; or • has been a director of the entity for such a period that their independence from management and substantial shareholders may have been compromised. The Board considers that each of the non-executive directors brings objective and independent judgment to Board deliberations and makes a valuable contribution to Kina through the skills and experience they bring to the Board and their understanding of Kina’s business. 58 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 MD&CEO may not be exercised by the same individual. Director induction and education Kina’s induction program is designed to provide all new directors with a comprehensive view of the business. As part of the induction, new directors are given a detailed overview of Kina’s operations, copies of governance and internal policies and procedures and instruction on the roles and responsibilities of the Board, its Committees and Senior Management. The electronic Board portal utilised by the Board provides directors access to relevant Governance Documents, educational information, Board and Committee papers and provides a secure means of communication between directors and Senior Management. There is a strong emphasis on continued education and directors are expected to keep themselves updated on changes and trends within the business, in the financial sector, market environment and any changes and trends in the economic, political, social, global, environmental and legal climate generally. Consistent with guidance on best-practice, all directors seek to complete a minimum of 20 hours during the year in ongoing professional development. Directors are encouraged to attend recognised courses, seminars and conferences and internal education sessions are scheduled at Board meetings throughout the year. Principle 3: Instil a culture of acting lawfully, ethically and responsibly A listed entity should instill and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly. Kina Group Purpose Statement Kina’s purpose is ‘to constantly improve the prosperity of the people, communities, and markets that we serve’. Kina Group Vision Statement Our Vision is ‘to be the most dynamic, progressive and accessible financial services organisation in the Pan Pacific region’. This Vision is supported by our Strategic Priorities: • Growth and 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: digital from the inside and out, simple processes, great customer service, always first when it matters; • Dynamic People: we love people, our culture is everything, our people are well trained, adaptable and care; and • Sustainable Communities: we are in the business of doing good, building trust, and creating long-term value for all our stakeholders. Kina’s Culture Our People are here to make a difference, not just for their day job. They are passionate about empowering customers to effect life change. Kina’s culture is underpinned by our Group Values, FIRTH: Fairness Imagingation Reflection Togetherness Honesty Since the introduction of the FIRTH values, Kina has seen an increase in employee participation in FIRTH value moments which has helped them gain renewed perspective in our values and how they can be applied through the business. Our Learning Managements System was updated to include self-assessment and leader assessment of employee contribution to our Values and defined behaviours Kina has articulated its Group Vision Statement, its Defining Purpose and its Culture in its Board Charter, a copy of which is available on the Company’s website at investors.kinabank.com.pg/Investors/?page=corporate- governance. t n e m e t a t S e c n a n r e v o G e t a r o p r o C 59 Acting Ethically and Responsibly The Board is committed to ensuring that Kina maintains the highest standards of integrity, honesty and fairness in its dealings with all stakeholders, and that Kina complies with all legal and other obligations. Kina’s Code of Ethics and Business Conduct (Code) applies to all directors, employees of Kina and its subsidiaries (including subcontractors and consultants). The Code sets out certain minimum standards of conduct that Kina expects of its employees and directors including integrity, diligence, impartiality, equality and fairness. The Code sets out how employees and directors are to conduct themselves in order to meet these minimum standards. It is a requirement for all directors and officers to acknowledge the Code annually. Whistleblower Policy The Board has adopted a Protected Disclosure (Whistle-Blower) Policy. The Board wishes to promote an organisational culture that values open, transparent, ethical, legal, compliant behaviour and does not tolerate behaviour that departs from the high standards expected of Kina directors and employees. This Policy is intended to reinforce that culture and to provide a safe, secure, confidential means whereby persons with concerns over any breaches including any unlawful conduct, misconduct, malpractices, violation of any legal or regulatory provisions that has, or may have occurred, can report it without fear of reprisal, discrimination or harassment of any kind. It is expected that the protected disclosures will be made in confidence and in the knowledge that it will be properly investigated and escalated to the appropriate level for it to be properly addressed. Anti-Bribery and Corruption Policy The Board has adopted an Anti-Bribery and Corruption Policy. The purpose of the Policy is to provide clarity of expectations, which helps to reinforce and strengthen the understanding of our responsibilities as well as those with whom we engage and also provide guidance in dealing with incidents or suspected incidents of bribery and corruption, should they occur. The Policy complements Kina’s other related policies, in particular, the Code of Ethics and Business Conduct, Conflicts of Interests Policy, and the Gift and Entertainment Policy. The Policy harmonises with Kina’s Core Values that emphasise principles of fairness, imagination, reflection, togetherness and honesty in our relationships and business dealings with both our internal and external stakeholders. Principle 4: Safeguard the integrity of corporate reports A listed entity should have appropriate processes to verify the integrity of its corporate reports. Audit and Risk Committee Details of the Audit and Risk Committee are set out on page 54 above. Written Declarations When the Board considers the statutory half-year and annual financial statements, the Board obtains a declaration1, from the MD&CEO and CFO concerning the integrity of the financial statements and assurance as to the effective operation of the risk management and internal compliance and control systems. Kina’s financial reports for the half-year ended 30 June and the full year ended 31 December are respectively reviewed and audited by Deloitte, the Company’s external auditor. 1 (equivalent to the declaration required by section 295A of the Corporations Act and the statements required by Recommendation 4.2 of the Principles and Recommendations) 60 Principle 5: Make timely and balanced disclosure A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. Timely and Balanced disclosure Kina is committed to observing its disclosure obligations under the ASX Listing Rules, the PNGX Listing Rules, the (PNG) Companies Act, the Corporations Act, Capital Markets Act 2015, and the PNG Securities Act. The Board has adopted a Continuous Disclosure Policy and a Shareholder Communications Policy that implement Kina’s commitment to providing timely, complete and accurate disclosure of information. The Continuous Disclosure Policy sets out the roles and responsibilities of officers and employees in complying with Kina’s continuous disclosure obligations and nominates those individuals who are responsible for determining whether or not information is required to be disclosed. Shareholder Communications The Shareholder Communications Policy promotes effective communication with shareholders and seeks to ensure that shareholders have equal and timely access to material information concerning Kina. The Policy sets out the investor relations program, a key tenet of which is to encourage effective shareholder participation. In accordance with the Shareholder Communications Policy, Shareholders are encouraged to attend General Meetings of shareholders and shareholder information sessions and to submit written questions prior to those meetings. If they are unable to attend General Meetings of shareholders, shareholders are encouraged to vote by proxy or other means included in the Notice of Meeting. Kina’s website kinabank.com.pg contains information regarding the Company, the Board and Senior Executive Team, corporate governance, media coverage, ASX and PNGX Announcements, investor presentations and reports. Kina’s Investor Relations Program includes a number of scheduled and ad hoc interactions with institutional investors, private investors, sell-side and buy-side analysts and the financial media. At a minimum, so as to ensure that shareholders and other stakeholders have a full understanding of Kina’s performance and strategies, Kina will convene analyst briefings twice a year on Kina’s financial performance and objectives, following release of the half- year and full year financial results. Shareholders may receive and send information electronically to and from both Kina and Kina’s Share Registry. Other methods of communication are also available to shareholders and other stakeholders, including telephone and mail. Kina may consider the use of other reliable technologies as they become widely available. Each director automatically receives a copy of each ASX and PNGX Announcement directly from the ASX Market Announcements Platform as soon as it has been released by ASX and PNGX. In accordance with Kina’s Continuous Disclosure Policy and Shareholder Communications Policy, any presentation to a new and substantive investor or analyst presentation, is released on the ASX Market Announcements Platform ahead of the presentation. t n e m e t a t S e c n a n r e v o G e t a r o p r o C 61 Principle 6: Respect the right of security holders A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as security holders effectively. Kina values engagement with its shareholders, providing an understanding to the market of the Company’s business, performance and governance. The Company uses the following procedures for engaging with its shareholders: • Periodic Reporting: The Company produces financial statements for its shareholders and other interested parties twice per year and allows shareholders to receive these documents by mail or access them electronically (investors.kinabank.com.pg/ Investors/?page=Reports-and-Presentations). • Annual General Meeting: Shareholders are encouraged to attend the Annual General Meeting each year and are provided with an explanatory memorandum on the resolutions proposed through the Notice of Meeting. If unavailable to attend, shareholders are encouraged to appoint a proxy to vote/attend on their behalf. The Company requires its external auditor to attend each Annual General Meeting and be available to answer questions from shareholders about the conduct of the audit and the preparation and contents of the auditor’s report. • Website: The Kina website provides information on the Company’s products and services as well as information useful to shareholders and market participants (kinabank.com.pg). In particular: − the Investor section (investors.kinabank.com.pg/investors); and − Corporate Governance section (investors.kinabank.com.pg/Investors/?page=corporate-governance) directs shareholders to information likely to be of greatest interest to them. • Investor Relations: On its website at investors.kinabank.com.pg/Investors/?page=asx-announcements, the Company posts prompt and relevant communications for shareholders and the market generally to access, such as ASX and PNGX Announcements and financial results. Investors and shareholders can also contact the Company or its share registry, Link Market Services, directly by email or by mail and can in turn choose to receive communications electronically at investors.kinabank.com.pg/Investors/?page=my-shareholding. The Notice of Meeting for any general or annual meetings of Kina shareholders includes the statement that in accordance with Article 55.3 of the Constitution, the Chairman intends to demand a poll on each of the resolutions proposed at the Meeting. 