ANNUAL REPORT BANK OF SOUTH PACIFIC LIMITED

Transcription

1 2007 ANNUAL REPORT BANK OF SOUTH PACIFIC LIMITED

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3 CONTENTS Chairman's Report 3 A Brief History of Bank South Pacific 6 Board of Directors 8 Managing Director's Report Strategic Business Unit Review 14 Bank South Pacific Core Values 20 Corporate Governance 21 Historical Summary Overseas Branches and Subsidiaries 31 Directors' Report and Financial Statements 33 Directors' Report 34 Statement by the Directors 35 Income Statement 36 Balance Sheet 37 Statement of Changes in Shareholders' Equity 38 Cash Flow Statement 39 Accounting Policies 40 Financial Risk Management 46 Notes to the Financial Statements 54 Independent Audit Report 72 Shareholder Information 74 Branches & Representative Office 78 Branch Network 80 THE VISION The vision of BSP is simple: A bank with a powerful customer focus and an understanding of shareholder value

4 The strategy of BSP is also a simple one: We segment our approach to the market based on customer groups who deliver value The structure at BSP is flat, reflects customer focus and has limited levels: Executives with responsibility for customers and value report directly to the Managing Director The people at BSP are those best equipped to manage customers and deliver value: A customer and value based bank has customer and value based people

5 CHAIRMAN'S REPORT Market share of Papua New Guinea's total commercial bank assets was 54%; The BSP kina loans and receivables portfolio continued a responsible growth pattern maintaining a market share of 52% at year-end The loans and receivables portfolio grew from K1.26 billion as at year end 2006 to K1.64 billion end 2007; Shareholder and public confidence underpinned by the strong performance of BSP is clearly evident when reviewing the company share trading activity on the Port Moresby Stock Exchange: Share trades on Port Moresby Stock Exchange closed at K7.26 at year end, a 81% increase on the closing trades of K4.01 on 31 December 2006; BSP market capitalization increased from K1.76 billion to K3.28 billion during I am delighted to report the strong results achieved by Bank South Pacific Limited (BSP) during recent years featured again during The high level key performance indicators hereunder are evidence of the continuing growth and the prudent administration of the Bank: After tax net profit of K million was achieved for 2007, a significant 71.18% increase on the net profit of K million achieved for 2006; A further significant improvement in the recognized banking industry efficiency benchmark - the expense to income ratio - that has progressively reduced during recent years; % % % % This level of efficiency ratio compares most favourably with better performing peer banking institutions worldwide; Total operating and administrative costs continue to be well controlled, these increasing by 5.77% from K million during 2006 to K million during 2007; A dividend payment of K71.22 million was distributed to shareholders during July 2007, this equating to 16 toea per share and to 64% of the 2006 net profit. Strong growth in the total Papua New Guinea banking system again featured during BSP maintained its impressive growth profile: Total BSP balance sheet assets reached K5.8 billion, an increase of K1.5 billion or 35% during 2007; The sterling key performance indicator results were achieved against a backdrop of a strong economy stimulated by buoyant commodity prices for the majority of Papua New Guinea's exports - including oil, gold, copper, palm oil, coffee and cocoa - as well as strong fiscal management of the National Government budget and prudent monetary policy settings by the Central Bank, the Bank of Papua New Guinea. Political stability also featured with the Somare led National Alliance Government creating history as the first Papua New Guinea national government to serve a full term of five years. The Somare led National Alliance national government was re-elected during July 2007, indicating ongoing political stability during the coming years. The Papua New Guinea economy continues to be strong and prospects for 2008 are positive. Although world demand may experience some contraction in the medium term, any impact on the Papua New Guinea economy is expected to be moderate. The high commodity prices for Papua New Guinea export products gives an adequate buffer for any reduction in world market prices. Indeed anticipated increases in production levels of several export commodities may well compensate for any softening of prices or demand. At a macro-economic level inflation continues to be low, interest rates continue to be low, the Papua New Guinea kina currency is stable and is supported by a record level of foreign exchange reserves that reached K5,919 million (US$2,109 million) at year end. This level of foreign exchange reserves is adequate to cover 17.6 months of non-mineral imports. Buoyant domestic liquidity coupled with strong fiscal management of the National Government budget augers well for During 2007 total real GDP is estimated to grow by 6.2% compared to a growth of 2.6% in In 2008 real GDP is projected to grow by 6.6%. BANK SOUTH PACIFIC I ANNUAL REPORT

6 CHAIRMAN'S REPORT Opening of new Wabag Branch premises During 2007 the Board approved a record capital expenditure budget - some K40 million - to continue the upgrade of systems, premises and customer service capacity. This is in order to ensure BSP maintains its presence as the nation s largest and pre-eminent banking institution. A significant increase in electronic banking capacity continues with additional ATM and EFTPOS devices being installed. Two new state of the art i570 IBM AS400 computers are now installed at the recently upgraded BSP Data Centre located in the former Monidata premises. The data centre now has the capacity to process the increased demand for real time data transmission, not only in Papua New Guinea, but also the electronic data requirements of the BSP international branches at Niue, Fiji and the Solomon Islands. An important acquisition was completed during April Following a long period of negotiation the acquisition of the total shareholding of the National Bank of Solomon Islands (NBSI) was settled. The NBSI is the largest retail bank in the Solomon Islands. The Solomon Islands undertaking has been rebadged as BSP. A significant transformation program is underway. In particular the BSP electronic banking products are being introduced. The Board is confident that the Solomon Islands, together with the Niue and Fiji branches, will contribute significantly to the overall performance of BSP in the future. A new branch at Nadi, the tourist hub of Fiji, was opened early This is a clear demonstration to the people of Fiji that BSP is now a serious participant in the Fiji banking scene. At home in Papua New Guinea new branch premises were completed at Wabag. The construction of new branch premises at Moro, the oil and gas hub of the Southern Highlands, is well advanced and expected to be completed early The progressive renovation of several additional branches was completed during This program will continue. International ratings agency Standard and Poors completed their regular annual review of the BSP 4 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

7 CHAIRMAN'S REPORT Kina Billion Total Assets Net Profit After Tax undertaking during August 2007 and upgraded the BSP rating to B+ with a positive outlook. This is in accordance with Papua New Guinea's sovereign rating that was similarly reviewed upwards. The sovereign rating is the highest rating level available to a Papua New Guinea incorporated entity. The BSP balance sheet structure continues with strong capital adequacy maintained at a level to qualify for the well capitalized status according to international banking definition. This capital policy will be maintained by the Board. In conclusion I wish to acknowledge the excellent work of the executive management team and all the bank staff during The record results are evidence of the total commitment by a dedicated executive staff ably supported by a large team of rapidly developing professional banking staff. To all shareholders and my fellow Board members - I acknowledge with thanks your ongoing support. I look forward to reporting another sterling result for 2008 in due course Kina Million N N BEANGKE Chairman BANK SOUTH PACIFIC I ANNUAL REPORT

8 A BRIEF HISTORY OF BANK SOUTH PACIFIC The Bank commenced operations on 1 May 1957 in Port Moresby as a branch of the National Bank of Australasia Limited. Operations were later expanded to several centres and on 17 May 1974 the Company was incorporated as Bank of South Pacific Limited, a wholly owned subsidiary of the Australian parent, with a paid-up capital of K2.00 million. In April 1980 and August 1981, a total of 300,000 ordinary fully paid shares of K1.00 were issued to the public in Papua New Guinea, thus increasing the paid-up capital to 2,300,000 fully paid K1.00 shares. On 24 August 1993, the nationally owned company, National Investment Holdings Limited (NIHL) acquired the 87% shareholding held by National Australia Bank. On 25 October 1993, 100% ownership of the Bank was achieved by NIHL, which later changed its name to BSP Holdings Limited. In December 1995, BSP Holdings Limited completed a successful capital raising of K2.70 million by way of a Convertible Note Issue. The holding company took up an additional 2,700,000 fully paid shares of K1.00 in Bank of South Pacific Limited, increasing the issued capital to K5,000,000. In October 1998, BSP Holdings Limited raised K12.90 million through a Rights Issue of shares at K3.00. During December 1998 BSP Holdings Limited went into voluntary liquidation and its shareholders now hold shares in Bank of South Pacific Limited. In 2001 the Privatisation Commission, on behalf of the Government of Papua New Guinea, offered for sale a 51% interest in the Papua New Guinea Banking Corporation (PNGBC) through a competitive trade sale process. The Company participated in this process by lodging a bid whereby it proposed to effect the acquisition of PNGBC by way of an amalgamation under the Companies Act rather than through a sale and purchase. Following an appraisal of all bids lodged in relation to the acquisition of PNGBC, the Commission agreed to accept the Company's bid. The Company, the Commission and the PNGBC executed the amalgamation deed in December 2001 which provided for the implementation of the amalgamation. The amalgamation was completed on 9 April BANK SOUTH PACIFIC I ANNUAL REPORT 2007

