Financial Crime World

PNG Banking Sector Stands Strong Amid Global Uncertainty

Port Moresby, Papua New Guinea - The country’s banking sector has emerged from the global financial crisis with strong indicators of stability and resilience, according to a recent report.

Banking Sector Overview

At the end of 2010, the banking sector assets comprised about 69% of the total, with:

  • Four commercial banks
  • Seven authorized superannuation funds
  • Five life insurance companies
  • Several non-bank financial institutions licensed and regulated by the Bank of Papua New Guinea (BPNG)

Key Performance Indicators

The report highlights strong indicators of banking sector performance, including:

  • High asset growth: A key indicator of a bank’s ability to lend and grow.
  • Strong capital levels: The sector’s capital adequacy ratio (CAR) stood at around 28% as at the end of 2010, more than twice the level required by BPNG.
  • Profitability: Banking sector profitability has been decreasing but remains high compared to regional peers.
  • Significant liquidity: The sector has a high level of liquid assets, allowing it to withstand potential shocks.

Concerns and Risks

However, deposit concentration remains a concern due to the small economy. Additionally:

  • Loan growth: Has been high in recent years, driven by excess liquidity in the system.
  • Non-performing loans (NPLs): Remain low compared to regional peers, but provisioning is high.

Stress Tests and Risks

The report conducted stress tests on the banking system, assuming uniform increases in NPLs and shocks to asset quality in key sectoral concentrations. The results indicate that:

  • The CAR would need to fall below the recommended 12% level only if there were extreme situations such as a doubling or tripling of NPLs.
  • Interest rate and exchange rate risks: Are limited, with net interest income recalculated for different maturity buckets showing negligible impact on capital levels. Foreign exchange risks were found to be immaterial.

Conclusion

Overall, the report concludes that the banking sector faces little impact from credit risk shocks in the near term and is well-equipped to withstand potential shocks to asset quality in key sectoral concentrations.