62 Principle 7: Recognise and manage risk A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. Audit and Risk Committee Details of the Audit and Risk Committee are set out on page 54 above. Risk Management and Internal Controls Risk is managed structurally through clearly defined risk management policies specific to certain parts of the business. These are interlinked and feed into a Group Risk Management Framework, which is overseen by the Audit and Risk Committee. The Board has approved and regularly reviews and updates the Group’s Risk Appetite Statement and tolerance limits, as part of the Group Risk Management Framework, to ensure that all major areas of risk and risk management systems are appropriately monitored and accurately documented. Kina has a dedicated Group Chief Risk Officer (CRO) who is responsible for the Governance, Risk and Compliance attributes of the businesses. The CRO reports to the MD&CEO and the Chair of the Audit and Risk Committee to ensure all material risks remain well managed. The Audit and Risk Committee is supported by a number of approved risk management committees, including the Credit Committee, Asset and Liability Committee, Operational Risk and Compliance Committee and Executive Committee. The management committees have been established to nurture a strong and robust risk culture within the Group through the application of the three lines of defence risk model, and the implementation of key policies and frameworks. Communication and education throughout the Group on the three lines of defence model emphasises each individual’s role in the management of risk. During 2022, the Group’s Risk Management Framework, including underlying policies, was reviewed by the Audit and Risk Committee and, where relevant, by the Board. A dedicated Compliance department is in place to ensure that Kina personnel are aware of the Group’s prudential and legislative obligations and that these are maintained at all times. Risk within the Group is managed according to the appropriate risk parameters whilst promoting compliance of the limits set in the Board Approved Risk Appetite Statement. People risk is monitored including via an Occupational Health, Safety and Wellbeing regime, which is designed to maintain the safety of Kina’s Employees and Customers. The Group’s risk management activities comply with all relevant regulation including that of the BPNG Standards, relevant legislation and the Investment Promotion Authority (IPA), and the ASX and PNGX Listing Rules. Kina also employs skilled credit managers who understand the PNG economic environment to ensure that the growing loan portfolio is maintained within an acceptable level of risk and within Kina’s Board-approved risk appetite. All lending proposals are considered based on credit policy and within the risk appetite of the Group. Debt servicing assessment criteria is maintained to ensure Kina understands its level of credit risk while managing its impairment exposure. Kina’s risk management framework and internal control functions incorporate an Internal Audit function, which reports directly to the Audit and Risk Committee. The Internal Audit function continues to be co-sourced with external providers, which brings the benefit of enhancing Kina personnel’s existing knowledge and expertise. The Internal Audit function provides independent and objective assurance to the Board, via the Audit and Risk Committee. The annual Internal Audit Plan is formulated using a risk- based approach. Progress against the Internal Audit Plan is reported to the Committee on a quarterly basis. The internal audit function determines an independent assessment of the effectiveness of Kina’s Risk Management and internal control environment which is utilised in continual improvement measures of Kina’s business processes. Kina is exposed to the economic conditions of PNG through its normal course of business in lending monies to commercial businesses operating in PNG. Kina does not believe it currently has any material exposure to environmental or social (ESG) sustainability risks and the Company is currently working to develop further our ESG framework and processes. t n e m e t a t S e c n a n r e v o G e t a r o p r o C 63 Principle 8: Remunerate fairly and responsibly A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite. Remuneration and Nomination Committee Details of the Remuneration and Nomination Committee are set out on page 55 above. Remuneration Kina is committed to a fair and responsible system of remuneration throughout the Group. Members of Senior Management are remunerated in a way that aims to attract and retain an appropriate level of talent and reflects their performance in relation to the delivery of corporate strategy and operational performance. Remuneration for non-executive directors is set using advice from independent consultants and considers the level of fees paid to non-executive directors of similar corporations and the responsibilities and work/time requirements of the non-executive directors. The Remuneration Report and further details about the remuneration policy of Kina are set out in the 2022 Annual Report. Dealings in Company Securities The Board has adopted a Securities Trading Policy that applies to Kina’s equity-based remuneration scheme and explains the conduct that is prohibited under the PNG Securities Act, Capital Markets Act, and the Corporations Act. The Securities Trading Policy: • provides for certain Trading Windows when ‘Relevant Persons’ may trade provided the appropriate process has been adhered to; • prohibits any Relevant Person from entering into a hedge transaction involving unvested equity held pursuant to an Employee, Senior Management or Director Equity Plan operated by Kina; • prohibits any Relevant Person from entering into a hedge transaction involving unvested equity held pursuant to an Employee, Senior Management or Director Equity Plan operated by Kina; • sets out the prohibitions against insider trading and prescribes certain requirements for dealing in Kina securities; and • prohibits Relevant Persons from trading in Kina securities while in possession of material non-public information, which is information a reasonable person would expect to have a material effect on the price or value of Kina securities. Principle 9: Additional Recommendations Kina is registered in Papua New Guinea and is in the same time zone as Eastern Australia. All meetings of Kina’s Board and its Committees are held at a reasonable time and in accordance with the COVID protocols implemented by the PNG Government. 64 Effort. Reward. 08 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 2022. Principal activities Dividends The principal continuing activities of the Company The Company paid a dividend of PGK 18.5 toea and its Subsidiaries during the year were the (AUD 7.0 cents) per share (K53.1m) in April 2022 provision of commercial banking and financial in relation to the profit for the half year ended 31 services (including asset financing, provision December 2021. In September 2022, the Company of commercial and personal loans, money also paid dividend of PGK 10.3 toea (AUD 4.1 cents) market operations and corporate advice), fund per share (K29.6m) in relation to the profit for the half administration, investment management services and year ended 30 June 2022. share brokerage. The directors consider there are no unusual or other After balance sheet date events 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 Subsequent to balance sheet date, the directors declared a final dividend of PGK 16.1 toea (AUD 6.5 cents) per share (K46.2m) on underlying NPAT declared for the second half of financial year 2022. See also note 39 for other subsequent events. The net profit attributable to equity holders for the year for the Group was K116.5 million compared with K70.8 million in 2021. Donations The profit includes the following items: During the year the Group made donations totalling K124,996 (2021: K401,718) • Net interest income of K181.2 million, compared with K177.3 million in the prior year to 31 December 2021. Auditor’s fees Fees paid to the auditor during the year for professional services are shown in note 37 to the accounts. The external auditor is Deloitte Touche Tohmatsu Ltd. • Net fee and commission income of K116.2 million compared with K89.3 million in the prior year. • Operating income before impairment losses and other operating income of K366.5 million, up from K334.4 million in the prior year. • Expected credit losses on financial instruments at amortised cost of K4.8 million, compared with K6.5 million in the prior year. • Other operating expenses of K213.3 million, compared with K194.1 million in the prior period. 66 Remuneration of employees During the year, the number of employees or former employees (not being directors of the Company), receiving remuneration in excess of K100,000 per annum from the Group stated in bands of K10,000 was as follows: In PGK 1,820,001 - 1,830,000 1,530,001 - 1,540,000 1,030,001 - 1,040,000 970,001 - 980,000 910,001 - 920,000 900,001 - 910,000 870,001 - 880,000 800,001 - 810,000 790,001 - 800,000 770,001 - 780,000 750,001 - 760,000 740,001 - 750,000 720,001 - 730,000 710,001 - 720,000 660,001 - 670,000 640,001 - 650,000 600,001 - 610,000 580,001 - 590,000 570,001 - 580,000 550,001 - 560,000 530,001 - 540,000 510,001 - 520,000 500,001 - 510,000 490,001 - 500,000 480,001 - 490,000 470,001 - 480,000 450,001 - 460,000 440,001 - 450,000 420,001 - 430,000 400,001 - 410,000 390,001 - 400,000 380,001 - 390,000 360,001 - 370,000 350,001 - 360,000 330,001 - 340,000 320,001 - 330,000 310,001 - 320,000 300,001 - 310,000 280,001 - 290,000 270,001 - 280,000 250,001 - 260,000 230,001 - 240,000 220,001 - 230,000 210,001 - 220,000 t r o p e R ’ s r o t c e r i D 67 2022 2021 In PGK 2022 2021 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 4 4 5 2 11 10 10 6 9 16 16 1 4 7 5 8 9 6 11 6 16 21 * Increase in fixed base salary and impact of foreign exchange conversion. 1* - - 2 1 - 2 1 1 1 - - 1 - - - 2 2 - 1 1 1 1 - 1 1 1 - - 1 - - 1 1 1 1 2 2 2 - 1 - 1 1 - 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 2 - 3 1 Directors’ remuneration Directors’ fees paid during the year was as follows: 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 *increase in fixed base salary and impact of foreign exchange conversion. 2022 2021 PGK’000 PGK’000 455 333 285 257 285 258 451 360 309 278 306 274 1,873 1,978 1,817* 452 2,269 4,142 1,533* 454 1,987 3,965 Signed at Port Moresby on behalf of the board on 30 March 2023. Mr Isikeli Taureka Director and Chairman Mr Greg Pawson Managing Director and Chief Executive Officer 68 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 2022 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 2023 Mr Greg Pawson Managing Director and Chief Executive Officer Port Moresby, 30 March 2023 n o i t a r a l c e D ’ s r o t c e r i D – t r o p e R ’ s r o t c e r i D 69 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 AAuuddiittoorrss’’ 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 2022, the consolidated income statement, 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 2022 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 Auditors’ 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 EExxppeecctteedd ccrreeddiitt lloossss oonn llooaannss aanndd aaddvvaanncceess As at 31 December 2022, the Group has recognised a loss allowance for Expected Credit Losses (ECL) amounting to K42.50m on loans and advances held at amortised cost in accordance with IFRS 9 Financial Instruments (IFRS 9) as 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 controls over: Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 70 KKeeyy AAuuddiitt MMaatttteerr disclosed in Note 3(b). requirements IFRS 9’s Loans and advances subject impairment the commercial lending portfolio, residential lending loan portfolio, personal commitments. loan portfolio and to include Significant management judgement was necessary in determining the loss allowance, including: • • The application of the requirements of IFRS 9 as reflected in the Group’s ECL model, particularly in light of the current economic environment; Identification of exposures with a significant movement in credit quality to determine whether 12-month or lifetime expected credit loss should be recognised; and • Assumptions used in the ECL model such as determination of significant in credit risk, definition of default, probability of default, loss given default and forward- looking macroeconomic factors as disclosed in Note 3(b). increase IImmppaaiirrmmeenntt ooff nnoonn--ccuurrrreenntt aasssseettss ggooooddwwiillll iinncclluuddiinngg HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr • • The accuracy of data input into the system used for determining the past due status and approval of credit facilities; and The ongoing monitoring and identification of loans displaying indicators of impairment and whether they are migrating on a 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 loss allowance for ECL. Our procedures included, but were not limited to: in determining the • Assessing whether the ECL model adequately addresses the requirements of the IFRS 9; • Assessing, on a sample basis, the individual exposures to determine if they are classified into appropriate default stages and aging categories for the purpose of determining the loss allowance for ECL; • Assessing the reasonableness of the assumptions driving Probabilities of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD); and • Assessing the adequacy of management overlays to the modelled loss allowance for ECL by recalculating the coverage provided by the loss allowance (including overlays) to the loan book, taking into account recent history, performance and de-risking of the relevant portfolios. We also assessed the appropriateness of the disclosures in Note 3(b) and Note 16 to the consolidated financial statements. In conjunction with our valuation specialists, our procedures included, but were not limited to: As at 31 December 2022 the Group has recognised goodwill amounting to K92.7m, arising from the acquisitions of Maybank (PNG) Limited and Maybank Property (PNG) Limited as disclosed in Note 38. • Evaluating the appropriateness of management’s key controls over the impairment assessment process, including the identification of potential indicators of impairment such as the carrying value exceeding the market capitalisation; In accordance with IAS 36 Impairment of Assets, Cash Generating Units (CGUs) including goodwill are required to be tested for impairment at least annually. • Assessing the reasonableness of cash flow projections and growth rates against external economic and financial data and the Group’s own historical performance; requires impairment significant The test judgement due to assumptions required in preparing a discounted cash flow model (value in use). These assumptions include: t r o p e R s ’ r o t i d u A t n e d n e p e d n I – t r o p e R ’ s r o t c e r i D 71 KKeeyy AAuuddiitt MMaatttteerr HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr • Forecasting future cash flows for the CGU into accounting regulatory and taking macroeconomic factors; • Comparing historical performance against prior years’ forecasts to assess management’s budgets and historical forecasting accuracy; • Discount rates; and • Terminal value growth rates. IInnffoorrmmaattiioonn tteecchhnnoollooggyy IT systems for processing The Group’s business 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 and is considered a key audit matter. • Assessing the key assumptions and methodology used by management in the impairment model, in particular the discount rate and the terminal growth rate; and • Testing the mathematical accuracy of the impairment model. We also assessed the appropriateness of the disclosures in Note 38 to the consolidated financial statements. In conjunction with our IT specialists, our procedures included but were not limited to: • 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 auditors’ report, and the annual report (but does not include the consolidated financial statements and our auditors’ report thereon), which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditors’ 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. 