9 A BRIEF HISTORY OF BANK SOUTH PACIFIC The Company's shares were listed on the Port Moresby Stock Exchange on 27 August In 2004, the Company returned a profit after tax of K86.65 million up from the K39.98 million result in As at 31 December 2004, shareholders' equity reached K million. During 2004, the Bank acquired the Niue branch operations of Westpac Banking Corporation. In November 2005, Standard & Poors (S&P) issued an inaugural credit rating for Bank of South Pacific Limited. The rating was B+ Stable, consistent with the S&P sovereign rating for Papua New Guinea saw continued strong financial performance and balance sheet growth. Profit after tax increased to K99.22 million. Total assets increased to K2.95 billion and shareholders equity grew to K million. Market capitalisation reached K1.40 billion. During this year, Capital Stockbrokers Limited was acquired and renamed BSP Capital Limited. Strong balance sheet growth with total assets reaching K4.73 billion and a 12.50% increase in after tax profit to K million continued the strong growth and financial performance during On 18 December 2006 a BSP branch was established in Suva, Fiji following the acquisition of the Habib Bank Ltd interests in Fiji. The acquisition of the National Bank of Solomon Islands Ltd was completed during April Now rebadged as a branch of BSP, it has the largest branch network in the Solomon Islands. During the year, a representative office was established in Sydney, Australia. Outstanding performance continued during Total assets increased to K5.80 billion, after tax profit increased by 71% to K million and market capitalisation to K3.28 billion. Expense to income ratio reduced to 39.40%. BANK SOUTH PACIFIC I ANNUAL REPORT

10 BOARD OF DIRECTORS Board of Directors. Standing, L-R: Sir Nagora Bogan, Gerea Aopi, John Jeffery, Garth McIlwain, John Kapi Natto. Seated, L-R: Vai Reva, Noreo Beangke, Tom Fox, Dr Ila Temu. Absent: Lyle Procter Noreo Beangke, BA (Ec) Chairman Director since August Appointed Chairman May Noreo Beangke is the Managing Director of Credit Corporation (PNG) Limited, a position he has held since He holds a Bachelor of Economics degree from the University of Papua New Guinea. Mr Beangke is also Chairman of PNG Coffee Exports Ltd, and a Director of New Guinea Islands Produce Ltd and Credit Corporation (Fiji) Limited. Garth McIlwain, CBE, FFin, FAICD Managing Director Director since April Garth McIlwain was appointed as Managing Director on 1 November 2003 and has over forty years banking and finance experience in Australia, Papua New Guinea and Fiji. He commenced his career with the Commonwealth Bank of Australia and subsequently held senior positions in the Reserve Bank of Australia and the Bank of Papua New Guinea. He was appointed Executive Chairman of the State-owned Papua New Guinea Banking Corporation (PNGBC) in September 2000 by the Governor of the Bank of Papua New Guinea, and was responsible for returning PNGBC to profitability through sound and prudent management. Mr McIlwain's current directorships include Chairman of Anderson's Foodland Group, a Director of Tower Insurance Ltd, New Guinea Islands Produce Limited and Credit Corporation (Fiji) Limited. Tom Fox, OBE, BEc - Non-executive Director Director since June Thomas Fox is currently an Executive Director of Kramer Group Limited. He holds a Bachelor of Economics degree from the University of Papua New Guinea. He commenced his career with the Reserve Bank of Australia, and gained wide experience in senior management roles within semi-government institutions, and private sector companies, which included serving as the Managing Director of the Investment Corporation of Papua New Guinea for 8 years. His other current directorships include, PNG Sustainable Infrastructure Ltd, Capital Life Insurance Company Ltd. Mr Fox is also a a trustee for the Institute of National Affairs, and a foundation member and fellow of the PNG Institute of Directors. 8 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

11 BOARD OF DIRECTORS John Jeffery - Non-executive Director Director since June John Jeffery had a long and successful career in Australia before moving to Papua New Guinea in 1986 to take up a position at Madang based James Barnes PNG Limited. Mr Jeffery's directorships include Chairman NASFUND and The Tower Ltd. He also continues to serve as President of the Employers' Federation of PNG and is a founding member of the PNG Institute of Directors Inc. Vai Reva, CBE, BEc - Non-executive Director Director since April Vai Reva's career highlights include manager and/or director roles with Investment Corporation of Papua New Guinea, Agriculture Bank of Papua New Guinea, PNG Microfinance Ltd, the National Planning Office and British American Tobacco (PNG) Ltd. Mr Reva has also served as representative for Papua New Guinea at the Asian Development Bank in Manila, Philippines. Gerea Aopi, CBE, MBA - Non-executive Director Director since April Gerea Aopi has achieved several tertiary degrees in Papua New Guinea, and a Masters of Business Administration from the University of Queensland. His career began with the PNG Development Bank and progressed through a variety of positions to Managing Director. He currently holds the position of General Manager, PNG with Oil Search Limited. Mr Aopi is also currently a director of Steamships Trading Company Limited, POMSox Ltd, Niu Marsh Ltd, Kumul Hotels and Endeavour Properties Ltd and is the Chairman of Telikom (PNG) Ltd. Dr Ila Temu, PhD, MEc - Non-executive Director Director since Dr Temu achieved a distinguished academic career with the University of Papua New Guinea, the National Research Institute, the Australian National University and the University of California, Davis USA where he was awarded his Ph D. Dr Temu entered the private sector during 1996 when he was appointed Managing Director, Mineral Resources Development Company and during 2000 he accepted the appointment as General Manager, Government Relations, Placer Niugini Ltd, and subsequently in 2006, became Country Manager, PNG, Barrick Limited. He is a member of the Management Group for the PNG Incentive Fund and an executive member of the Employers' Federation of Papua New Guinea. Sir Nagora Bogan, KBE, LLb - Non-executive Director Appointed a director in Sir Nagora Bogan graduated with a Bachelor of Law from the University of Papua New Guinea in In 1992 Sir Nagora was appointed Commissioner General of the PNG Internal Revenue Commission. In 1996, he was appointed as PNG's Ambassador to the United States with accreditation as Ambassador to Mexico and High Commissioner to Canada. In 2002 Sir Nagora became a private business entrepreneur. He is Chairman and CEO of In Touch Media Ltd, a multimedia/record label company, Chairman of the Board of POSF Limited and Director on several private company boards. Sir Nagora received his knighthood during 1997 in recognition of his distinguished public service. Lyle Procter, MEc, FFin - Non-executive Director Director since July Lyle Procter has been a career central banker, having spent 36 years with the Reserve Bank of Australia. He also spent several years with the Australian Department of Foreign Affairs. Since retiring from the Reserve Bank Mr Procter has worked as a consultant to the International Monetary Fund, Washington, and the Asian Development Bank, Manila. He has also worked privately as a consultant to the Australian banking industry, and in several South-East Asian countries. Other current directorships include Sun Hung Kai and Co. Ltd and Quality HealthCare Asia Ltd. John Kapi Natto, BA, B Ed Hons - Non-executive Director Appointed a Director in 2006 John Kapi Natto graduated from Hobe Sound Bible College, Florida USA in 1989 with a Bachelors Degree in Education and also graduated from University of Papua New Guinea with a Bachelor of Education (Honours) Degree in He is currently the Managing Director of Kutubu Security Services Ltd which provides total security services to the Oil Search operations in Kutubu, SHP. Mr Natto is the Chairman of Namo'aporo Landowners Association Inc and Petroleum Resources Kutubu Ltd. BANK SOUTH PACIFIC I ANNUAL REPORT

12 MANAGING DIRECTOR'S REPORT During 2007 real GDP growth estimated at 6.2% was recorded. GDP growth of 6.6% is forecast for Average inflation of around 4% during 2007 is expected to be around 3% to 5% during Foreign exchange reserves of K5,919 million (US$2,109 million) were held as at end 2007, a significant increase from the level of K4,325 million (USD1,450 million) held at year end This level of foreign exchange reserves is sufficient for 11.3 months of total and 17.6 months of non-mineral import covers. During 2007 the neutral monetary policy stance by the central bank, the Bank of Papua New Guinea, prevailed, as did the Kina Facility rate of 6.00%. The central bank has indicated that the neutral stance of monetary policy will continue into The Papua New Guinea currency, the Kina, traded in a stable range, supported by the high level of foreign exchange reserves: The Chairman's Report highlights the outstanding financial performance by Bank of South Pacific Limited (BSP) during The significant 35% growth in balance sheet total assets to K5.8 billion and the 71% growth in after tax profit to K million confirm that the bank's executive has responded to the significant growth of BSP during recent years. The stringent administration of operational expenditure and the increase in revenue that corresponds to the overall growth in total assets has produced an extraordinary efficiency outcome. During 2007 the internationally recognized bank efficiency benchmark the expense to income ratio reduced from 52% to 39%. This is a most impressive achievement. It places BSP amongst the most efficient commercial banks worldwide. The Papua New Guinea commercial banking industry again achieved strong growth during 2007, total assets increasing from K8.06 billion to K10.67 billion. BSP total balance sheet assets increased accordingly - from K4.33 billion to K5.8 billion. This level of BSP assets represents 54% of the total Papua New Guinea banking system assets, again confirming BSP's pre-eminent position in the Papua New Guinea banking sector. Prospects for 2008 are positive. The 2008 BSP budget forecast is for continued growth in total assets and annual profitability. US dollar range to during 2007 compared to to during Australian dollar range to during 2007 compared to to during Strong domestic liquidity in the banking system continued during The Bank of Papua New Guinea issues 28 day and 63 day Central Bank Bills as a monetary policy instrument to assist domestic liquidity management. As at year end Central Bank Bills totaling K million were held by BSP. These Bills attracted a weighted interest rate return of 4.90% per annum. The National Capital Adequacy Ratio 20.6% 31.9% 29.4% 25.9% 29.0% THE ECONOMY 2007 continued recent years of positive economic activity, strong fiscal management and political stability. All macro-economic indicators have been positively maintained. The Papua New Guinea economy has been greatly assisted by buoyant world market commodity prices for the oil, mineral and tree crop export products. Indications are for a continuation of these favourable economic indicators during BANK SOUTH PACIFIC I ANNUAL REPORT 2007

