An assessment of Kina Bank’s proposed acquisition of Westpac business in PNG and Fiji

By Jotam Sinopane, Vantage Capital Ltd

On 7 December, Kina Bank announced the acquisition of Westpac Bank PNG and Fiji (subsidiaries of Westpac Banking Group) at a price of AU$420m or PGK1.0bn. This transaction will be the biggest acquisition in PNG’s corporate history.

Westpac is the oldest bank, having established in 1910 in Port Moresby and Fiji. One of Westpac’s strategic priorities is to ‘return to its core businesses of banking in Australia and New Zealand’ hence the divestment of its non-core assets and exit in some international locations. 

The acquisition is expected to be completed by 30 September 2021, subject to regulatory approvals. This article briefly covers recent mergers and acquisition (M&A) activity in PNG and post-acquisition of Westpac. 

The financial industry in PNG and Fiji

The financial industry in PNG continued to grow significantly after the reforms of 2000, with assets valued at PGK49bn (AU$19bn) at the end of 2019. Commercial Banks comprising of BSP, Kina Bank, Westpac PNG and Australia & New Zealand (ANZ) PNG make up 61% of the financial sector in PNG in 2019. We pay tribute to late Sir Mekere Morauta for the structural reforms that spurred and supported the growth of the finance industry in PNG.

In Fiji, there are six banks, including BSP, ANZ and Westpac, with smaller players including the Bank of Baroda, HFC Bank and Bred Bank. ANZ Bank commands a market share of around 31% in loans, followed by BSP with 26%. The financial industry in Fiji is valued around FJ$22.8bn (AU$15bn) at the end June 2020.

The financial industry in PNG and Fiji are well-capitalized and highly profitable. Industry Return on Equity (ROE) is around 24.3% and 20.6% in PNG and Fiji respectively. There is still potential as indicated by an increasing population who remain unbanked – 75% in PNG and 23% in Fiji. Also the private sector credit to GDP ratio is around 92.1% in Fiji and 9.25% in PNG. 

Westpac Bank PNG[1]

Beside Westpac's strategic plan to exit the Pacific market, Westpac PNG’s decreasing profitability since the Bank of PNG FX Band has quicken their pace. FX income contributes +54% of total income for Westpac PNG and ANZ Bank PNG. Westpac’s foreign exchange income decreased to PGK79m in 2015, compared to PGK179m in 2014 – a decline in half. Thereafter, performance continued to deteriorate with NPAT down by 82% (CAGR) to PGK64m in 2020. ROE and return on assets (ROA) declined to 6.7% and 1.7% respectively.

Kina expects the deal to provide strong synergies, growth opportunities, and customer benefits leveraging on its digital capabilities. However, we anticipate some challenges in maintaining customer relationship and streamlining some performance metrics in Fiji.

M&A activity in PNG Finance Industry

M&A activity in the financial sector in PNG and the Pacific has increased in the last 5-years. In January 2015, BSP announced the acquisition of Westpac Pacific branches for PGK275m (AU$125m). In the same year, Kina Bank acquired Maybank PNG at consideration of PGK349m (AU$159m). Kina’s dual listing and strategic partnership with Asian Development Bank (ADB) has given the Bank unlimited access to capital, which supported its inorganic growth.

In 2018, Kina acquired ANZ’s retail, SME and commercial business for PGK24m, at a PBV of 1.0x. Kina also acquired 15% stake in Microfinance Limited (MiBank) at a consideration of PGK2.5m in August 2019. The price to earnings (PE) and price to book value (PBV) multiples from these transactions are tabled below.

Purchase price

According to Kina Bank’s announcement, total consideration will be around AU$420m (PGK1.0bn), including;

• Kina has paid a deposit of AU$42m or PGK110m upon execution,
• AU$60m payable in three AU$20m six monthly instalments after completion,
• AU$45m of future earn-outs to be paid annually over the 24 months following completion, subject to business performance hurdles based on actual performance of the Fiji branch.

Funding will be sourced from existing cash reserves, cash from operations and issuance of Tier 2 subordinated debt facility to strategic investors. Kina will go to the market to raise AU$18.9m at eight Australian cents (per share) as part of the latter strategy.

Kina Bank’s acquisition is at a PBV of 0.79x, compared to an average of 1.21x in the market (comparable transactions). The implied PE is estimated at 9.25x, compared to market evidence of 7.0x. The PBV was lower than comparable transaction evidence, however higher than the average PE in the PNG market.

Post-acquisition

Competition is highly concentrated in PNG and Fiji- BSP has the largest market share in loans in PNG and Fiji. Post-acquisition will see Kina consolidate its position as the second largest bank in PNG, while making its entrance in the Fiji market. We expect Kina Bank’s market share in loan and deposit to be around 22% and 19% respectively. In PNG, Kina’s market share in loans will increase to 21%, while deposits will increase to around 24%. BSP is still a dominant player in PNG with market share of +64% as at September 2020. The combination puts Kina at a size where it can continue to be a viable competitor to BSP in the long term.

In summary, the acquisition will bolster Kina’s presence in PNG and make entrance into Fiji. Kina will no doubt become the ‘regional digital bank of the future.’ The acquisition is in line with both Kina and Westpac’s strategic direction. We expect ANZ Bank to exit the Pacific market in the near future, as such it is important for other local banks to rise-up. Perhaps, Credit Corporation (CCP) and National Development Bank (NDB) could strategize to expand. Entry to PNG and Fiji financial sector is considered low, with the only barrier being licensing and regulatory requirements, hence there is opportunity for new international banks to enter. 

[1] The author is not privy to the audited financial reports of Westpac PNG and Fiji, however depend on the Key Disclosure Statements [KDS] provided in the newspapers for this analysis.