72 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. Auditors’ 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 auditors’ 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 auditors’ 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 auditors’ 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. t r o p e R s ’ r o t i d u A t n e d n e p e d n I – t r o p e R ’ s r o t c e r i D 73 We also provide the directors of the Company with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ 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 2022.. 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 auditors’ report are Benjamin Lee and David Rodgers. DELOITTE TOUCHE TOHMATSU DELOITTE TOUCHE TOHMATSU Benjamin Lee Partner Chartered Accountants Registered under Accountants Act 1996 David Rodgers Partner Chartered Accountants Registered Company Auditor in Australia Port Moresby 30 March 2023 Brisbane 30 March 2023 74 Statements of Comprehensive Income. For the year ended 31 December 2022 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 Note Consolidated Parent 2022 2021 2022 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 224,600 (43,389) 181,211 116,324 (110) 116,214 60,339 469 3,610 4,657 206,935 (29,623) 177,312 89,391 (55) 89,336 223,949 (42,991) 180,958 82,908 (110) 82,798 206,842 (29,533) 177,309 58,459 (69) 58,390 65,632 61,843 66,316 562 817 703 74 3,737 9,190 50 467 4,117 366,500 334,362 338,600 306,649 (4,825) (6,519) (4,160) (6,665) (213,257) (194,127) (203,322) (186,127) - 148,418 (31,930) (27,700) 106,016 (35,206) - 131,118 (26,704) (27,700) 86,157 (29,634) 5 5 6 6 7 15 8 3b 9 31 10 Net profit for the year attributable to the equity holders of the Company 116,488 70,810 104,414 56,523 Other comprehensive income - - - - Total comprehensive income for the year attributable to the equity holders of the Company 116,488 70,810 104,414 56,523 Earnings per share – basic (toea) Earnings per share – diluted (toea) 27 b 27 b 2022 40.60 40.35 2021 24.68 24.39 The notes on pages 16 to 79 are an integral part of these consolidated financial statements. e m o c n I e v i s n e h e r p m o C f o s t n e m e t a t S – t r o p e R ’ s r o t c e r i D 75 Statements of Financial Position. As at 31 December 2022 Assets Cash and cash equivalents 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 Note Consolidated Parent 2022 2021 2022 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 433,488 1,215,763 383,083 15,262 2,158,921 152,650 - 952 32,094 - 82,839 92,786 32,493 79,669 408,334 795,362 212,874 11,652 1,950,447 112,107 - 31 16,988 - 90,467 92,786 48,663 45,947 397,376 1,215,763 383,083 10,508 366,302 795,362 212,874 6,771 2,154,963 1,944,273 152,650 38,113 - 31,246 248 82,839 92,786 32,493 76,847 112,107 65,518 - 16,474 248 90,467 92,786 48,364 42,393 4,680,000 3,785,658 4,668,915 3,793,939 2,060 4,701 2,060 4,701 3,878,835 3,036,921 3,896,958 3,079,454 5,148 - 14,111 41,713 126,803 4,068,670 11,697 - 10,906 48,851 95,959 5,130 30,507 12,717 41,713 122,088 11,493 9,612 9,802 48,851 94,917 3,209,035 4,111,173 3,258,830 12 13 14 15 16 17 29 23 11 18 19 38 20 21 22 23 29 24 25 26 Net assets 611,330 576,623 557,742 535,109 Shareholders’ equity Issued and fully paid ordinary shares Share-based payment reserve Retained earnings 27 a 27 c 394,693 4,504 212,133 394,693 3,587 178,343 394,693 4,504 158,545 394,693 3,587 136,829 Total equity 611,330 576,623 557,742 535,109 These financial statements have been approved for issue by the Board of Directors and signed on its behalf by: Mr Isikeli Taureka Director and Chairman Mr Greg Pawson Managing Director and Chief Executive Officer The notes on pages 16 to 79 are an integral part of these consolidated financial statements. 76 Statements of Changes in Equity. For the year ended 31 December 2022 Consolidated Attributable to the equity holders of the Group Balance as at 31 December 2020 Profit for the year Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid Share Capital PGK ‘000 394,693 - - - - Balance as at 31 December 2021 394,693 Profit for the year Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid - - - - Balance as at 31 December 2022 394,693 Share-Based Payment Reserve Retained Earnings PGK ‘000 PGK ‘000 2,774 - (3,476) 4,289 - 3,587 - (1,360) 2,277 - 4,504 179,567 70,810 - - (72,034) 178,343 116,488 - - (82,698) 212,133 Total PGK ‘000 577,034 70,810 (3,476) 4,289 (72,034) 576,623 116,488 (1,360) 2,277 (82,698) 611,330 Parent Attributable to the equity holders of the Parent Balance as at 31 December 2020 Profit for the year Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid Share Capital PGK ‘000 394,693 - - - - Balance as at 31 December 2021 394,693 Profit for the year Employee share scheme – vested rights Employee share scheme – value of employee services Dividend paid - - - - Balance as at 31 December 2022 394,693 Share-Based Payment Reserve Retained Earnings PGK ‘000 PGK ‘000 2,774 - (3,476) 4,289 - 3,587 - (1,360) 2,277 - 4,504 152,340 56,523 - - (72,034) 136,829 104,414 - - (82,698) 158,545 Total PGK ‘000 549,807 56,523 (3,476) 4,289 (72,034) 535,109 104,414 (1,360) 2,277 (82,698) 557,742 y t i u q E n i s e g n a h C f o s t n e m e t a t S – t r o p e R ’ s r o t c e r i D 77 Statements of Cash Flows. For the year ended 31 December 2022 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 Consolidated Parent 2022 2021 2022 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 215,812 (29,974) 60,339 469 118,472 (110) 6,177 935 - 206,779 (33,943) 65,632 562 87,978 (55) 1,415 1,750 - 215,162 (29,576) 61,843 74 206,686 (33,853) 66,316 50 82,839 58,459 (110) 6,565 935 - (69) 2,588 1,750 1,890 Cash payments to employees and suppliers (171,979) (179,188) (112,229) (239,076) Income tax paid (54,436) (28,918) (47,838) (22,419) Cash flows from operating profits before changes in operating assets and liabilities Changes in operating assets and liabilities: 145,705 122,012 177,665 42,322 - net (increase)/ decrease in regulatory deposits (170,208) (27,163) (170,208) (27,163) - net increase in loans and advances to customers (210,776) (336,052) (210,776) (336,053) - 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 (35,491) 828,498 (2,640) 23,245 14,904 (36,208) 17,850 476,206 804,090 479,979 (684) (2,201) (2,640) 19,276 (684) (2,164) Net cash inflow/(outflow) from operating activities 28c 578,333 247,022 581,199 174,087 Cash flows from investing activities Purchase of property, equipment and software (14,005) (28,431) (14,005) (28,431) Proceeds from sale of property and equipment 306 148 306 148 Net movement in investment securities 28b (452,937) (50,494) (452,937) (50,144) Other one-off expenses Refund of deposit from Westpac 31 32 - - (8,407) 84,567 - - (8,407) 84,567 Net cash inflow/(outflow) generated from/(used in) investing activities (466,636) (2,617) (466,636) (2,267) Cash flows from financing activities Dividend paid 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 28a (82,698) (72,034) (82,698) (72,034) (82,698) (72,034) (82,698) (72,034) 28,999 (3,845) 408,334 433,488 172,371 (4,184) 240,147 408,334 31,865 (791) 366,302 397,376 99,786 (98) 266,614 366,302 78 Notes to the Financial Statements. For the year ended 31 December 2022 1. Summary of significant accounting policies General information 1.1 The Company and its subsidiaries are incorporated in Papua New Guinea. The Group’s business activities include provision of banking services, personal and commercial loans, money market operations, provision of share brokerage, fund administration, investment management services, asset financing, and corporate advice. Effective 9 July 2021, 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. The directors have, at the time of approving the financial statements, a reasonable expectation that the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the financial statements. Basis of preparation 1.2 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 2022 were authorized for issue by the Board of Directors on 30 March 2023. 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. Amendments to IFRSs that are mandatorily effective for the current reporting period 1.3 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: • impact of the initial application of Interest Rate Benchmark Reform • impact of the initial application of COVID-19-Related Rent Concessions—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 determined that there is no material impact arising as a result of initial application of Interest Rate Benchmark Reform. Impact of the initial application of COVID-19-Related Rent Concessions—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. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 79 1. Summary of significant accounting policies Amendments to IFRSs that are mandatorily effective for the current reporting period (continued) 1.3 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. New and revised IFRS standards in issue but not yet effective 1.4 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 2021 amendments to IFRS 17) Insurance Contracts Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Amendments to IAS 1 Amendments to IFRS 3 Amendments to IAS 16 Amendments to IAS 37 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 Annual Improvements to IFRS Standards 2018- 2021 Cycle Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture Amendments to IAS 1 and IFRS Practice Statement 2 Disclosure of Accounting Policies Amendments to IAS 8 Amendments to IAS 12 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. Basis of consolidation 1.5 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. 80 1. Summary of significant accounting policies (continued) 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. Segment reporting 1.6 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 – Banking & Finance and Wealth Management. Foreign currency translation 1.7 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. Interest income and interest expense 1.8 Interest income and expense for all financial instruments except for 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. Fee and commission income 1.9 The Group recognises fee and commission income from following major services it provides to customers; • Investment and portfolio management - The Group manages investments for a number of superannuation funds and corporate clients. These services are provided by the Group on monthly basis and therefore billed accordingly. Revenue is recognised as and when the bill is raised i.e. when performance obligation is satisfied. • Fund administration - The Group earns a fee through administration of funds for its customers based on the fee rates agreed under the terms of the contract. The services are billed to customers on monthly basis at which point revenue is recognised, i.e. at the time when performance obligation is satisfied. • Share brokerage - The Group generates share brokerage from trading services for customers on Port Moresby Stock Exchange (“PNGX”) and Australian Stock Exchange (“ASX”). Revenue is recognised upon settlement of the trade which is commensurate with when the performance obligation is satisfied. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 81 • 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. • 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. Leases 1.10 At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A right-of-use asset and a corresponding lease liability is recognised with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether: • the contract involves the use of an identified asset – this may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; • the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and • the Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Group has the right to direct the use of the asset if either: − the Group has the right to operate the asset; or − the Group designed the asset in a way that predetermines how and for what purpose it will be used. At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the leases of land and buildings in which it is a lessee, the Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right- of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, at the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: • fixed payments, including in-substance fixed payments, less any lease incentive receivable; • variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; • the amount expected to be payable under a residual value guarantee, if any; and • the exercise price, if any, under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Short-term leases and leases of low-value assets. The Group has elected not to recognise right-of-use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. 82 1. Summary of significant accounting policies (continued) Taxation 1.11 The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the country where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authority. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rate (and law) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The deferred tax liability in relation to investment property that is measured at fair value is determined assuming the property will be recovered entirely through sale. Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 1.12 Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the following: • fair values of the assets transferred; • liabilities incurred to the former owners of the acquired business; • equity interests issued by the Group; • fair value of any asset or liability resulting from a contingent consideration arrangement; and • fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition-related costs are expensed as incurred. The excess of (a) over (b) is considered as goodwill: (a) sum of 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; and (b) the fair value of the net identifiable assets acquired. 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. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 83 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 and deposits held at call with financial institutions which are subject to an insignificant risk of changes in value, and bank overdrafts. In the statement of financial position, cash and bank balances comprise cash (i.e. cash on hand and demand deposits) and cash equivalents. Cash equivalents are short-term (generally with original maturity of three months or less), highly liquid investments that are readily convertible to a known amount of cash and which are subject to an insignificant risk of changes in value. Cash equivalents are held for the purpose of meeting short-term cash commitments rather for investment or other purposes. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above. Financial instruments 1.14 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. 84 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 • assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or • assets designated at FVTPL using the fair value option. These assets are measured at fair value, with any gains/losses arising on re-measurement recognised in profit or loss. Reclassification If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that results in reclassifying the Group’s financial assets. During the current financial year there was no change in the business model under which the Group holds financial assets and therefore no reclassifications were made. Changes in contractual cash flows are considered under the accounting policy on Modification and de-recognition of financial assets described below. Impairment The Group measures and recognises loss allowances for ECLs on the following financial instruments that are not measured at FVTPL: • Loans and advances; • Investment in Government Inscribed Stocks; • Other financial assets; • Loan commitments issued; and • Financial guarantee contracts issued. ECLs are required to be measured through a loss allowance at an amount equal to: • 12-month ECL, i.e. lifetime ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or • full lifetime ECL, i.e. lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3). A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL. More details on the determination of a significant increase in credit risk and determination of ECL are provided in note 3. 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 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). s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 85 The Group considers the following as constituting an event of default: • the borrower is past due more than a specified number of days depending upon the type of loan arrangement on any material credit obligation to the Group; or • the borrower is unlikely to pay its credit obligations to the Group in full. 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. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss. 86 1. Summary of significant accounting policies (continued) 1.14 Financial instruments (continued) Financial liabilities A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Group or a contract that will or may be settled in the Group’s own equity instruments and is a non-derivative contract for which the Group is or may be obliged to deliver a variable number of its own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Group’s own equity instruments. Financial liabilities are classified as ‘other financial liabilities’ as the Group does not have any financial liabilities that are classified or designated as at FVTPL. Other financial liabilities Other financial liabilities, including deposits and borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The EIR is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. When the Group exchanges with the existing lender one debt instrument into another one with substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. 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 re-measurement is presented in other revenue. The Group has not designated any financial guarantee contracts as at FVTPL. Property, plant and equipment 1.15 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 11.25% to 15% Building improvements Motor vehicles 10% 30% Office equipment 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. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 87 Intangible assets and other non-financial assets 1.16 Goodwill Goodwill is measured as described in note 38 Goodwill having an indefinite useful life is not amortised 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 A customer deposit relationship asset was recognized with the acquisition of Maybank (PNG) Limited in 2015. Also, the acquisition of Australian and New Zealand (ANZ) Bank’s retail, commercial and SME banking businesses in PNG on 23 September 2019 gave rise to the recognition of core customer deposit intangible (note 20), representing the value, or avoided cost, of having a deposit base from consumer and business transaction accounts, savings accounts, term deposits and other money market accounts that provide a cheaper source of funding than alternative sources of funding. Customer deposit relationship is amortised using the straight-line method over a period of five years and three years on the Maybank and ANZ acquisition respectively, and is stated at cost less accumulated amortization and impairment. Customer deposit relationship is also assessed for any indication of impairment at each reporting date and whenever there is an indicator that these maybe impaired. Software Costs associated with maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with identifiable and unique software products controlled by the Group that will probably generate economic benefits exceeding costs beyond one year are recognized as intangible assets. Direct costs include staff costs of the software development team and an appropriate portion of relevant overheads. Expenditure which enhances or extends the performance of computer software programs beyond their original specifications is recognized as a capital improvement and added to the original cost of the software. Computer software development costs recognized as assets are amortised using the straight-line method over their useful lives, not exceeding a period of five years. Provisions 1.17 Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligations can be made. Employee benefits 1.18 Short-term obligations Provision is made for benefits accruing to employees in respect of annual leave and other short term obligations when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within twelve months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognized in respect of employee benefits which are not expected to be settled within twelve months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. The contributions in relation to employees of the Group who contribute to defined contribution pension plans are charged to the statement of comprehensive income in the year to which they relate. 88 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. Share capital and other equity accounts Share capital 1.19 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 recognized 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. Earnings per share Basic earnings per share 1.20 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. Fiduciary activities 1.21 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). s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 89 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 to the 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: USD AUD SGD GBP EUR NZD JPY Others PGK ‘000 31-Dec-22 Cash balance 257 40 Due from other banks 62,043 47,743 31-Dec-21 Cash balance 62,300 47,783 264 303 Due from other banks 92,485 62,546 92,749 62,849 There were no material liabilities denominated in foreign currency. 2 407 409 71 212 283 70 331 401 32 203 235 152 1,285 1,437 193 1,739 1,932 566 920 1,486 630 532 1,162 179 302 481 206 215 421 29 2,070 2,099 77 2,266 2,343 90 3. Financial risk management (continued) a) Market risk (continued) 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% (2021:10%) USD/PGK – exchange rate – decrease 10% (2021:10%) (ii) Interest rate risk Impact on statement of comprehensive income in 2022 PGK ‘000 (176) (215) 2021 PGK ‘000 (8,408) 10,276 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 components of the statements of financial position. Sensitivity to interest rates arises from mismatches in re-pricing dates, cash flows and other characteristics of the assets and their corresponding liability funding. These mismatches are actively managed by the Assets and Liabilities Committee (ALCO), which meets regularly to review the effects of fluctuations in the prevailing levels of market interest rates of the financial position and cash flows of the Group. The following table risks summarises the Group’s exposure to interest rate risks: Assets Cash and cash equivalents Central bank bills Loans and advances to customers Investments in Government Inscribed Stocks Liability Due to customers Assets Cash and cash equivalents Central bank bills Loans and advances to customers Investments in Government Inscribed Stocks Liability Due to customers Sensitivity Year ended 31 December 2022 Carrying amount Average Interest rate (% p.a.) PGK ‘000 433,488 1,215,763 2,158,921 152,650 3,878,835 0.00% 5.38% 7.66% 9.93% 1.15% Year ended 31 December 2021 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% Given the profile of assets and liabilities at 31 December 2022 and prevailing interest rates, a 200 basis points increase/decrease in market rates in relation to lending will result in a maximum possibility of K1,639,739. (2021: K4,586,584) 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 listed shares traded on stock exchange. 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). s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 91 3. Financial risk management (continued) a) Market risk (continued) 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 2022 and net assets as of balance date would have been affected by K763,103 (2021: K582,621). Equity prices – increase 5% (2021:5%) Equity prices – decrease 5% (2021:5%) b) Credit risk Impact on statement of comprehensive income in 2022 PGK ‘000 763 (763) 2021 PGK ‘000 583 (583) Credit risk is the risk that a customer or counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group’s main income generating activity is lending to customers and therefore credit risk is a principal risk. Credit risk mainly arises from loans and advances to customers and other banks (including related commitments to lend such as loan or credit card facilities) and investments in debt securities. The Group considers all elements of credit risk exposure such as counterparty default risk, geographical risk and sector risk for risk management purposes. (i) Credit risk management The Group’s credit committee is responsible for managing the Group’s credit risk by: • Ensuring that the Group has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances in accordance with the Group’s stated policies and procedures, IFRS and relevant supervisory guidance. • Identifying, assessing and measuring credit risk across the Group, from an individual instrument to a portfolio level. • Creating credit policies to protect the Group against the identified risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to continually monitor exposures against internal risk limits. • Limiting concentrations of exposure by type of asset, counterparties, industry, credit rating, geographic location etc. • Establishing a robust control framework regarding the authorisation structure for the approval and renewal of credit facilities. • Developing and maintaining the Group’s risk grading to categorise exposures according to the degree of risk of default. Risk grades are subject to regular reviews. • Developing and maintaining the Group’s processes for measuring ECL including monitoring of credit risk, incorporation of forward looking information and the method used to measure ECL. • Ensuring that the Group has policies and procedures in place to appropriately maintain and validate models used to assess and measure ECL. • Establishing a sound credit risk accounting assessment and measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk and to account for ECL. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of credit risk. The internal audit function performs regular audits making sure that the established controls and procedures are adequately designed and implemented. (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. 