13 MANAGING DIRECTOR'S REPORT Focus on customer service Government also continued to issue longer term Inscribed Stock - often to lengthen the maturity profile of the Treasury Bill funding portfolio. BSP subscribes to all these instruments in order to employ surplus liquidity. As at year end K million was invested in Treasury Bills with a weighted interest rate return of 5.41% per annum. The BSP Inscribed Stock portfolio totaled K1.35 billion with a weighted interest rate return of 7.92% per annum for maturities less than three years and 9.67% per annum for the longer term holdings. Commercial bank indicator lending rates operated in the range of 8.95% to 9.45% at year end. BSP housing loans with repayment terms of up to 25 years and interest rates of 7.20% per annum continued to be well supported, as were personal loans. The personal loan portfolio experienced significant growth during the year. This trend is expected to continue. Total all bank kina loans outstanding increased to K3.13 billion as at year end. The BSP total kina loan and receivables portfolio increased by K million to K1.64 billion and confirmed a 52% market share, slightly below the level of 54% at end The strong fiscal management of the Papua New Guinea national budget was maintained during The nominal projected fiscal deficit of K35.00 million for 2007 did not occur as significantly higher than forecast mineral taxation receipts resulted in a record surplus. A supplementary budget presented to the national parliament in October appropriated K1.6 billion in surplus receipts. The 2008 national budget brought down on 20 November 2007 projects a total revenue of K7,201 million with a nominal K202 million surplus. The budget places increased focus on the Medium Term Development Strategy (MTDS) with significant increases in funding for the priority areas of education, health and the rehabilitation of transport infrastructure. The 2008 national budget has generally been well received. As highlighted the nation's economy has been positively impacted by strong export receipts during recent years. BANK SOUTH PACIFIC I ANNUAL REPORT

14 MANAGING DIRECTOR'S REPORT Developing a strong sales culture This trend is expected to continue into the medium term: Coffee: Coffee prices remained strong during the year and coffee export receipts totaled K million for the export of 54,600 tonnes. This compares with K million for the export of 52,300 tonnes during 2006 Cocoa: Despite the challenges of the pod borer infestation located in an area of the Gazelle Peninsular, New Britain, cocoa bean exports increased slightly to 46,900 tonnes during This compares with 44,000 tonnes exported during Export returns of K million during 2006 and K million during 2007 confirm reasonable price stability during this period. Palm Oil: Significant increase in world prices resulted in export receipts for palm oil totaling K million for 368,300 tonnes during Comparative figures for 2006 are 362,300 tonnes returning K million. Mineral and Oil Sectors: The mineral and oil sectors again produced strong levels of export volumes and earnings. Record prices for gold, copper and crude oil continue to feature. Export receipts from this sector during 2007 totaled K11.41 billion. This compares with export receipts of K10.73 billion during The recently completed Sinivit and Simberi gold mines commenced full production and construction of the Hidden Valley gold mine and the Ramu Nickel mine will continue during The 2007 production levels achieved by existing larger mines - Ok Tedi, Lihir and Porgera are expected to be achieved again during A slight increase in crude oil due to higher production from the South East Mananda project also features for THE BANK The Strategic Business Unit Review in this report gives more detailed coverage regarding each of BSP's seven strategic business units. The strong growth over all areas of the Bank during recent years results in positive challenges for BSP. People quality has been previously highlighted. A sense of maturity complemented by increasing expertise and experience together with a commitment to each of the Core Values, published elsewhere in this Report, as necessary personal attributes is now developing throughout all levels of the staff. Training programs - both internal and external - receive priority. Staff communication and development and a comprehensive review of salary, grade levels and associated benefits including the staff housing advance scheme are having positive impacts. These all augur well for the long term. The Pacific expansion strategy is now a reality - the acquisitions in Niue, Fiji and the Solomon Islands create 12 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

15 MANAGING DIRECTOR'S REPORT Government and Public Authorities Transport and Communication Loan Portfolio by Industry % 1% 4% 5% Agriculture 11% 9% Construction 8% 7% new branches in these nations. The most daunting challenges continue to be public utility infrastructure. BSP liases continually with the various public corporations so as to minimize the effect of these challenges. Recent developments give some comfort that improvements will eventuate in the medium term. The Board of Directors of BSP meets on eight occasions annually and continues to be visionary and supportive. The Executive Committee meets weekly, is professional and uniquely qualified to take BSP forward with confidence. The outstanding results across all key performance indicators during 2007 are evidence of this. Manufacturing 10% 8% Private Households Commerce, Finance and Other Business 19% 24% 47% 46% The new year 2008 has commenced strongly and I am confident that shareholder satisfaction will be maintained and the vision adopted for BSP a bank with a powerful customer focus and an understanding of shareholder value will again be fulfilled when the 2008 results are duly reported. GARTH McILWAIN Managing Director BANK SOUTH PACIFIC I ANNUAL REPORT

16 2007 STRATEGIC BUSINESS UNIT REVIEW The daily execution of the Bank's business operations is the responsibility of the seven strategic business units (SBUs), Retail Bank, Corporate and International, Paramount Banking, Credit and Risk, Human Resources, Operations and Finance & Planning. Highlights of each SBU performance in 2007 include: RETAIL BANK Kevin McCarthy PNA,SAFin, ACIS General Manager Retail Bank Retail Bank looks after the personal customers of Bank South Pacific across its network of 35 branches in Papua New Guinea, 120 ATM's and over 2000 EFTPOS machines. It looks after their loan requirements, deposit requirements and transactional banking needs. In addition to this, Retail Bank also manages the Bank's overseas operation in the Solomon Islands, Fiji and Niue. A brief commentary on these operations is presented separately on pages Highlights 2007 produced a solid financial result with revenues up by over 23% and costs well contained in line with our growing business. Our highlight in 2007 was the results obtained by our personal lending sales team. Personal loans grew from K47m to K116m - an increase of 144%. This was largely attributable to the changes we made in our processes in late 2006 where we decentralised the lending process to our branches and greatly improved our turnaround time. Over 80% of our loans are now completed with 48 hours. Together with a motivated and more mature sales force, and wonderful cooperation from our branch managers, these great results were achieved also saw great changes in our branch customer service activities. The launch of our new Smart Banking personal transaction and savings products in August gave our clients far greater choice in regard to what delivery channel they wished to use. It also allowed our clients to reduce their monthly banking fees by taking advantage of our convenient electronic banking alternatives of EFTPOS and ATM's. This launch involved significant staff training and customer education and has been well accepted by clients. This launch was supported by comprehensive media advertising in the press and radio and also saw Bank South Pacific back on our TV screens in a series of television commercials aimed at building our brand and highlighting product offerings. In our electronic banking area we added an additional 20 ATM's to our network, rolled out additional EFTPOS terminals and in mid December launched an ATM interchange arrangement with ANZ Bank which allows ANZ clients to use BSP ATM's and vice versa. We were proud to open our new branch building in Wabag in November. This will provide an enhanced banking service to the people of Enga province Challenges 2008 will continue to see major change within the Retail Bank. Our largest change and major investment is the completion of the Aperio implementation. This is a major new technology platform that will provide us the ability to:- Know our customers better via a customer relationship management system Review and streamline our processes and apply them consistently Scanning and imaging of all our documents including cheques and deposits We are focusing on customer service in 2008 and in mid 2007 created a National Manager Customer Service position to provide this focus. This will include the introduction of a staffing for service model to ensure we have the right amount of staff to service our clients and reduce queues in our branches. We will focus on building our personal lending sales business with additional training and process improvement. We expect to see far greater activity in our Home Loan business where a lot of preliminary work on employee housing schemes has been completed. We will continue to upgrade our branch network. We expect to open a new branch in Moro in the Southern Highlands gas fields in April, and we are completing feasibility studies for the further expansion of our branch network in Papua New Guinea. We continue to invest in the maintenance and upgrading of our many other branch buildings. We will increase the size of our electronic banking network in Papua New Guinea with an additional 30 ATM's being installed at the moment and plans for a further 20 machines to be installed in late 2008 / early We are also looking at plans to expand our ATM functionality to allow other payments such as Mobile phone top ups. 14 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

17 2007 STRATEGIC BUSINESS UNIT REVIEW 2008 will continue our major change program to deliver a bank that is customer focused. CORPORATE AND INTERNATIONAL Peter Dixon MBA General Manager Corporate and International The Corporate and International SBU comprises five functional business units being Corporate Lending, Commercial Lending, Business Lending, Treasury and Trade. Lending BSP's combined Corporate, Commercial and Business lending portfolio grew by 21% in 2007 from the previous year, with 2007 another year of strong private sector credit growth in PNG. Significant growth in lending to small and medium enterprise (SME) customers was a notable feature, with the continuation of buoyant economic conditions conducive to an increased appetite for borrowing by local entrepreneurs. An expanding and vibrant SME sector is essential for sustained economic growth in PNG and lending to this sector will remain a strong focus for BSP. In the current low interest rate environment, the appetite for fixed interest rate borrowing by corporate clients continues to be evident. Competition for good commercial business has driven the need for competitive pricing of lending, with lending margins on corporate deals having reduced. The mix of fixed and floating loans continues to be prudently managed. Competition for good quality lending opportunities remained intense in 2007, but despite robust competitive conditions, BSP maintained a minimum market share of 50% of Kina lending throughout the year. One of the major contributing factors to retaining a dominant lending market share is a team of professional and experienced relationship managers who manage their client relationships well and are quick to identify quality credit opportunities. The strength of any organization lies in the quality of its people and Corporate & International continues to build capacity through a range of focused training programs. Two of our senior staff attended the Senior Manager's program at Melbourne Business School in 2007, with a number of other staff undertaking bank sponsored tertiary studies. Throughout the year staff attended various inhouse training programs focused on addressing identified skills gaps. Looking ahead, prospects for 2008 appear bright, with further significant lending growth anticipated given continuation of positive economic conditions. There are a number of major infrastructure and development projects in the pipeline, which hold much promise for the year ahead in terms of fueling lending growth. Treasury The Treasury business unit within the Corporate and International SBU manages the BSP foreign exchange and domestic money market activities. Treasury enjoyed a successful year with strong growth in foreign exchange earnings, with spreads stabilising and increased volumes being dealt in the market on the back of high export commodity prices. Treasury continued to extend its customer base across all sectors as evidenced by an increase in foreign exchange market share to 24%. With expectations of continuing high commodity prices in conjunction with a more vibrant international trade sector, we anticipate continuity of foreign exchange earnings in 2008 notwithstanding that increases may be moderated by further foreign exchange liberalization by the Central Bank. Despite domestic supply restraints with increased levels of surplus market liquidity, interest earnings on liquid assets surpassed budget expectations as a result of a higher depositor base of low cost funds and investment in high yielding long-term government securities. The Bank's treasury area continues to mitigate risk in line with world's best practice. Trade Finance BSP's trade finance area provides both exporters and importers with strong support through a range of bank services and products particularly tailored to trade engagements. The business unit is also responsible for the back office function of Treasury. Trade finance has largely been used by exporters, with many of the bank's import customers operating on open account. The area will be restructured in early 2008 in order to improve operational efficiency. The functional areas of trade finance, treasury support and international payments will be brought under the International Operations business unit under the control of Corporate and International. BANK SOUTH PACIFIC I ANNUAL REPORT

18 2007 STRATEGIC BUSINESS UNIT REVIEW PARAMOUNT BANKING Aho Baliki OBE General Manager Paramount Banking Credit and Risk SBU comprises business units responsible for the credit, legal, audit and risk, securitisation, and loan recovery functions within the bank. Credit and Risk is both a service provider and custodian of credit quality. Strategically, its business is driven by the needs of the customer facing SBU's. Credit department is responsible for all loan approvals within the bank and also has responsibility for monitoring and managing the credit risk in the loan portfolio and compliance with the credit policy of the Bank. Asset Management department is responsible for collection of all delinquent and non-accrual loans within the Bank. In 2007 Paramount Banking improved processes and protocols that consolidated client relationships and continued to provide quality service to BSP's high value client base. Under, General Manager, Aho Baliki, Paramount Banking achieved success in 2007 with good relationship management of the Bank's large deposit customers particularly with the National Government and various aid agencies supporting Papua New Guinea. Paramount Banking Centres are located in Port Moresby, Boroko, and Waigani in the National Capital. Also Lae, Madang and Kokopo. Highlights for the year included: - Growth of 32% in depositors' funds, increasing from K1.90 billion in 2006 to a consolidation of over K2.50 billion during Supporting the National Government in the implementation of their budgetary requirements. Continue to support the Government's Treasury rollout to the districts. Obtained new business relationships and development of the banking arrangements for the Transport Sector Support Program. In 2008, Paramount Banking will continue to be client focused with the aim to be different to its competitors by being the Banker of choice for its high value net worth clients. CREDIT AND RISK Robin Fleming MBA, MMGT, SAFin General Manager Credit and Risk Lending Support attends to all loan document preparation, loan settlement, loan input and loan funding functions across the bank network. Audit and Risk is responsible for all financial audits, operational audits, lending audits, compliance audits, information technology and system audits, investigative audits, business unit reviews and risk management activities within the bank. To preserve the independence of the department, Audit and Risk reports operationally to General Manager Credit and Risk but on a functional basis it reports to the Board Audit Risk and Compliance Committee. Legal Services is responsible for prompt and commercial legal advice to all SBU's, compliance with POMSOX reporting requirements, compliance with Bank of PNG regulatory requirements, corporate compliance requirements, and also board secretarial functions within the bank. Credit The bank experienced significant lending growth in 2007 that has been driven by improved business sentiment, a low interest rate regime, relative stability in exchange rates and increased economic activity associated with mining and petroleum exploration and agriculture exports. Credit department maintained its emphasis on credit quality focusing on compliance with credit standards for new approvals and facility reviews. In conjunction with Audit Department an independent review of the credit portfolio was again undertaken by PPB Chartered Accountants and Business Reconstruction Specialists from Melbourne Australia. All asset quality indicators remain sound and the expectation is that there will be no adverse trend in quality emerging in The new Standard & Poor's risk rating methodology was introduced during the year with all lending facilities being graded under the new risk rating system at the end of The new risk rating system provides an additional tool for portfolio analysis and validation of loss provisioning. 16 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

19 2007 STRATEGIC BUSINESS UNIT REVIEW The bank's credit policy was rolled-out to the new Fiji and Solomon Islands operations and training was undertaken with staff in these countries to familiarize them with these policies and processes. Work also commenced on a rewrite of the banks Credit Manual in the third quarter of 2007 and this exercise will be completed in Asset Management Staff of Asset Management performed admirably in 2007 and recoveries exceeded budget for the year with a number of large long outstanding legacy files being finalized. Higher property values in Port Moresby in particular again contributed to the sound recoveries result. Lending Support Lending Support facilitated the review and standardization of security documents for the bank's Fiji operations in early 2007 and also the customization of security documents for the Solomon Islands operations in mid Streamlining of processes continued during the year however the major strategic initiative was the roll-out of the Nautilus document imaging software solution. This involved scanning and electronic storage of all security documents and 90% of the task was completed by the end of Audit and Risk Audit has been progressing customer identification due diligence guidelines and suspicious transactions reporting requirements of the Proceeds of Crime Act 2005 with the other commercial banks and the Financial Intelligence Unit, which is within the Fraud and Anti- Corruption section of the Royal Papua New Guinea Constabulary. Suspicious transactions reporting commenced at the end of 2007 and cash transactions reporting will be introduced in With the implementation of transactions reporting requirements of the Proceeds of Crime Act 2005 Papua New Guinea will have met the minimum standards detailed in the FATF 49 recommendations. In addition to a comprehensive audit program covering all branches in PNG and most Business Units in PNG, audit commenced training and up-skilling of the Solomon Islands auditors, familiarizing them with BSP's audit process. Audit also implemented an automated audit and risk administration software solution, Galileo and Maqique, during 2007 and this was completed at the end of the year. Independent overview of audit activities was again undertaken in 2007, by an external Audit consultant from Australia and PPB Chartered Accountants and Business Reconstruction Specialists from Melbourne Australia. Specialised risk training continued in Two Certified Risk Analyst courses were attended and successfully completed by 21 of the Bank's 70 Risk Officers which includes Risk Officers from SI and Fiji. There are now 34 Risk Officers across the bank with risk analyst certification. Legal Services Legal Services department maintained effective service standards in respect of compliance with POMSOX reporting requirements, BPNG regulatory requirements, corporate compliance requirements, and also board secretarial functions within the bank. The department continued with its carriage of in house legal matters and internal legal advice to departments within the bank. It also participated in the successful completion of the settlement for National Bank of Solomon Islands Limited. HUMAN RESOURCES Giau Duruba BEc, SAFin General Manager Human Resources The Human Resources SBU provides support services to all Strategic Business Units (SBUs) as they relate to the human capital of the Bank. The key initiatives for HR in 2007 included; Developing a Total Remuneration Packaging policy for the Management category employees. Under the scheme employees are allowed to salary sacrifice for certain salary friendly benefits for tax effectiveness. This is one of the key strategies for staff attraction/retention in the Bank. Developing a First Home-Owner Home Ownership Scheme policy as a key strategy for staff attraction/retention in the bank. This scheme will be in full operation in Developing a HIV/AIDS workplace policy in conjunction with BAHA, and conducting a number of workplace awareness programs in the branches. Finalizing a number of Technical skills related courses namely; New Employee Induction Program & Risk Management. These programs are on offer to our employees in Approval of the 3-year Training & Localization plan approved by the National Training Council and all work permits for contract officers' issued on time. In line with business growth, total headcount increased to 2,345 (overseas operations 196) from 1,903 persons. The BANK SOUTH PACIFIC I ANNUAL REPORT