92 3. Financial risk management (continued) b) Credit risk (continued) (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. LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from any collateral. EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities. The Group’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. (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 cash equivalents at amortised cost Cash and cash equivalents Treasury and central bank bills at amortised cost Central bank bills Regulatory deposits at amortised cost Regulatory deposits Loans and advances to customers at amortised cost Loans and advances to customers Investments in Government Inscribed Stocks at amortised cost Investments in Government Inscribed Stocks Bank guarantees Other financial assets 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 cash equivalents at amortised cost PGK ‘000 PGK‘ 000 31 December 2022 31 December 2021 Consolidated Concentration by sector Cash on hand With central bank (exchange settlement account) With other banks Total Concentration by region Papua New Guinea Offshore* Total *bank accounts maintained in Australia, New Zealand, Great Britain, Singapore, Malaysia, Philippines, Japan, India and Turkey 151,370 160,392 121,726 433,488 319,423 114,065 433,488 115,451 123,895 168,988 408,334 243,502 164,832 408,334 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 93 3. Financial risk management (continued) b) Credit risk (continued) Cash and cash equivalents at amortised cost PGK ‘000 PGK ‘000 31 December 2022 31 December 2021 Parent Concentration by sector Cash on hand With central bank (exchange settlement account) With other banks Total Concentration by region Papua New Guinea Offshore* Total 151,370 160,392 85,614 397,376 328,423 68,953 397,376 115,451 123,895 126,956 366,302 273,241 93,061 366,302 *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 2022 31 December 2021 PGK ‘000 PGK ‘000 1,215,763 1,215,763 1,215,763 1,215,763 795,362 795,362 795,362 795,362 Parent 31 December 2022 31 December 2021 PGK ‘000 1,215,763 1,215,763 1,215,763 1,215,763 PGK ‘000 795,362 795,362 795,362 795,362 Consolidated 31 December 2022 31 December 2021 PGK ‘000 PGK ‘000 383,038 383,038 383,038 383,038 212,874 212,874 212,874 212,874 94 3. Financial risk management (continued) b) Credit risk (continued) Regulatory deposits at amortised cost PGK ‘000 PGK ‘000 31 December 2022 31 December 2021 Parent Concentration by sector With central banks Total Concentration by region Papua New Guinea Total 383,038 383,038 383,038 383,038 212,874 212,874 212,874 212,874 Consolidated Loans and advances to customers at amortised cost PGK ‘000 PGK ‘000 31 December 2022 31 December 2021 553,845 59,467 3,874 16,233 18,806 6,684 171,237 694,077 79,030 23,214 837 316,094 43,623 211,309 3,088 547,260 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 2,201,418 1,988,547 2,201,418 2,201,418 1,988,547 1,988,547 Concentration by sector Individuals: – Mortgages – Unsecured lending – Corporate entities: – Agriculture, Forestry & Fishing – Mining – Manufacturing – Electrical, Gas & Water – Building and Construction – Wholesale & Retail – Hotel & Restaurants – Transport & Storage – Financial Intermediation – Real Estate/Renting/Business Services – Equipment Hire – Other Business – Personal Banking Total Concentration by region Papua New Guinea Total s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 95 3. Financial risk management (continued) b) Credit risk (continued) Loans and advances to customers at amortised cost PGK ‘000 PGK ‘000 31 December 2022 31 December 2021 Parent Concentration by sector Individuals: – Mortgages – Unsecured lending – Corporate entities: – Agriculture, Forestry & Fishing – Mining – Manufacturing – Electrical, Gas & Water – Building and Construction – Wholesale & Retail – Hotel & Restaurants – Transport & Storage – Financial Intermediation – Real Estate/Renting/Business Services – Equipment Hire – Other Business – Personal Banking Total Concentration by region Papua New Guinea Total 553,845 59,467 3,874 16,233 18,806 6,684 171,237 694,077 79,030 23,214 837 316,094 43,623 206,333 3,088 547,260 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 2,196,442 1,982,019 2,196,442 2,196,442 1,982,019 1,982,019 Consolidated Investments in Government Inscribed Stocks at amortised cost PGK ‘000 PGK ‘000 31 December 2022 31 December 2021 Concentration by sector Sovereign Total Concentration by region Papua New Guinea Total 154,881 154,881 154,881 154,881 113,746 113,746 113,746 113,746 96 3. Financial risk management (continued) b) Credit risk (continued) Investments in Government Inscribed Stocks at amortised cost PGK ‘000 PGK ‘000 31 December 2022 31 December 2021 Parent Concentration by sector Sovereign Total Concentration by region Papua New Guinea Total Bank guarantees Concentration by sector Corporate entities: – Agriculture, Forestry & Fishing – Wholesale & Retail – Building and Construction – Transport & Storage – Other Business Total Concentration by region Papua New Guinea Total Bank guarantees Concentration by sector Corporate entities: – Agriculture, Forestry & Fishing – Wholesale & Retail – Building and Construction – Transport & Storage – Other Business Total Concentration by region Papua New Guinea Total 154,881 154,881 154,881 154,881 113,746 113,746 113,746 113,746 Consolidated 31 December 2022 31 December 2021 PGK ‘000 PGK ‘000 4,616 3,800 11,812 2,426 3,090 25,744 25,744 25,744 18,199 13,210 9,857 129 5,433 46,829 46,829 46,829 Parent 31 December 2022 31 December 2021 PGK ‘000 PGK ‘000 4,616 3,800 11,812 2,426 3,090 25,744 25,744 25,744 18,199 13,210 9,857 129 5,433 46,829 46,829 46,829 The amount of bank guarantees disclosed above represent notional amount guaranteed being the maximum exposure to credit risk s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 97 3. Financial risk management (continued) b) Credit risk (continued) 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. Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total Consolidated 31 December 2022 Cash and cash equivalents Treasury and central bank bills Regulatory deposits Loans and advances Investments in Government Inscribed Stocks Other financial assets Bank guarantees Total gross carrying amount Loss allowance Net carrying amount PGK ‘000 433,488 1,215,997 383,083 1,899,383 154,881 83,659 25,744 4,196,235 (23,681) 4,172,554 PGK ‘000 PGK ‘000 PGK ‘000 - - - - - - - - - 110,370 178,079 13,586 - - - 110,370 (5,458) 104,912 - - - 178,079 (19,579) 158,500 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total Cash and cash equivalents Treasury and central bank bills Regulatory deposits Loans and advances Investments 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 PGK ‘000 PGK ‘000 - - - - - - - - - 152,442 71,667 14,890 - - - 152,442 (10,447) 141,995 - - - 71,667 (7,602) 64,065 13,586 4,498,270 - (48,718) 13,586 4,449,552 Consolidated 31 December 2021 PGK ‘000 433,488 1,215,997 383,083 2,201,418 154,881 83,659 25,744 PGK ‘000 408,334 795,362 212,874 1,988,547 113,746 49,937 46,829 - - - - - - 14,890 3,615,629 - (43,729) 14,890 3,571,900 98 3. Financial risk management (continued) b) Credit risk (continued) Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL Parent 31 December 2022 POCI Total Cash and cash equivalents Treasury and central bank bills Regulatory deposits Loans and advances Investments in Government Inscribed Stocks Other financial assets Bank guarantees PGK ‘000 397,376 1,215,997 383,038 1,895,673 154,881 80,901 25,744 Total gross carrying amount 4,153,610 Loss allowance Net carrying amount (23,682) 4,129,928 PGK ‘000 PGK ‘000 PGK ‘000 - - - - - - - - - PGK ‘000 397,376 1,215,997 383,038 110,248 176,935 13,586 2,196,442 - - - 110,248 (5,456) 104,792 - - - 176,935 (18,562) 158,373 - - - 154,881 80,901 25,744 13,586 4,454,379 - (47,700) 13,586 4,406,679 Parent 31 December 2021 Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL POCI Total Cash and cash equivalents Treasury and central bank bills Regulatory deposits Loans and advances Investments in Government Inscribed Stocks Other financial assets Bank guarantees PGK ‘000 366,302 795,362 212,874 1,745,860 113,746 46,383 46,829 Total gross carrying amount 3,327,356 Loss allowance Net carrying amount (25,680) 3,301,676 PGK ‘000 PGK ‘000 PGK ‘000 - - - - - - - - - PGK ‘000 366,302 795,362 212,874 151,457 69,812 14,890 1,982,019 - - - 151,457 (10,443) 141,014 - - - 69,812 (7,252) 62,560 - - - 113,746 46,383 46,829 14,890 3,563,515 - (43,375) 14,890 3,520,140 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 99 3. Financial risk management (continued) b) Credit risk (continued) This table summarises the loss allowance as of the year end by class of exposure/asset. 31 December 2022 31 December 2021 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 PGK ‘000 42,497 2,231 3,990 48,718 PGK ‘000 38,100 1,639 3,990 43,729 Parent 31 December 2022 31 December 2021 Loss allowance by classes Loans and advances to customers at amortised cost Investments in Government Inscribed Stocks at amortised cost Other financial assets Total PGK ‘000 41,479 2,231 3,990 47,700 PGK ‘000 37,746 1,639 3,990 43,375 Other financial assets comprise of miscellaneous receivables from individuals on which lifetime ECL has been recognised. No ECL has been recognised on other classes of financial assets either due to negligible probability of default or the assets being fully collateralized by high quality liquid assets. 100 3. Financial risk management (continued) b) Credit risk (continued) Table below summarises the movement in ECL during the year by class of financial assets: Balance at 01 January 2022 Additional ECL recognised Write- offs Bad debt Recoveries Balance at 31 December 2022 Consolidated Loss allowance by classes PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Loans and advances to customers at amortised cost Investments in Government Inscribed Stocks at amortised cost Other financial assets Total 38,100 1,639 3,990 43,729 4,323 592 - 4,916 (857) 931 42,497 - - - - 2,231 3,990 (857) 931 48,718 Balance at 01 January 2021 Additional ECL recognised Write- offs Bad debt Recoveries Balance at 31 December 2021 Consolidated Loss allowance by classes PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Loans and advances to customers at amortised cost Investments in Government Inscribed Stocks at amortised cost Other financial assets Total 35,345 6,555 (5,550) 1,750 38,100 1,674 4,038 41,057 9 - (44) (48) - - 1,639 3,990 6,564 (5,642) 1,750 43,729 Balance at 01 January 2022 Additional ECL recognised Write- offs Bad debt Recoveries Balance at 31 December 2022 Loss allowance by classes PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Loans and advances to customers at amortised cost Investments in Government Inscribed Stocks at amortised cost Other financial assets Total 37,746 1,639 3,990 43,375 3,659 592 - 4,251 (857) 931 41,479 - - - - 2,231 3,990 (857) 931 47,700 Parent Balance at 01 January 2021 Additional ECL recognised Write- offs Bad debt Recoveries Balance at 31 December 2021 Loss allowance by classes PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Loans and advances to customers at amortised cost Investments in Government Inscribed Stocks at amortised cost Other financial assets Total 34,845 6,701 (5,550) 1,750 37,746 1,674 4,038 40,557 9 - (44) (48) - - 1,639 3,990 6,710 (5,642) 1,750 43,375 Parent s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 101 3. Financial risk management (continued) b) Credit risk (continued) Loss allowance – 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 Consolidated 31 December 2022 Loss allowance as at 01 January 19,983 10,527 7,590 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 2,677 (1,190) (2,701) - 12,263 (2,619) 1,234 (6,120) - 3,886 (58) (44) 8,821 (857) 9,889 (13,572) (1,450) (5,762) 17,460 5,458 19,579 - - - - - - - - 38,100 - - - (857) 26,038 (20,784) 42,497 Consolidated 31 December 2021 Loss allowance – 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 Loss allowance as at 01 January 12,058 19,777 3,510 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 637 (3,436) (209) - 22,052 (616) 3,453 (4,240) (4,703) 8,751 (21) (17) 4,449 (766) 3,547 (11,119) (11,895) (3,112) 19,983 10,527 7,590 - - - - - - - - 35,345 - - - (5,469) 34,350 (26,126) 38,100 102 3. Financial risk management (continued) b) Credit risk (continued) Loss allowance – 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 Parent 31 December 2022 Loss allowance as at 01 January 19,985 10,525 7,236 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 2,677 (1,190) (2,701) - 12,263 (13,572) (2,619) 1,234 (6,120) - 3,886 (58) (44) 8,821 (857) 8,871 (1,450) (5,408) 17,462 5,456 18,561 Loss allowance – Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL - - - - - - - - 37,746 - - - (857) 25,020 (20,430) 41,479 Parent 31 December 2021 POCI Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Loss allowance as at 01 January 12,058 19,718 3,069 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 637 (3,436) (209) - 22,054 (11,119) (616) 3,453 (4,224) (4,704) 8,751 (21) (17) 4,433 (766) 3,451 (11,853) (2,913) 19,985 10,525 7,236 - - - - - - - - 34,845 - - - (5,470) 34,256 (25,885) 37,746 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 103 3. Financial risk management (continued) b) Credit risk (continued) Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL Consolidated 31 December 2022 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 1,749,549 152,441 71,667 14,890 1,988,547 41,924 (70,988) (44,382) - (39,095) 72,997 (64,450) - (2,829) (2,009) 108,832 (857) 581,710 8,615 17,725 - - - - - - - - (857) 608,050 (358,430) (20,138) (14,450) (1,304) (394,322) 1,899,383 110,370 178,079 13,586 2,201,418 Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL Consolidated 31 December 2021 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 1,417,091 184,262 29,673 19,050 1,650,076 39,492 (70,073) (6,279) - (39,106) 70,901 (34,912) (4,704) 646,922 22,163 (386) (828) 41,191 (766) 5,009 - - - - - - - (5,470) 912 675,006 (277,604) (46,163) (2,226) (5,072) (331,065) 1,749,549 152,441 71,667 14,890 1,988,547 104 3. Financial risk management (continued) b) Credit risk (continued) Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL Parent 31 December 2022 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 1,745,858 151,459 69,812 14,890 1,982,019 41,924 (70,988) (44,382) - (39,095) 72,997 (64,450) - (2,829) (2,009) 108,832 (857) 578,000 8,492 17,068 - - - - - - - - (857) 603,560 (354,739) (19,155) (13,082) (1,304) (388,280) 1,895,673 110,248 176,935 13,586 2,196,442 Loans and advances to customers at amortised cost Stage 1 12-month ECL Stage 2 Lifetime ECL Stage 3 Lifetime ECL Parent 31 December 2021 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 1,414,258 183,885 27,621 19,050 1,644,814 39,492 (70,073) (6,204) - (39,106) 70,901 (34,756) (4,704) 643,231 21,181 (386) (828) 40,960 (766) 4,464 - - - - - - - (5,470) 912 669,788 (274,846) (45,942) (1,253) (5,072) (327,113) 1,745,858 151,459 69,812 14,890 1,982,019 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 105 3. Financial risk management (continued) b) Credit risk (continued) 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. Year ended 2022 Consolidated Year ended 2021 Gross carrying amount Loss allowance Gross carrying amount Loss allowance Loans and advances to customers 0-29 days 30-59 days 60-89 days 90-180 days More than 181 days Total PGK ‘000 1,899,939 64,459 46,028 41,223 149,769 2,201,418 PGK ’000 17,460 3,284 2,173 4,299 15,281 42,497 PGK ‘000 1,727,938 54,961 32,132 61,225 112,292 1,988,547 PGK ‘000 17,082 5,127 2,288 4,861 8,742 38,100 Parent Gross carrying amount Loss allowance Gross carrying amount Loss allowance Year ended 2022 Year ended 2021 Loans and advances to customers 0-29 days 30-59 days 60-89 days 90-180 days More than 181 days Total PGK ‘000 1,896,229 64,401 45,964 41,112 148,736 2,196,442 PGK ’000 17,460 3,284 2,173 4,271 14,291 41,479 PGK ‘000 1,724,250 54,053 32,057 61,209 110,449 1,982,018 PGK ‘000 17,082 5,127 2,288 4,857 8,392 37,746 Collateral held as security and other credit enhancements The Group holds collateral or other credit enhancements to mitigate credit risk associated with financial assets. The main types of collateral and the types of assets these are associated with are listed in the table below. Exposure type Mortgage lending Personal lending Corporate lending Investment securities Lease receivables Type of collateral held Mortgage over residential property Mortgage over residential property / bill of sale Mortgage over commercial property Sovereign guarantee Charge over property and equipment Bank guarantee and documentary letters of credit Charge over cash deposit In addition to the collateral included in the table above, the Group holds other types of collateral and credit enhancements, such as second charges, floating charges and guarantees for which specific values are not generally available. 