20 2007 STRATEGIC BUSINESS UNIT REVIEW main contributors were Retail Bank, IT Operation and Overseas acquisitions. Staff turnover was 11.5% compared to 13.0% in 2006, a commendable result, considering PNG industry average is around 15-20%. Total training Mandays increased to 6,685 from 6,300 in 2006; thus demonstrating our continued focus on People Quality development, which is critical to our expansion program. The training programs included Leadership/Management Skills development for the Senior Management staff and other core behaviour competencies based on the 2006 performance fill the gap needs. Total of 7 Senior Managers attended the Senior Management Course at the Melbourne Business College, Mt. Eliza. In 2008, we will concentrate on the following; Revise the current Performance Management System to incorporate our new core values, and other core technical skills into the evaluation process. Ensure a good portion of our employees participate in the First Home-Owners Home Ownership Scheme, through out the country. Convert current salary structure for the Supervisory Category employees to a Total Remuneration Packaging Structure. Develop an employee Wellness Awareness Programme so employees are provided with the relevant information and facts about better health living. Source/implement a number of online training programmes to ensure our employees continue to up-skill themselves in a more cost effective and convenient manner. OPERATIONS The Operations Strategic Business Unit is responsible for the delivery of Information Technology Electronic Banking Fixed Asset Services Fleet Management Lew Kenah Acting Chief Operating Officer Security Purchasing 2007 was a very busy year for Operations with a number of key projects implemented. These included: The commissioning of our Waigani Data Centre and relocation of BSP servers and equipment to the Data Centre Our Data Network Group assuming the responsibility for the running of the Bank's Data Networks Commissioning of an additional 20 ATM's. This includes four new Mini Cube ATM's located at Tabubil, Maprik, Kokopo and Ramu The launch of Visa Card Acquiring on Merchants terminals and BSP ATM's. Visa transactions continue to grow at a steady rate through this new channel The launch of ATM interchange with ANZ Commencement of the work on upgrading our Production and Backup servers to accommodate our transactional banking growth. This will also allow for centrallised processing of BSP Fiji, Solomon Islands and Niue transactions Operations focus in 2008 will be on providing our internal and external customers with a much improved service level will also see operations complete the following projects: Commissioning of two new IBM i570 Mainframe computers. This will help improve reliability and speed of our processing which will in turn lead to a better service level for our customers Completion of an upgrade to our branches LAN and WAN Network to improve data throughput and customer service levels Commissioning of 33 new ATM's in PNG, 4 in Fiji and 11 in the Solomon Islands. This will take the total number of ATM's in our Network to 168 Commissioning of 41 new ATM's to replace those that are coming to the end of their working life Improvements to our Personal Internet Banking Product Operations will continue to invest heavily in improving our staff skill levels through a number of in-house and external training courses. Operations are also committed to working closely with the other Strategic Business Units to help deliver a much improved customer service focus in BANK SOUTH PACIFIC I ANNUAL REPORT 2007

21 2007 STRATEGIC BUSINESS UNIT REVIEW FINANCE & PLANNING Johnson Kalo BA(Comm), Dip.AFI, ACPA(PNG), FFin Chief Financial Officer The Finance & Planning Strategic Business Unit (SBU) consists of the Core Financial Accounting function, Management Reporting activities, and group-wide Project Management services. The Finance & Planning Strategic Business Unit (SBU) has maintained solid, dependable performance in 2007, continuing to provide essential accounting and project support to the rest of the business. This has been achieved during a year where employment opportunities in the country have increased significantly with continued growth in economic activity. Consequently, resource mobility has increased in the local labour market and the general level of labour costs has risen in response to these developments. People in the SBU have responded with determination and a willingness to get on with the job of supporting the business, at times outside the scope of their activities. The Project Management Office (PMO) is BSP's homegrown team of implementation specialists across a range of infrastructure and IT system assets. The PMO has progressed very strongly on the path of embedding a project management culture in the organization, with a blend of discipline and responsiveness. This will continue in 2008, with focus on the project life cycle management, project prioritization and resource allocation. The delivery of some essential project work in 2007 indicates the level of development. Highlights in the infrastructure area of the PMO operations have been the completion of the new Wabag branch premises and a major refurbishment of the Waigani Drive Data Centre. Major product and channel support projects have included a nationwide ATM re-fleeting exercise, Visa card acquiring, and Swift implementation to the Fiji operations. Projects to install a database and planning system for the risk management and internal audit activities of the bank and to upgrade the core banking system software, were also completed, demonstrating the breadth of PMO skills and the application of sound project management methodology throughout support businesses as well as customer centric areas. The PMO has expanded its resources as it faces the near to medium term challenges of a growing variety of projects, both in-country and offshore. The Planning & Control Unit (P&C) has discharged its budgeting and management reporting responsibilities effectively in Rapid turnaround budgeting and forecasting routines continue to be strongly enforced and supported by timely performance reporting. Reporting cycles have been adhered to, and P&C continues to support on site management reporting capabilities in several areas of the bank. Our people have been able to respond to other areas of the bank requiring specialist management accounting services, including involvement in the project work on the system and accounting integration of newly acquired Pacific operations and the Aperio/Process Streamline initiative. This initiative presents some rich data management and reporting challenges and opportunities for the accounting functions of the SBU, as the ability to access and analyse an increasing variety of financial and non-financial information is enhanced by data-warehouse and reporting capabilities to be realized under this development. Financial Accounting operations has maintained core general ledger operations and ensured the integrity and timeliness of external and compliance reporting throughout the period, aptly demonstrated by the production of BSP's high quality annual reports. Some notable achievements in 2007 included the successful implementation of electronic supplier payments within the BSP system, to improve the efficiency of our supplier interactions, with planned expansion of the facility to allow payments to all the banks in The general ledger systems and reporting tools continue to be upgraded in line with technology application trends and standards in the accounting industry. In 2008, Financial Accounting will further adapt itself to the growing demands of group external reporting, and also reorganise its activities to accommodate data-warehouse operations. BANK SOUTH PACIFIC I ANNUAL REPORT

22 BANK SOUTH PACIFIC CORE VALUES These core values are shared by all at Bank South Pacific. They serve to underpin, guide and shape everything we do as we work toward realising the vision of being a Bank with a powerful customer focus and an understanding of shareholder value. INTEGRITY: LEADERSHIP: PEOPLE: PROFESSIONALISM: QUALITY: TEAMWORK: Integrity defines our obligation as bank employees to embrace the highest level of ethical principles, meet the demands of compliance and care deeply about the preservation and promotion of standards and behaviour in our work place and in our community. We are leaders at Bank South Pacific, because we all understand that what we do and how we do it acts to influence and inspire others around us. Our concept of people includes all who work in BSP, our customers, suppliers and shareholders and we are committed to considering their special needs and to treating each and every person with dignity and respect. Being professional means that we are committed to continual self-development and achieving the highest possible standards in accord with the principles and practices that shape outcomes in the financial services industry. Quality is a special value for BSP. It represents our pledge to being highly efficient in our use of resources, doing things as simply as possible, getting it right first time and consistently delivering superior customer service. Our commitment to teamwork is based on the understanding that there is wisdom in all, that cohesive teamwork creates greater job satisfaction and that achieving our vision is only possible if we work enthusiastically as a team.

23 CORPORATE GOVERNANCE Bank South Pacific Ltd (BSP) has adopted an approach to Corporate Governance that is underpinned by its core values of Integrity, Leadership, People, Professionalism, Quality and Teamwork. This approach is supported by a comprehensive framework of Corporate Governance principles and policies. The BSP Board ( the Board ) has demonstrated its commitment to developing and maintaining a standard of corporate governance that seeks to match global practice. The Board ensures that it complies with the requirements of BSP home exchange, Port Moresby Stock Exchange ( POMSOX ). It also closely monitors developments in corporate governance principles and practice within Australia and has benchmarked itself against:- 1. ASX Corporate Governance Council Corporate Governance and Best Practice Recommendations 2. Australian Prudential Regulatory Authority Prudential Standard APS Standard Australia AS Good Governance Principles BSP is mindful of the advantages of demonstrating to investors that its corporate governance standards meet the requirements expected of companies listed in countries such as Australia. This Corporate Governance Statement therefore compares BSP's corporate governance practices to the ASX Corporate Governance Council and Best Practice Recommendations. BSP manages in excess of half the banking market in Papua New Guinea, and is predominantly owned by institutions and individuals in Papua New Guinea. The Board, Management and staff of BSP are very much aware of their responsibilities to the people of Papua New Guinea. The set of Corporate Governance principles developed by BSP is intended to provide a framework that will help to ensure that BSP deals fairly and openly with all its stakeholders - shareholders, customers and staff alike. BSP publishes its corporate governance practices on its website. This is available at in the shareholders section. 1 THE BOARD OF DIRECTORS a) Role and Responsibility of the Board The roles and responsibilities of the Board are defined in the Board Charter. This document also details the matters reserved for the Board and matters that have been delegated to management. The Board, with the support of its Committees, is responsible to the shareholders for the overall performance of the Company including its strategic direction; establishing goals for management; and monitoring the achievement of those goals with a view to optimising Company performance and increasing shareholder value. Key functions of the Board include: overall strategy of the Company, including operating, financing, dividend, and risk management appointing the Managing Director and setting an appropriate remuneration package appointing General Managers and setting appropriate remuneration packages appointing the Company Secretary and setting an appropriate remuneration package endorsing appropriate policy settings for management reviewing Board composition and performance reviewing the performance of management approving an annual strategic plan and an annual budget for the Company and monitoring results on a regular basis ensuring that appropriate risk management systems are in place, and are operating to protect the Company's financial position and assets ensuring that the Company complies with the law and relevant regulations, and conforms with the highest standards of financial and ethical behaviour acquisitions and disposals material to the business establishing authority levels Directors' remuneration via the Remuneration & Nomination Committee selecting, with the assistance of the Audit, Risk and Compliance Committee, and recommending to shareholders, the appointment of external auditors approving financial statements A number of these responsibilities have been delegated by the Board to various Committees. The Committees and their responsibilities are detailed below under Board Committees. The Board has delegated to management responsibility for: developing the annual operating and capital expenditure budgets for Board approval, and monitoring performance against these budgets BANK SOUTH PACIFIC I ANNUAL REPORT

24 CORPORATE GOVERNANCE developing and implementing strategies within the framework approved by the Board, and providing the Board with recommendations on key strategic issues appointing management below the level of General Manager and preparing and maintaining succession plans for these senior roles developing and maintaining effective risk management policies and procedures keeping the Board and the market fully informed of material developments b) Membership, expertise, size and composition of the Board The Corporate Governance Principles affirm that the majority of the Board should be independent. As is typical of small financial markets generally there are, in Papua New Guinea, very considerable demands on the relatively small numbers of people with the skills and experience to fill the demanding role of Non-Executive Director on the Boards of the Nation's larger corporate institutions. In these circumstances it is inevitable that a number of the Non-Executive Directors of BSP will also have roles on the Boards, or in Senior Management, of institutions that may be significant shareholders in, or substantial customers of, the Bank. Directors of BSP are meticulous in handling situations where there could potentially be conflicts of interest, by declaring their interests in advance, and absenting themselves from any consideration of matters where a conflict might arise. The Bank's Corporate Governance Principles require Directors to disclose any new Directorships and equity interests at each Board meeting. The maximum number of Directors, as prescribed by the Constitution approved by shareholders, is 10. At the date of this Report there are 10 Directors, with 9 Non Executives designated as independent, plus the Managing Director. Under the Constitution, at each annual general meeting one-third of the company's Directors, in addition to any Director appointed during the year, excluding the Managing Director, must offer themselves for re-election by the shareholders. Normally, Non-Executive Directors are expected to serve a maximum of four three-year terms, dating from the AGM at which the newly elected Director is first confirmed by shareholders. This provision has effect from the date the Bank took its present form, following the merger of BSP with the Papua New Guinea Banking Corporation in April The Board will apply this provision with a degree of flexibility should it be necessary to ensure appropriate continuity, bearing in mind the particular circumstances of the Papua New Guinea market. 1 The Board has a broad range of skills, experience and expertise that enables it to meet its objectives. Details of the Directors' business backgrounds and experience are provided on pages 8 and 9. The Board accepts that it has a responsibility to shareholders to ensure that it maintains an appropriate mix of skills and experience (without gender bias) within its membership, and consequently gives careful consideration to setting criteria for new appointments it may recommend to shareholders in accordance with the Company's Constitution. It has delegated the initial screening process involved to its Remuneration and Nomination Committee which, in accordance with its Charter, may seek independent advice on possible new candidates for Directorships. All Directors must be satisfied that the best candidate has been selected. Nominees of the Board and/or shareholders must meet the fit and proper person criteria established by the Bank of Papua New Guinea before they can take their place on the Board. The Board does not accept that any office bearer and/or employee of an institutional shareholder, by virtue only of his/her position within that organisation, will have an automatic right to be appointed to the Board. On joining the Board, new Directors will be provided with a comprehensive orientation program. c) Role and selection of the Chairman The Chairman is elected by the Directors and his role includes: ensuring all new Board members are fully aware of their duties and responsibilities providing effective leadership on the company's strategy presenting the views of the Board to the public ensuring the Board meets regularly throughout the year, and that Minutes are taken and recorded accurately setting the agenda of meetings and maintaining proper conduct during meetings reviewing the performance of non-executive Directors 1 For example, to avoid a situation where a number of Directors would otherwise be approaching retirement date at around the same time, or to recognise circumstances when suitably qualified candidates may not be immediately available. 22 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

25 CORPORATE GOVERNANCE The Chairman is not permitted to occupy the role of Managing Director. Noreo Beangke, who sits on the Board as an independent Non-Executive Director, is the current Chairman. He has been Chairman of Bank South Pacific since the Bank took its present form following the merger with the Papua New Guinea Banking Corporation. d) Director independence and Conflict of Interest Directors are determined to be independent if they are judged to be free from any material or other business relationship with the Bank that would compromise their independence. Prior to appointment Directors designate are required to provide information to the Board for it to assess their independence. In assessing the independence of Directors the Board will consider a number of criteria including: the Director is not an executive of the Bank the Director is not a substantial shareholder of the Bank or otherwise associated directly with a substantial shareholder of the Bank. the Director has not within the last 3 years been a material consultant or a principal of a material professional adviser to the Bank or a group member, or an employee materially associated with the service provided the Director is not a material supplier to or customer of the Bank or other group member, or a material consultant to the Bank or other group member, or an employee materially associated with the material supplier or customer the Director has no material contractual relationship with the Bank or other group member other than as a Director of the Bank the Director is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director's ability to act in the best interests of the Bank This information is assessed by the Board to determine whether on balance the relationship could, or could reasonably be perceived to, materially interfere with the exercise of the Director's responsibilities. Materiality is assessed on a case-by-case basis. As noted earlier, the Board is cognisant of the need to avoid conflicts of interest and it has in place policies and procedures for the reporting of any matter, which may give rise to a conflict between the interests of a Director and those of the Company. These arrangements are designed to ensure that the independence and integrity of the Board are maintained. The Bank of Papua New Guinea sets prudential limits on loans to associated persons. Bank South Pacific fully conforms with these requirements. Financial Note 27, Related party transactions, on pages 66-69, provides details of Directors' interests. e) Meetings of the Board and attendance Scheduled meetings of the Board are held at least every two months, and the Board meets on other occasions as necessary to deal with matters requiring attention. Meetings of Board Committees are scheduled regularly during the year. The Board has a policy of rotating its meetings between locations where the Company has a significant presence. On these occasions the Board also visits Company operations and meets with local management and key customers. The Chairman, in consultation with the Managing Director, determines meeting agendas. Meetings provide regular opportunities for the Board to assess BSP management of financial, strategic and major risk areas. To help ensure that all Directors are able to contribute meaningfully, papers are provided to Board members one week in advance of the meeting. Broad ranging discussion on all agenda items is encouraged, with healthy debate seen as vital to the decision making process. Financial Note 28, Directors' and Executive remuneration, on pages 69-70, provides attendance details of Directors at Board meetings during f) Review of Board Performance The Remuneration and Nomination Committee reviews the processes by which the Board regularly assesses its own performance in meeting its responsibilities. It is intended to extend the assessment of the Board as a whole to include an assessment of the contribution of each individual Director. The Board is cognisant of the need to continually identify areas for improvement; to ensure that it meets the highest standards of corporate governance; and for the Board and each Director to make an appropriate contribution to the Company's objective of providing value to all its stakeholders. The performance review is conducted annually, and may involve assistance from external consultants. g) Board Access to Information and Advice All Directors have unrestricted access to company records and information and receive regular detailed financial and operational reports to enable them to carry out their duties. The General Managers make regular presentations to the Board on their areas of responsibility. The Chairman and the other Non-Executive Directors have the opportunity to meet with the Managing Director and the General Managers for further consultation, and to discuss issues associated with the fulfilment of their roles as Directors. BANK SOUTH PACIFIC I ANNUAL REPORT

26 CORPORATE GOVERNANCE The Board recognises that in certain circumstances individual Directors may need to seek independent professional advice, at the expense of the Company, on matters arising in the course of their duties. Any advice so received is made available to other Directors. Any Director seeking such advice is required to give prior notice to the Chairman of his or her intention to seek independent professional advice. 2 BOARD COMMITTEES a) Board Committees and Membership The Board has established two Committees whose functions and powers are governed by their respective Charters. These committees are the Audit Risk and Compliance Committee, and the Remuneration and Nomination Committee. Membership of the Committees and a record of attendance at committee meetings during the year is detailed in the table below. Remuneration details are provided in Financial Note 28 on page 69. Membership of Board Committees as at 31 December 2007 Board Audit Risk and Compliance Committee John Jeffery - Chair 6/6 Vai Reva 6/6 Gerea Aopi 4/6 Remuneration and Nomination Committee Tom Fox - Chair 3/3 Noreo Beangke 3/3 Ila Temu 2/3 b) Committee Charters The Committee Charters are available in the shareholders information section of the BSP website c) Committee Structure Committee members are chosen for the skills, experience and other qualities they bring to the Committee. At the next Board meeting following each Committee meeting, the Board is given a report by the Chairman of the respective Committee and Minutes of the meeting are tabled. The Audit Risk and Compliance Committee is comprised of three Non-Executive Directors, a majority of whom should be independent, and who are duly appointed by the Board. The Chairman of the Audit Risk and Compliance Committee must be one of the independent Directors, other than the Chairman of the Board. Each member should be capable of making a valuable contribution to the Committee and membership is reviewed annually by the BSP Board. The Remuneration and Nomination Committee comprises three Non-Executive Directors, the majority of whom should be independent, and who are duly appointed by the Board. The Chairman of the Remuneration and Nomination Committee must be one of the independent Directors, other than the Chairman of the Board. Each member should be capable of making a valuable contribution to the Committee, and membership is reviewed annually by the BSP Board. A review of the performance of Committee members will form part of the Board's performance review. d) Board Audit Risk and Compliance Committee The Audit Risk and Compliance Committee is delegated by the Board with responsibility for reviewing and monitoring the: integrity of the financial statements and the financial reporting and audit process external auditor's qualifications, performance and independence performance of the internal audit function of the Bank systems of internal control and management of all risks systems for ensuring operational efficiency and cost control systems for approval and monitoring of expenditure including capital expenditure processes for monitoring compliance with laws and regulations (both in Papua New Guinea and overseas) implementation of Board decisions by management and making recommendations to the Board for the appointment of the external auditor annual internal audit plan and its ongoing review. In the course of fulfilling its mandate, the Committee meets with both the internal and external auditors without management present. i. Annual Financial Statements The Audit Risk and Compliance Committee reviews the annual financial statements to determine whether they are complete and consistent with the information known to Committee members and to assess whether the financial statements reflect appropriate accounting principles. In particular it: 24 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