106 3. Financial risk management (continued) b) Credit risk (continued) 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% Total Mortgage lending LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Fully cash covered Total Year ended 2022 Consolidated Year ended 2021 Gross carrying amount Gross carrying amount PGK ‘000 PGK ‘000 67,922 73,712 58,677 148,867 204,667 553,845 67,153 79,259 47,391 185,421 168,040 547,264 Parent Year ended 2022 Year ended 2021 Gross carrying amount Gross carrying amount PGK ‘000 PGK ‘000 67,922 73,712 58,677 148,867 204,667 - 553,845 67,153 79,259 47,391 185,421 168,040 - 547,264 Credit impaired – Mortgage lending PGK ‘000 PGK ‘000 Year ended 2022 Consolidated Year ended 2021 Gross carrying amount Gross carrying amount LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Total 9,501 14,806 9,082 6,829 31,602 71,820 3,502 7,161 1,077 3,182 9,314 24,236 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 107 3. Financial risk management (continued) b) Credit risk (continued) Credit impaired – Mortgage lending PGK ‘000 PGK ‘000 Year ended 2022 Year ended 2021 Gross carrying amount Gross carrying amount Parent LTDV ratio Less than 50% 51-75% 75-90% 90-100% More than 100% Total Personal lending 9,501 14,806 9,082 6,829 31,602 71,820 3,502 7,161 1,077 3,182 9,314 24,236 The Group’s personal lending portfolio consists of secured and unsecured loans as follows: Secured Unsecured Total Year ended 2022 Year ended 2021 Consolidated and Parent PGK ‘000 553,845 59,467 613,312 PGK ‘000 547,260 30,158 577,418 For secured loans, the Group requires formal valuation of collateral to be performed prior to approval of the loan facility. The valuation is conducted by the external firm of valuers independent of the Group who are required to meet certain minimum standards as per the Group’s policy. Collateral value determined by the valuer is further discounted by 20-30% before determining the facility limit. The discounted value of the collateral must exceed the facility limit by at least 12.5% to allow for sufficient buffer should there be any adverse movement in value due change in macroeconomic indicators. The collateral value is updated when the facility is classified as stage 3 or at least every 2 years. The Group monitors the collateral value on an ongoing basis and in event of any indicator which may result in significant decline will require the fresh valuation to be performed. As at 31 December 2022, 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 2022, the portfolio of the corporate lending is fully collateralized by eligible collateral. Investment securities The Group holds Investments in Government Inscribed Stocks measured at amortised cost with a carrying amount of K152,649,962 (2021: K112,107,469) 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. 108 3. Financial risk management (continued) c) Liquidity risk c) Liquidity risk Liquidity risk is the risk of being unable to meet financial obligations as they fall due. The Group’s liquidity and funding risks are governed by a policy framework which is approved by the Board of Directors. Liquidity and funding positions and associated risks are overseen by the ALCO. The following outlines the Group’s approach to liquidity and funding risk management focusing on conditions brought on by the current global economic environment: • ensuring the liquidity management framework is compatible with local regulatory requirements, • daily liquidity reporting and scenario analysis to quantify the Group’s positions, • targeting commercial and corporate customers’ liability compositions, • intense monitoring of detail daily reports to alert management and directors of abnormalities, and • 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, and • assigned responsibilities for internal and external written communications Maturities of financial assets and liabilities The table below presents a maturity analysis of the 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. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 109 3. Financial risk management (continued) c) Liquidity risk Up to 1 month 1 to 3 months 4 to 12 months 1 to 5 years Over 5 years Total contract value Total carrying value 31 December 2022 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 Consolidated - - - - - 5,114 - 5,114 - - - - - Cash and cash equivalents 433,479 - - Central bank bills 74,900 193,340 975,290 Regulatory deposits 383,083 - - Total financial assets 891,462 193,340 975,290 Due to other banks 2,060 - - Due to customers 2,782,132 396,063 714,868 92,225 - - 2,876,417 396,063 714,868 Other liabilities Total financial liabilities Issued financial guarantee contracts Issued loan commitments Total 31 December 2021 Cash and cash equivalents 761 3,607 140 302 14,853 9,990 159 - 4,368 442 15,012 9,990 408,334 - - Central bank bills 95,000 65,000 670,000 Regulatory deposits Total financial assets 212,874 716,209 - - 65,000 670,000 Due to other banks 4,701 - - Due to customers 2,451,325 335,136 250,131 11,725 Other liabilities Total financial liabilities Issued financial guarantee contracts Issued loan commitments Total 72,311 - - - 2,528,337 335,136 250,131 11,725 450 7,696 24,591 14,092 160,667 7,252 704 - 161,117 14,948 25,295 14,092 - - - - - - - - - - - - - - - - - - - - - - 433,479 433,479 1,243,530 1,199,368 383,083 383,083 2,060,092 2,015,930 2,060 2,060 3,898,177 3,878,835 92,225 92,225 3,992,462 3,973,120 25,744 4,069 29,812 N/A N/A N/A 408,334 408,334 830,000 212,874 795,362 212,874 1,451,209 1,416,570 4,701 4,701 3,048,317 3,036,921 72,311 72,311 3,125,329 3,113,933 46,829 168,623 215,452 N/A N/A N/A 110 3. Financial risk management (continued) c) Liquidity risk Up to 1 month 1 to 3 months 4 to 12 months 1 to 5 years Over 5 years Parent Total carrying value Total contract value 31 December 2022 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 PGK‘000 Cash and cash equivalents 397,367 - - Central bank bills 74,900 193,340 975,290 Regulatory deposits 383,083 Due from subsidiaries 35,760 - - - - Total financial assets 891,110 193,340 975,290 Due to other banks 2,060 - - - - - - - - Due to customers 2,800,256 396,063 714,868 5,114 87,658 30,507 - - - - - - 2,920,481 396,063 714,868 5,114 Other liabilities Due to subsidiaries Total financial liabilities 31 December 2021 Cash and cash equivalents 366,302 - - Central bank bills 95,000 65,000 670,000 Regulatory deposits 212,874 Due from subsidiaries 65,518 - - - - Total financial assets 739,695 65,000 670,000 Due to other banks 4,701 - - - - - - - - Due to customers 2,493,857 335,136 250,131 11,725 Other liabilities Due to subsidiaries Total financial liabilities 71,326 9,612 - - - - - - 2,579,496 335,136 250,131 11,725 - - - - - - - - - - - - - - - - - - - - 397,367 397,367 1,243,530 1,199,368 383,083 383,083 35,760 35,760 2,059,740 2,015,578 2,060 2,060 3,916,301 3,896,958 87,658 30,507 87,658 30,507 4,036,526 4,017,183 366,302 366,302 830,000 795,362 212,874 212,874 65,518 65,518 1,474,695 1,440,057 4,701 4,701 3,090,849 3,079,454 71,326 9,612 71,326 9,612 3,176,488 3,165,093 The liquidity gap in ‘up to 1 month bucket’ is due to assumption that current and saving deposits amounting to K2,127m (31 December 2021: K1,667m) included within ‘due to customers’ mature within one month since these are on demand and do not have any fixed or determinable maturity. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 111 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 institutions 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: (i) Is adequate to protect the interest of depositors and creditors, (ii) Is commensurate with risk profile and activities of KSL, and (iii) 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: (i) Tier 1 risk based ratio of 8%, (ii) Total risk-based capital of 12%,and (iii) Leverage capital of 6%. As at 31 December 2022, 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 2022 PGK ‘000 2,080,590 326,605 142,496 469,101 15.7% 22.5% 7.5% 2021 PGK ‘000 1,900,018 340,265 94,560 434,825 18.3% 22.9% 9.2% 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 in the 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. 112 5. Net interest income Interest income Cash and short-term funds Investments 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 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 113 Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 54,747 13,143 156,710 224,600 (43,389) (43,389) 181,211 44,243 13,013 149,679 206,935 (29,623) (29,623) 177,312 54,096 13,143 156,710 223,949 (42,991) (42,991) 180,958 Consolidated 2022 2021 2022 44,150 13,013 149,679 206,842 (29,533) (29,533) 177,309 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 10,019 22,225 2,093 30,083 44,268 7,636 116,324 9,628 21,161 1,667 21,950 23,550 11,435 89,391 - - 1,512 30,083 44,268 7,045 82,908 - - 1,199 21,950 23,550 11,760 58,459 (110) (55) (110) (69) 116,214 89,336 82,798 58,390 Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 469 469 562 562 74 74 50 50 8. Other income Profits from disposal of property and equipment Unrealised gains/losses Support fees from subsidiaries (note 29) Office space recharge (note 29) Management fees (note 29) 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 36) Other Break-up of staff costs: Salaries, wages and other benefits Superannuation costs Cost of employee share based incentive plan Total staff costs Consolidated 2022 2021 2022 PGK ‘000 PGK ‘000 PGK ‘000 249 2,638 - - - 1,770 4,657 105 297 - - - 301 703 249 3,064 3,657 - 470 1,750 9,190 Consolidated 2022 2021 2022 PGK ‘000 PGK ‘000 PGK ‘000 85,778 75,607 80,388 - 58,904 38,203 4,978 6,556 1,921 16,917 213,257 79,510 3,991 2,277 85,778 30 56,350 36,398 5,325 4,910 1,590 13,918 194,127 67,360 4,055 4,192 75,607 - 55,820 38,203 4,857 5,634 1,707 16,713 203,322 74,339 3,772 2,277 80,388 Parent 2021 PGK ‘000 105 (70) 1,890 1,529 378 285 4,117 Parent 2021 PGK ‘000 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 As at 31 December 2022, the Group had 664 (2021: 685) employees and 3 (2021: 4) consultants. The Parent had 615 (2021: 633) employees and 3 (2021: 4) consultants. 114 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% (2021: 30%) Tax effect of: Permanent differences Prior year adjustment Impact of increase in tax rate on deferred taxes Income tax expense Represented by: Current tax Deferred taxes Income tax expense Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 148,418 44,525 (1,937) (243) (10,415) 31,930 46,971 (15,041) 31,930 106,016 31,805 131,118 39,336 5,569 (2,168) (1,986) (231) - (10,415) 86,157 25,847 5,935 (2,148) - 35,206 26,704 29,634 35,712 (506) 35,206 41,476 (14,772) 26,704 30,153 (519) 29,634 In December 2022, during the PNG Government’s announcement of 2023 national budget, an increase in the corporate income tax rate from 30% to 45% on commercial banks was announced and is effective 1 January 2023. Deferred taxes arise from temporary differences are actually measured on the expected tax rate at which those underlying temporary differences will reverse in the future. Therefore, if the tax rate is expected to increase in the subsequent reporting period then the differed taxes would need to be measured using that higher tax rate that is expected to apply in the future when those underlying temporary differences reverse. The Group’s deferred tax assets and liabilities have therefore been measured at the revised tax rate of 45% in line with accounting standards. This has resulted in an increase in net deferred tax asset of PGK 10.4m and a tax credit of PGK 10.4m included in the statutory net profit after tax. 11. Deferred taxes a) Net deferred tax assets where there is a right to offset: Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 26,130 8,168 18,771 53,068 (20,597) (377) (20,974) 32,094 16,167 3,272 14,655 34,094 (16,500) (606) (17,106) 16,988 25,824 7,750 18,771 52,345 (20,597) (501) (21,098) 31,246 16,060 2,941 14,655 33,656 (16,500) (682) (17,182) 16,474 Allowance for losses Employee benefit provision Lease liability Depreciation and amortisation Others Net deferred tax asset s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 115 b) The movement on deferred tax account is as follows: Balance at beginning of year Statement of comprehensive income credit/(charge) Balance at end of year Represented by: Deferred tax assets (note 11(a)) Deferred tax liabilities (note 11(a)) Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 16,988 15,106 32,094 53,068 (20,974) 32,094 16,482 506 16,988 34,094 (17,106) 16,988 16,474 14,772 31,246 52,345 (21,098) 31,246 15,956 518 16,474 33,656 (17,182) 16,474 116 12. Cash and cash equivalents 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 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 151,370 160,392 121,726 433,488 115,451 123,895 168,988 408,334 151,370 160,392 85,614 397,376 Consolidated 2022 2021 2022 115,451 123,895 126,956 366,302 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 268,240 975,290 (27,767) 1,215,763 160,000 670,000 (34,638) 795,362 268,240 975,290 (27,767) 1,215,763 160,000 670,000 (34,638) 795,362 Central bank bills are debt securities issued by the Bank of Papua New Guinea (BPNG) and are measured at amortised cost. 14. Regulatory deposits Regulatory deposit of the Group as at 31 December 2022 amounted to K383,083,700 (2021: K212,874,480). 