27 CORPORATE GOVERNANCE pays attention to complex and/or unusual transactions focuses on judgmental areas, for example those involving valuation of assets and liabilities; provisions; litigation reserves; and other commitments and contingencies meets with management and the external auditors to review the financial statements and the results of the audit reviews the other sections of the Annual Report before its release and considers whether the information is understandable and consistent with members' knowledge about the Bank and its operations satisfies itself as to the accuracy of the financial accounts, reconciles them with management accounts presented to the Committee, and signs off on the financial accounts of the Bank before they are submitted to the Board. ii. External Audit The Audit Risk and Compliance Committee is responsible for making recommendations to the Board on appointment and terms of engagement of BSP external auditors. The selection is made from appropriately qualified companies in accordance with Board policy. The Board submits the name of the recommended appointee to shareholders for ratification. In line with the policy of the Bank of Papua New Guinea, the signing partner in the external audit firm must be rotated at least every three years. The Committee reviews annually the performance of the external auditors and makes recommendations to the Board regarding the continuation or otherwise of their appointment, consistent with the Bank of Papua New Guinea's Prudential Standard No. 7/ External Auditors, while ensuring their independence is in line with Board policy (see below). There is a review of the external auditor's proposed audit scope and approach, to ensure there are no unjustified restrictions. Meetings are held separately with the external auditors to discuss any matters that the Committee or the external auditors believe should be discussed privately. The external auditor attends meetings of the Audit Risk and Compliance Committee at which the external audit and half yearly review are agenda items. The Committee ensures that significant findings and recommendations made by the external auditors are received and discussed promptly, and that management responds to recommendations by the external auditors in a timely manner. The duly appointed external audit firm may not be engaged by the company to provide specialist consultancy services relating to financial, strategic and or taxation matters. The external auditor is invited to the Annual General Meeting of shareholders and is available to answer relevant questions from shareholders. The Bank of Papua New Guinea Prudential Standards provide for a tri-partite meeting between BPNG, the external auditors, and the Bank, if required. iii. Internal Audit The Audit Risk and Compliance Committee approves, on the recommendation of management, the appointment of Manager Audit and Risk. The Committee meets regularly with Manager Audit and Risk. Reviews are undertaken of the scope of the work of the internal audit function to ensure no unjustified restrictions or limitations have been placed upon Audit and Risk Department. The Audit Risk and Compliance Committee also reviews the qualifications of internal audit personnel and endorses the appointment, replacement, reassignment or dismissal of the internal auditors. An independent review by an expert consultant is made annually as to the effectiveness of the internal audit and risk function. These reports are presented to the Board Audit Risk and Compliance Committee, and the Board. The Audit Risk and Compliance Committee meets separately with the internal auditors to discuss any matters that the Committee, or the internal auditors, believe should be discussed privately. The Internal Auditor has direct access to the Audit Risk and Compliance Committee and to the full Board. The Committee ensures that significant findings and recommendations made by the internal auditors are received and discussed promptly, and that management responds to recommendations by the internal auditors on a timely basis. Internal Audit meets with the external auditors half yearly, to review the scope and findings of internal audit's annual audit plan, and the extent of the external audit plan, having regard to internal audit's findings. iv. Compliance The Audit Risk and Compliance Committee reviews the effectiveness of the systems for monitoring compliance with all legal and regulatory obligations and the Constitution of the Bank. It also reviews the results of management's investigation and follow-up (including disciplinary action) of any fraudulent acts, or noncompliance. The Committee obtains regular updates from management and the Bank's legal officers regarding BANK SOUTH PACIFIC I ANNUAL REPORT

28 CORPORATE GOVERNANCE compliance matters, and satisfies itself that all regulatory compliance matters have been considered in the preparation of the financial statements. Reviews of the findings of any examinations by regulatory agencies are undertaken and the Chairman of the Board Audit Risk and Compliance Committee has the right to approach a regulator directly in the event of a prudential issue arising. v. Risk Management The Committee's role in the Bank's risk management processes are detailed in 3(b) below. e) Board Remuneration and Nomination Committee The Remuneration and Nomination Committee has been established to assist the Board in fulfilling its oversight responsibilities in respect of Board and Senior Executive Management selection, appointment, review and remuneration. The responsibilities of the Remuneration and Nomination Committee are: oversee the selection and appointment of a Managing Director and recommend an appropriate remuneration and benefits package to the full Board. determine and review appropriate remuneration and benefits of Directors for recommendation to the full Board, and subsequently to the shareholders. identify and maintain a clear succession plan for the Executive Management Team, ensuring an appropriate mix of skills and experience as well as appropriate remuneration and benefits packages are in place and reviewed regularly. ensure that the Board itself maintains an appropriate mix of skills and experience necessary to fulfil its responsibilities to shareholders while maintaining a world class Corporate Governance regime. receive and endorse positions/titles recommended by the Managing Director from time to time as applying to designated Senior Executive Management positions. review the procedures in place to ensure that all new Senior Executive appointees are adequately qualified and experienced, and that proper recruitment procedures are followed. review and make recommendations to the Board on the appointment and terms and conditions of employment to all Senior Executive Management positions. review and approve all termination arrangements for such Senior Executives. review transactions between the Company and any of the Directors or relevant Senior Executives. review and make recommendations to the Board on employee remuneration and benefits policies and practices generally. engage external consultants as and when deemed appropriate to benchmark remuneration packages for Executives and Senior Management. review Board performance, tenure, and succession planning. The Board has in place a review process, led by the Chairman, that involves a peer review of performance based on a broad range of criteria. A performance review was performed in RISK MANAGEMENT a) Approach to Risk Management The Bank's Risk Management activities are aligned to the achievement of the Bank's Objectives, Goals and Strategic Focus Plans. The Board, in consultation with the Executive Committee, determines the Bank's risk appetite and risk tolerance. These benchmarks are used in the risk identification, analysis and risk evaluation processes. BSP distinguishes the following major risks: Credit Risk - The potential for financial loss where a customer or counterparty fails to meet their financial obligation to the Bank. Market Risk - The potential financial loss arising from the Bank's activities in financial, including foreign exchange, markets. More detailed commentary on financial risk management is provided in the Notes to the financial accounts. Liquidity Risk - The risk of failure to adequately meet cash demand in the short term without incurring financial losses. Interest Risk - Risk to earnings from movement in interest rates. Operational Risk - The risk of loss resulting from inadequate or failed internal processes, people, or from external events, including legal and compliance risk. The Bank's Asset & Liability Committee monitors market risk, interest risk, and liquidity risk, and the Credit Committee monitors credit risk. Operational risk is managed at Business Unit level and a risk register system has been implemented across the Bank. The Executive Committee and the Board overview the highest tier of risks within these risk registers. 26 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

29 CORPORATE GOVERNANCE The Bank's risk management policy ensures that the Bank has in place acceptable limits for the risks identified by the Bank's employees. The risk management approach encompasses the following: defining the types of risks that will be addressed by each functional or policy area (i.e., credit risk, interest rate risk, liquidity risk, operational risk, etc.). ensuring that mechanisms for managing (identifying, measuring, and controlling) risk are implemented and maintained to provide for organisation wide risk management developing information systems to provide early warning, or immediate alert, of events or situations that may occur, or already exist, that could create one or more types of risk for the Bank creating and maintaining risk management tools, including those requested by the Board, such as policies, procedures, risk registers, controls and independent testing, personnel management and training, and planning instituting and reviewing risk measurement techniques that Directors and management may use to establish the Bank's risk tolerance, risk identification approaches, risk supervision or controls, and risk monitoring processes developing processes for those areas that represent potential risks. establishing appropriate management reporting systems regarding these risks so individual managers are provided with a sufficient level of detail to adequately manage and control the Bank's risk exposures b) Risk Management Roles and Responsibilities The Board accepts responsibility for ensuring it has a clear understanding of the types of risks inherent in the Bank's activities. Therefore responsibility for overall risk management in BSP is vested with the Board. However every employee from Executive Management to the newest recruit has a responsibility and a part to play in the process. There is a formal system of financial and operational delegations from the Board to the Managing Director, and from the Managing Director to the General Managers. These delegations reflect the Bank's risk appetite, and are cascaded down to managers who have skills and experience to exercise them judiciously. The Board defines the accountabilities (including delegated approval/control authorities/limits) and reporting/monitoring requirements for the risk management process. The severity of risks identified in the risk identification, analysis and evaluation processes, and noted in the Strategic Business Unit Risk Registers, is used to determine the approval/ control authorities/ limits. The Board reviews these risk limits annually along with an annual review of the Bank's significant risks. The Board has adopted guidelines, with the help of management analysis, covering the maximum loss exposure the Bank is able and willing to assume. These guidelines are detailed in the Bank's Risk Policy and Procedures Manual which has been externally reviewed and approved by the Board. The Board has also delegated to the Audit Risk and Compliance Committee responsibility for overview of loss control and for overseeing the risk management function. The Board Audit Risk and Compliance Committee is responsible for providing regular reports and recommendations to the Board on the risk management activities of the Bank, especially relating to risk issues that are outside of the authority of the Bank's Executive Committee to approve. The Bank's Executive Committee is responsible for deliberating on risk management issues which are outside of the delegated authorities/ limits of the Credit Committee, Asset and Liability Committee (ALCO) and General Managers, with escalation of these issues to the Audit Risk and Compliance Committee, and the Board itself, in case of need. c) Management Assurance The Board is provided with regular reports about BSP financial condition and its operating performance. Annually the Managing Director and the CFO certify to the Board that: the financial records of the Bank have been properly maintained and that they accurately record the true financial position of the Company the financial statements and notes meet all appropriate accounting standards there are sound systems of risk management and control that are operating effectively. Additionally all General Managers provide bi-annual statements attesting that: they have assessed and documented the risks and internal control procedures in their Strategic Business Unit they have identified any changes in business, operations and computer systems and the risks that may arise from those changes BANK SOUTH PACIFIC I ANNUAL REPORT