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 amortised cost. Regulatory deposit of the parent as at 31 December 2022 amounted to K383,083,700 (2021: K212,874,480). 15. Financial assets at fair value through profit or loss Equity securities – Listed – Unlisted Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 4,910 *10,352 15,262 5,036 6,616 11,652 184 *10,324 10,508 183 6,588 6,771 *The increase was attributable to the increase in value of MiBank investment s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 117 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 2021 PGK ‘000 10,682 817 153 11,652 2022 PGK ‘000 11,652 3,610 - 15,262 2022 Parent 2021 PGK ‘000 PGK ‘000 6,771 3,737 - 10,508 6,151 467 153 6,771 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: Overdrafts Property mortgage Asset financing Business and other loans Consolidated 2021 PGK ‘000 577,417 1,411,130 1,988,547 (38,100) 2022 PGK ‘000 613,312 1,588,106 2,201,418 (42,497) 2022 PGK ‘000 613,312 1,583,130 2,196,442 (41,479) Parent 2021 PGK ‘000 577,417 1,404,602 1,982,019 (37,746) 2,158,921 1,950,447 2,154,963 1,944,273 Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 80,108 627,468 71,792 1,422,050 2,201,418 78,489 547,260 30,293 1,332,503 1,988,547 80,108 627,468 71,792 1,417,074 2,196,442 78,489 547,260 30,293 1,325,977 1,982,019 118 16. Loans and advances to customers (continued) Movements in expected credit losses are as follows: Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Balance at beginning of year Impairment losses during the year Loans written off Bad debt recoveries Balance at end of year 38,100 4,323 (857) 931 42,497 35,345 6,555 (5,550) 1,750 38,100 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 2021 PGK ‘000 115,000 170 (4,048) 2,624 113,746 (1,639) 112,107 2022 PGK ‘000 155,000 333 (3,318) 2,866 154,881 (2,231) 152,650 37,746 3,659 (857) 931 41,479 2022 PGK ‘000 155,000 333 (3,318) 2,866 154,881 (2,231) 152,650 The movement in Investments in Government Inscribed Stocks is as follows: Consolidated 2022 2021 2022 34,845 6,701 (5,550) 1,750 37,746 Parent 2021 PGK ‘000 115,000 170 (4,048) 2,624 113,746 (1,639) 112,107 Parent 2021 Balance at beginning of year Additions / (maturities) Amortised discount/(premium) Accrued interest Write back / (addition) of expected credit losses PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 112,107 40,000 893 242 (593) 114,519 (3,000) 598 (45) 35 112,107 40,000 893 242 (593) 114,519 (3,000) 598 (45) 35 152,650 112,107 152,650 112,107 Investments in Government Inscribed Stocks are measured at amortised cost. Included within the balance is an amount of K nil (31 December 2021: K nil) which has been pledged with a third party against repurchase agreement transaction. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 119 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 Consolidated 2022 2021 2022 Parent 2021 % 100 100 100 100 100 % 100 100 100 100 100 Amount (K) Amount (K) 2 2 2 2 2 2 500,002 500,002 197 197 500,205 500,205 (251,677) (251,677) 248,528 248,528 *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. 120 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 4,810 18,578 5,627 43,034 2,129 1,074 63,503 138,755 - - - 4,214 - - 164 - (951) 8,119 72 - - - - 1,268 12,060 25,825 (72) - - - (4,056) (5,007) 4,810 22,792 4,840 51,225 2,129 2,270 71,507 159,573 4 - - 1,044 2,132 538 - - (1,132) 7,748 - (79) - - - 1,297 (2,132) 3925 14,556 - - - (11,259) (12,470) 4,814 25,968 4,246 58,894 2,129 1,435 64,173 161,659 (2,489) (5,712) (3,514) (20,718) (667) (2,300) (1,159) (5,262) Disposals - - 908 - Balance 31 December 2021 Charge during the year (3,156) (8,012) (3,765) (25,980) (594) (2,653) (746) (5,932) Disposals - - 1,132 35 (3,750) (10,665) (3,379) (31,877) - - - - - - - - - - - - - - (20,048) (52,481) (11,187) (20,575) 3,042 3,950 (28,193) (69,106) (12,144) (22,069) 11,188 12,355 (29,149) (78,820) 1,064 15,303 867 27,017 2,129 1,435 35,024 82,839 1,654 14,780 1,075 25,245 2,129 2,270 43,314 90,467 Cost Balance 31 December 2020 Additions Transfer in (out) Disposals Balance 31 December 2021 Additions Transfer in (out) Disposals Balance 31 December 2022 Accumulated depreciation Balance 31 December 2020 Charge during the year Balance 31 December 2022 Book value Balance 31 December 2022 Balance 31 December 2021 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 121 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 4,810 18,578 5,627 43,034 2,129 - - - 4,214 - - 164 - (951) 8,119 72 - - - - 1,074 1,268 (72) - 63,503 138,755 12,060 25,825 - - (4,056) (5,007) 4,810 22,792 4,840 51,225 2,129 2,270 71,507 159,573 4 - - 1,044 2,132 538 - - (1,132) 7,748 - (79) - - - 1,297 (2,132) 3925 14,556 - - - (11,259) (12,470) 4,814 25,968 4,246 58,894 2,129 1,435 64,173 161,659 (2,489) (5,712) (3,513) (20,718) (667) (2,300) (1,159) (5,262) Disposals - - 908 - Balance 31 December 2021 Charge during the year (3,156) (8,012) (3,764) (25,980) (594) (2,653) (746) (5,932) Disposals - - 1,132 35 (3,750) (10,665) (3,378) (31,877) - - - - - - - - - - - - - - (20,049) (52,481) (11,187) (20,575) 3,042 3,950 (28,194) (69,106) (12,144) (22,069) 11,188 12,355 (29,150) (78,820) Parent Cost Balance 31 December 2020 Additions Transfer in (out) Disposals Balance 31 December 2021 Additions Transfer in (out) Disposals Balance 31 December 2022 Accumulated depreciation Balance 31 December 2020 Charge during the year Balance 31 December 2022 Book value Balance 31 December 2022 Balance 31 December 2021 1,064 15,303 868 27,017 2,129 1,435 35,024 82,839 1,654 14,780 1,076 25,245 2,129 2,270 43,314 90,467 122 20. Intangible assets Consolidated Cost Balance 31 December 2020 Additions Transfer in (out) Balance 31 December 2021 Additions Transfer in (out) Disposals Balance 31 December 2022 Accumulated depreciation Balance 31 December 2020 Charge during the year Disposals Balance 31 December 2021 Charge during the year Disposals Balance 31 December 2022 Book value Balance 31 December 2022 Balance 31 December 2021 Software PGK ‘000 42,785 1,154 15,136 59,075 1,907 1,945 - 62,927 (15,071) (9,223) - (24,294) (11,614) - (35,908) 27,019 34,781 Customer deposit relationship / intangible Work in Progress Total PGK ‘000 PGK ‘000 PGK ‘000 22,468 - - 22,468 - - - 22,468 (11,705) (6,229) - (17,934) (4,533) - (22,468) - 4,534 10,972 13,512 (15,136) 9,348 1,546 (1,945) (3,475) 5,474 - - - - - - - 5,474 9,348 76,225 14,666 - 90,891 3,453 - (3,475) 90,869 (26,776) (15,452) - (42,228) (16,147) - (58,376) 32,493 48,663 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 123 Parent Cost Balance 31 December 2020 Additions Transfer in (out) Balance 31 December 2021 Additions Transfer in (out) Disposals Balance 31 December 2022 Accumulated depreciation Balance 31 December 2020 Charge during the year Disposals Balance 31 December 2021 Charge during the year Disposals Balance 31 December 2022 Book value Balance 31 December 2022 Balance 31 December 2021 Software PGK ‘000 42,785 1,154 15,136 59,075 1,907 1,945 - 62,927 (15,071) (9,223) - (24,294) (11,614) - (35,908) 27,019 34,781 Customer deposit relationship Work in Progress Total PGK ‘000 PGK ‘000 PGK ‘000 22,468 - - 22,468 - - - 22,468 (11,705) (6,229) - (17,934) (4,534) - (22,468) - 4,534 10,673 13,512 (15,136) 9,049 1,546 (1,945) (3,176) 5,474 - - - - - - - 5,474 9,049 75,926 14,666 - 90,592 3,453 - (3,176) 90,869 (26,776) (15,452) - (42,228) (16,148) - (58,376) 32,493 48,364 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 was fully amortised in 2022. 124 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 Write-off Balance at end of year 22. Due to customers Corporate customers Retail customers 23. Current income tax (assets) liabilities Balance at beginning of year Paid during the year Current provision 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 Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 5,631 9,127 68,901 83,659 (3,990) 79,669 (3,990) - (3,990) 5,684 5,545 38,708 49,937 (3,990) 45,947 4,038 (48) (3,990) 5,615 9,079 66,143 80,837 (3,990) 76,847 (3,990) - (3,990) Consolidated 2022 2021 2022 5,673 5,497 35,213 46,383 (3,990) 42,393 4,038 (48) (3,990) Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 3,072,938 2,356,300 3,091061 2,398,833 805,897 680,621 805,897 680,621 3,878,835 3,036,921 3,896,958 3,079,454 Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 11,666 (54,505) 47,279 (244) 4,196 (952) 5,148 4,196 4,883 (28,918) 37,862 (2,160) 11,666 (31) 11,697 11,666 11,494 (47,840) 41,706 (230) 5,130 - 5,130 5,130 3,761 (22,419) 32,300 (2,148) 11,494 - 11,494 11,494 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 125 24. Employee provisions Consolidated 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 Represented by: Short term provisions Long term provisions Total employee provision Consolidated Provision for Annual Leave Provision for Long Service Leave Provision for Salaries Provision for Bonus Total Opening balance Additions Payments 2022 Closing balance PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 4,306 2,251 - 4,349 10,906 4,933 2,623 55,406 7,313 70,275 (4,576) (129) (55,405) (6,960) (67,070) Opening balance Additions Payments 4,663 4,745 1 4,702 14,111 2022 Closing balance PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 3,944 1,902 - 3,956 9,802 4,712 2,424 51,538 6,875 65,549 (4,314) (129) (51,537) (6,654) (62,634) Consolidated 9,366 4,745 14,111 4,342 4,197 1 4,177 12,717 2022 Parent 8,520 4,197 12,717 2021 Opening balance Additions Payments Closing balance PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 4,698 2,093 37 4,709 11,538 2,351 511 48,539 7,110 58,511 (2,743) (353) (48,576) (7,470) (59,142) 4,306 2,251 - 4,349 10,906 126 24.Employee provisions (continued) Parent Provision for Annual Leave Provision for Long Service Leave Provision for Salaries Provision for Bonus Total Represented by: Short term provisions Long term provisions Total employee provision 25. Lease Liabilities Opening balance Additions Payments 2021 Closing balance PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 4,366 1,719 37 4,470 10,593 2,165 533 44,807 6,644 54,149 (2,587) (350) (44,844) (7,158) (54,940) 3,944 1,902 - 3,956 9,802 2021 Consolidated Parent 8,655 2,251 10,906 7,900 1,902 9,802 Details of associated lease liabilities recognised in respect of the right of use assets are presented below: Consolidated Maturity analysis – contractual undiscounted cash flows Less than one year One to five years More than five years Total undiscounted lease liabilities at 31 December Lease liabilities included in statement of financial position at 31 December Current Non-current Amounts recognised in statement of comprehensive income Interest on lease liabilities Expense relating to short-term leases 31 December 2022 31 December 2021 PGK ‘000 PGK ‘000 11,732 32,289 5,364 49,385 11,872 29,841 41,713 3,522 8,024 11,546 14,365 34,327 10,430 59,122 14,408 34,442 48,851 3,752 7,061 10,813 Amounts recognised in statement of cash flows Total cash outflow for leases 20,746 20,130 Total cashflows for leases is recorded under Cash payments to employees and suppliers in the statement of cash flows s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 127 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 31 December 2022 31 December 2021 PGK ‘000 PGK ‘000 11,732 32,289 5,364 49,385 11,872 29,841 41,713 3,522 7,777 11,299 14,365 34,327 10,430 59,122 14,408 34,442 48,851 3,752 7,061 10,813 Amounts recognised in statement of cash flows Total cash outflow for leases 20,746 20,130 Total cashflows for leases is recorded under Cash payments to employees and suppliers in the statement of cash flows 26. Other liabilities Accruals Unclaimed money and stale cheques Bank cheques Accounts payable Unearned commission income Lease incentive payable Advance payments Other liabilities Balance at end of year 2022 PGK ‘000 27,344 17,663 10,420 6,493 521 3,442 30,301 30,619 126,803 Consolidated 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 13,971 13,380 7,943 2,324 1,309 4,083 31,528 21,421 95,959 26,994 17,663 10,420 6,347 521 3,442 30,301 26,399 122,087 13,877 13,380 7,943 2,267 1,309 4,083 31,528 20,530 94,917 128 27. Issued and paid ordinary shares a) Movement The Company does not have authorised capital and ordinary shares have no par value. The table below provides the annual balances in share capital. Balance as at 31 December 2020 Share issued during the year Balance as at 31 December 2021 Share issued during the year Balance as at 31 December 2022 b) Earnings per share Number of shares Share captial ‘000 286,936 - 286,936 - 286,936 PGK ‘000 394,693 - 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 2022 116,488 286,936 288,695 40.60 40.35 Consolidated 2021 70,813 286,936 290,339 24.68 24.39 Kina operates both a Short Term Incentive (STI) and Long Term Incentive (LTI) plan. The purpose of these Plans is to assist in the reward, retention and motivation of key management personnel and align the interests of management and shareholders. The plans are commensurate with those adopted by major banks in Australia and the Pacific and is managed by an independent Plan manager. The operation of both the STI and LTI plans are explained below: Short term incentive plan (STI Plan) The STI plan provides participants with an opportunity to earn an incentive calculated as a percentage of their salary each year, conditional upon them achieving specified performance targets. Under the plan 65% of any award granted is paid as a cash bonus, with the remaining 35% awarded as a grant of performance rights to shares. The granted performance rights are restricted from exercise and subject to the Company’s clawback policy and subject to the rules of the Plan. The following STI plan arrangements were in place during the year ended 31 December 2022 Date of grant Number of share rights granted Market value at grant date Vesting date Vesting conditions 1 April 2022 1 April 2021 849,901 871,109 AUD 658,408 AUD 717,185 1 April 2024 1 April 2023 Continued service Continued service s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 129 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 2022 Date of grant 1 April 2022 1 April 2021 Number of share rights granted 1,297,727 1,399,664 AUD 1,006,516 AUD 1,152,341 AUD 629,398 1 April 2025 AUD 811,805 1 April 2024 Continued service Continued service Continued service 50% target TSR 50% target TSR 50% target TSR 50% target EPS growth 50% target EPS growth 50% target EPS growth 1 April 2020 617,987 AUD 883,722 AUD 349,163 1 April 2023 Market value at grant date Fair value at grant date Vesting date Vesting conditions The estimated fair value of share rights issued on 1 April 2022 under the LTI plan was AUD 0.49, compared to the grant date market value per share of AUD 0.7756. 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 Outstanding rights at end of year 2022 Number 4,164,980 2,146,628 (1,276,220) 5,035,388 Consolidated 2021 Number 3,661,485 2,270,773 (1,767,278) 4,164,980 The fair value at grant date of share rights awarded under the incentive schemes is recognized as an expense over the expected vesting period with a corresponding increase in the share based payments reserve in equity. The movement in the Share Based Premium Reserve is as below: Brought forward from previous year Expense arising from share incentive plans Rights vested Rights forfeited or lapsed Total 2022 PGK ‘000 3,587 2,277 (1,360) - 4,504 Consolidated 2021 PGK ‘000 2,774 4,192 (3,379) - 3,587 130 28. Statements of cash flows a) For the purposes of the statements of cash flow, cash and cash equivalents comprises the following: Cash and cash equivalents (note 12) b) Movement in investment securities is as follows: Central bank bills Government Inscribed Stocks Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 433,488 433,488 408,334 408,334 397,376 397,376 366,302 366,302 2022 PGK ‘000 1,181,124 152,769 1,333,893 Consolidated Parent 2021 PGK ‘000 767,594 113,362 880,956 Movement PGK ‘000 413,530 39,407 452,937 c) Reconciliation of net profit after tax for the year to net cash flows from operating activities is presented below: Net profit after tax Profit from disposal of property and equipment Depreciation and amortization (note 19 and 20) (Premium)/discount amortization (note 17) Share-based payment expense Net (losses)/gains from changes in fair values of financial assets (note 15) Increase/(decrease) in income tax payable 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 generated from operating activities Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 116,488 (249) 38,203 893 917 (3,610) (7,469) (15,106) - 3,845 70,810 (105) 36,398 598 813 (817) 6,783 (506) 8,407 4,184 104,414 (249) 38,203 893 917 (3,737) (6,363) (14,772) - 791 56,523 (105) 36,398 598 813 (467) 7,733 (519) 8,407 98 (416,120) (347,913) (369,739) (407,413) 860,541 578,333 468,370 247,022 830,841 581,199 472,021 174,087 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 131 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 2022, 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 2022, the total remuneration of the Directors was K4,142,855 (2021: K3,965,065). Key management personnel (KMP) of the group includes directors and the executive general managers (EGMs) during the year. The table below shows the Group specified EGM remuneration in aggregate (in K’000). No of KMP 11* 11** 2022 2021 Salary 9,597 8,305 Bonus Super Equity Options Other benefits 3,433 3,707 - - 917 813 1,720 2,083 Total 15,667 14,908 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 (2021: 12.50) basis points, unsecured and with no fixed term of repayment. Details as follows: Transactions Balance outstanding Income Expenses Income Expenses Due from 2022 2022 2021 2021 2022 2021 2022 Due to 2021 PGK’000 PGK’000 PGK’000 PGK’000 PGK’000 PGK’000 PGK’000 PGK’000 1,151 2,286 - - - - 221 - - - 784 3,254 - - - - 150 - - - 35,340 62,349 - - - 356 64 - - 224 64 - (30,507) (9,612) - - - - - - 3,437 221 4,038 150 35,760 62,637 (30,507) (9,612) KFM KISS KWM KNL KSL Fiji * 1 resigned as of 3 September 2022 * *2 resigned as of 12 November 2021, 1 position replaced as of 22 November 2021 132 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: Consolidated 2022 2021 2022 Parent 2021 PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 12,963 12,963 4,200 4,200 4,200 4,200 4,200 4,200 Clients funds held for shares trading 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 in 2021. No further transactions were performed in the current reporting period. s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 133 33. Segment reporting The segment information provided to the management for the reportable segments for the year ended 31 December 2022 is as follows: 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 Banking & Finance Wealth Management PGK‘000 224,348 (43,389) 61,843 82,799 8,876 334,477 (165,120) (4,160) (38,203) (207,483) 126,994 4,127 - 131,121 (26,705) 104,416 4,624,312 14,084 (4,062,544) PGK‘000 252 - (1,504) 33,415 (140) 32,023 (9,934) (665) - (10,599) 21,424 - (4,127) 17,297 (5,225) 12,072 55,688 - (6,126) Total PGK‘000 224,600 (43,389) 60,339 116,214 8,736 366,500 (175,054) (4,825) (38,203) (218,082) 148,418 4,127 (4,127) 148,418 (31,930) 116,488 4,680,000 14,084 (4,068,670) Banking and finance segments include the operations of Kina Bank while Wealth Management includes fund management and fund administration business. 134 33. Segment reporting (continued) The segment information provided to the management for the reportable segments for the year ended 31 December 2021 is as follows: 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 Banking & Finance Wealth Management PGK‘000 206,932 (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 (28,431) (3,206,686) PGK‘000 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 - (2,349) Total PGK‘000 206,935 (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 (28,431) (3,209,035) 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 2022, 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 2022 PGK ‘000 25,744 25,744 Consolidated 2021 PGK ‘000 46,829 46,829 s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 135 35. Commitments Capital commitments There was a total of K2,793,486 relating to commitments under contracts for capital expenditure at balance sheet date (31 December 2021: K3,822,580). Loan commitments There was a total of K229.8m relating loan commitment at balance sheet date (31 December 2021: K168.6m). 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 2022. Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets Level 1 Level 2 Level 3 Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Consolidated 4,910 - 4,910 - - - - 10,352 10,352 Level 1 Level 2 Level 3 4,910 10,352 15,262 Parent Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 184 - 184 - - - - 10,323 10,323 184 10,323 10,508 136 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 2021. Assets Investment securities measured at FVTPL - Investment in shares – Listed - Investment in shares – Unlisted Total assets Level 1 Level 2 Level 3 Total PGK ‘000 PGK ‘000 PGK ‘000 PGK ‘000 Consolidated 5,036 - 5,036 - - - - 6,616 6,616 Level 1 Level 2 Level 3 5,036 6,616 11,652 Parent Total Assets PGK ‘000 PGK ‘000 PGK ‘000 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 Reconciliation of level 3 fair value measurements of financial assets and financial liabilities The group holds investment in unlisted securities amounting to K10,351,782 (31 December 2021: K6,616,782) in level 3 category. During the year, there were additions or disposals in these securities. The increase is entirely attributable to gain arising on revaluation of these investments. The parent holds investment in unlisted securities amounting to K10,323,495 (31 December 2021: K6,588,495) in level 3 category. During the year, there were additions or disposals in these securities. The increase is entirely attributable to gain arising on revaluation of these investments. Financial instruments not measured at fair value For the financial instruments not measured at fair value as at 31 December 2022 and 2021, 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 Audit and audit related Other services Audit and audit related Other services s t n e m e t a t S l i a i c n a n F e h t o t s e t o N – t r o p e R ’ s r o t c e r i D 137 2022 PGK ‘000 1,919 - 1,919 2022 PGK ‘000 1,707 - 1,707 Consolidated 2021 PGK ‘000 1,590 - 1,590 Parent 2021 PGK ‘000 1,452 - 1,452 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 K92.8 million. 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. For the purpose of impairment test, goodwill is allocated to the Group’s banking business as an independent cash generating unit (CGU). The banking CGU including goodwill was tested for impairment as at 31 December 2022 by comparing the CGU’s carrying amount with its recoverable amount and no impairment loss was recognised. The recoverable amount is determined based on a value-in-use calculation which uses post-tax cash flow projections based on financial budgets approved by the directors discounted by a cost of equity of 16% applicable to banking business. Given a banking business is generally valued on equity basis, the use of post-tax cash flows and discount rate is considered more appropriate. The projected cash flows cover a period of 5 years beyond which they are extrapolated using an estimated growth rate of 3%. The key approved budgets the cashflow models are derived from assume an average growth rate in net profit after tax (NPAT) over the forecast period of 6.3%. Sensitivity analysis Under above assumptions, the estimated recoverable amount of the CGU exceeds its carrying amount by K128 million. As disclosed in note 10, during the year the corporate income tax has been increased from 30% to 45% applicable to banking institutions and effective 1 January 2023. The Group has assumed the new tax rate in the forecast cash flows which has resulted in significant impact on the forecasts. Had the tax rate been 30%, the recoverable amount would have exceeded the carrying amount by K386m. The Group has conducted an analysis of sensitivity of the impairment test to changes in the key assumptions used to determine the recoverable amount assuming a corporate income tax rate of 45%. The directors believe that the following represent reasonably possible changes in the key assumptions on which the recoverable amount of the banking CGU is based would result in the carrying amount to exceed its recoverable amount: • If all other assumptions remain the same, should the discount rate be increased to 19%, the carrying value will exceed the recoverable amount by K12 million. • If all other assumptions remain the same, should the average NPAT growth rate be reduced to 3.3%, the carrying value will exceed the recoverable amount by K13 million. 39. 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 16.1 toea (AUD 6.5 cents) per share (K46.2m). 138 Plan. Prosper. 09 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 31 March 2023. (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 305,562 3,416,523 6,777,085 78,249,357 198,187,373 286,935,900 0.11 1.19 2.36 27.27 69.07 100 510 1,169 847 2,359 316 5,202 (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 - - - 269,162 4,876,101 5,145,263 - - - 5.23 94.77 100.00 - - - 4 10 14 % 9.81 22.48 16.29 45.36 6.08 100 % - - - 28.57 71.43 100.00 (c) Number of holders for each class of equity securities on issue Class of equity security Securities No. of holders Quoted securities (fully paid ordinary shares) Unquoted securities (performance rights) 286,935,900 5,145,263 878 14 (d) Unmarketable Parcel of Shares The number of shareholders holding less than a marketable parcel of ordinary shares is 281, holding 95,290 securities. (e) Substantial Shareholders Name Number of shares % of total shares issued HSBC Custody Nominees (Australia) Limited 49,858,927 17.38 (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). 140 (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. (h) 20 largest holders of quoted securities (fully paid ordinary shares) Rank Name Number of shares % of total shares issued 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 49,858,927 17.38 Comrade Trustee Services Limited (DFRBF A/C) Mineral Resources CMCA Holdings Limited National Nominees Limited Citicorp Nominees Pty Limited BNP Paribas Nominees Pty Ltd (DRP) BNP Paribas Nominees Pty Ltd (IB AU NOMS RETAILCLIENT DRP) Kykuit Pty Ltd Airwolf Limited Sky Finance Limited Perpetual Shipping Limited Gas Resources PNG LNG Plant Limited Garmaral Pty Ltd Mr Ivan Lu Mr Robert Rockefeller Kina Asset Management No 1 Limited J P Morgan Nominees Australia Pty Limited Columbus Asset Management Pty Ltd (YATES INVESTMENT A/C) GEAT Incorporated (GEAT-PRESERVATION FUND A/C) Capital Nominees Limited Total Top 20 Balance of Register Total fully paid ordinary shares on issue 7,951,328 5,312,834 5,295,526 4,611,845 4,492,145 3,996,884 3,650,006 2,885,390 2,656,642 2,500,000 2,139,037 2,032,615 2,025,172 2,025,000 2,000,000 1,818,221 1,800,000 1,570,500 1,383,872 2.77 1.85 1.85 1.61 1.57 1.39 1.27 1.01 0.93 0.87 0.75 0.71 0.71 0.71 0.70 0.63 0.63 0.55 0.48 110,005,944 176,929,956 286,935,900 38.34 61.66 100.00 (i) On-market buy-back There is no current on-market buy-back. (j) Securities purchased on-market during the reporting period To satisfy the entitlements of holders of performance rights under the Kina Performance Rights Plan 621,442 $0.86 Number of shares purchased Average purchase price n o i t a m r o f n I l r e d o h e r a h S 141 10 Corporate Directory. Alotau Branch Chascorp Haus, Section 10, Allotment 9, Office 6, Ground Floor, Alotau PO Box 723, Alotau Milne Bay Province Directors Isikeli Taureka (Chairman) Greg Pawson (CEO) Karen Smith-Pomeroy Dr Jane Thomason Paul Hutchinson Andrew Carriline Dr Ila Temu Company Secretary Johnson Kalo 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 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 Papua New Guinea 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 142 A digital version of this report can be accessed via investors.kinabank.com.pg/investors 

Continue reading text version or see original annual report in PDF format above