30 CORPORATE GOVERNANCE the risk management and internal compliance and control systems are appropriate and operating efficiently and effectively any weaknesses in the risk management and internal compliance and control systems have been identified and remedial action taken 4 ETHICAL BEHAVIOUR BSP acknowledges the need for Directors and employees at all levels to observe the highest standards of ethical behaviour when undertaking Company business. To this end, the Board has adopted a Code of Conduct for both Directors and members of the Executive Management team of the Company and stipulated that each Director, and relevant employees, acknowledge in writing having read, understood and agreed to abide by the Code; and a Corporate Mission, Objectives, and Core Values Statement which establishes principles to guide all employees in the day to day performance of their individual functions within the Company. To ensure the maintenance of high standards of corporate behaviour on an ongoing basis, the Board further stipulates that senior management periodically undertake an appropriate communication program to reinforce both the Code and Core Values Statements. All Directors are encouraged to maintain membership of an appropriate Directors Association to keep abreast of current trends in Director's duties, responsibilities and corporate governance issues. BSP is committed to a culture in which it is safe and acceptable for employees, customers and suppliers to raise concerns about poor or unacceptable practices, irregularities, corruption, fraud and misconduct. The Bank has adopted a whistle blowing policy that is designed to support and encourage staff to report in good faith matters such as: unacceptable practices; irregularities or conduct which is an offence or a breach of laws of Papua New Guinea (actions and decisions against the laws of Papua New Guinea including non-compliance); corruption; fraud; misrepresentation of facts; decisions made and actions taken outside established BSP policies & procedures; sexual harassment; abuse of Delegated Authorities; misuse of company assets; disclosures related to miscarriages of justice; health and safety risks, including risks to the public as well as other employees; damage to the environment; other unethical conduct; failure to comply with appropriate professional standards; abuse of power, or use of the Bank's powers and authority for any unauthorised purpose or personal gain; breach of statutory codes of practice; Directors and Management of the Company are subject to Securities Act 1997 restrictions for buying, selling or subscribing for securities in the Company if they are in possession of inside information, i.e. information which is not generally available and, if it were generally available, a reasonable person would expect to have a material effect on the price or value of the securities of the Company. Further Directors and management may only trade in the securities of the Company, subject to the foregoing insider trading restrictions, during each of the eight weeks following the announcements of half yearly profit and yearly profit or the date of issue of a prospectus. Management should discuss proposed share trades with the Managing Director in advance, who in turn will keep the Chairman of the Board appraised of management activities. Directors should discuss proposed share trades with the Chairman in advance. In addition Directors and management must not trade in any other entity if inside information on such entity comes to the attention of the Director or management by virtue of holding office as an Officer of the Bank. 5 MARKET DISCLOSURE The Bank's continuous disclosure regime is fundamental to the rights of shareholders to receive information concerning their securities. The most important aspect of the Bank's shareholder communication policy is to comply with the continuous disclosure regime and to implement best practice disclosure policy. Market announcements are posted to BSP website immediately after release to the market. All market announcements made by the Bank since its listing in August 2003 are currently available on the website. 28 BANK SOUTH PACIFIC I ANNUAL REPORT 2007

31 CORPORATE GOVERNANCE Where BSP provides financial results briefings to analysts or media, these briefings are published on the website as soon as possible after the event. In any event no material information which has not been previously released to the market is covered in such briefings. The material upon which the briefing is based (such as slides or presentations) is released to the market prior to the briefing. The Bank's insider trading rules are important adjuncts to the continuous disclosure regime in ensuring that shareholders are given fair access to material information regarding securities. BSP seeks to limit the opportunity for insider trading in its own securities through its continuous disclosure policies and the dealing rules applying to its employees and Directors. 6 SHAREHOLDER COMMUNICATIONS BSP Code of Conduct requires its employees to act with high standards of honesty, integrity, fairness and equity in all aspects of their employment with the Bank. With this in mind, BSP commits to dealing fairly, transparently and openly with both current and prospective shareholders using available channels and technologies to communicate widely and promptly. The Bank commits to facilitating participation in shareholder meetings, and dealing promptly with shareholder enquiries. Our shareholder communication policy is built around compliance with disclosure obligations and aspiring to be at the forefront of best practice in disclosure. Our framework for communicating with shareholders is to concisely and accurately communicate: nature of the role, the pay position relative to comparable market pay levels, and individual and business performance. The at risk component of the remuneration package is a performance based Executive Management Share Option Plan (EMSOP). This plan is structured to provide senior management with the incentive to deliver sustained growth in value for shareholders. Performance hurdles are incorporated in the EMSOP and senior staff are selected to participate based on their annual performance, potential, and the business need to retain critical skills. Further information about the EMSOP is provided in Note 23 to the Annual Accounts on page Under PNG tax law individuals who participate in the EMSOP are responsible for any related taxation liabilities. Non-executive Directors are remunerated on a fixed basis within an aggregate Directors' fee pool approved periodically by shareholders. An external review of nonexecutive Directors' remuneration was undertaken by First Commercial Limited in The shareholders last approved a pool of K1.00 million in May During 2007 K0.73 million of the pool was utilised (2006: K0.68 million). A table of fees paid to Directors during 2007 is produced on page 69. Non-executive Directors are not paid any retirement or superannuation benefits, nor do they participate in any share option programs. our strategy. how we implement that strategy; and the financial results consequent upon our strategy and its implementation. The Bank uses shareholder forums such as the Annual General Meeting, and group meetings with larger shareholders, within disclosure policies, to communicate financial performance and strategies. 7 REMUNERATION BSP remuneration policy for senior management is comprised of a fixed component and an at risk component that is directly related to long term incentives. The remuneration packages of General Managers and the Managing Director are approved by the Remuneration and Nomination Committee, and details are provided by the Committee to the Board. Fixed remuneration of senior management is reviewed at the time of contract renewal taking into account the BANK SOUTH PACIFIC I ANNUAL REPORT

32 HISTORICAL SUMMARY 2007 Profit and Loss (K'000) Net interest income 116, , , , , ,872 Non interest income 80,562 95, , , , ,510 Bad & doubtful debt (expense)/recovery 3,823 8,112 (601) 3,968 1,311 4,345 Other operating expenses (139,227) (191,054) (166,283) (167,265) 178, ,871 Operating Profit 61,617 60, , , , ,856 Impairment of non-current asset (140,557) (1,755) 5 (10,373) 6 Profit before tax (78,940) 60, , , , ,571 Income tax (expense) (6,890) (20,361) (16,986) (43,006) (52,902) (92,499) Profit/(loss) after tax (85,830) 39,981 86,651 99, , ,072 Dividends (toea) Dividends paid per share Balance Sheet (K'000) Net loans and advances 702, , , ,538 1,163,252 1,550,271 Total assets 1,779,139 1,904,917 2,196,639 2,952,458 4,333,666 5,819,549 Deposits 1,552,161 1,623,645 1,836,729 2,542,935 3,773,805 5,055,917 Capital 146, , , , , ,700 Performance Ratios Return on Assets -6.7% 2.2% 4.2% 3.4% 3.1% 3.8% Return on Equity -83.4% 24.4% 39.7% 32.2% 31.7% 39.5% Expense/Income 70.7% 78.5% 61.5% 54.6% 51.9% 39.4% Key prudential ratios Capital adequacy 15.3% 20.6% 31.9% 29.4% 25.9% 29.0% Liquid Asset Ratio 51.8% 52.2% 56.0% 56.2% 51.4% 50.3% Leverage ratio 6-7.8% 10.7% 9.6% 7.5% 9.2% Exchange rates (One (1) PNG Kina buys): US Dollar AUS Dollar (Source - Bank of Papua New Guinea Quarterly Economic Bulletin) 3 From 2005 onwards, statistics are consolidated for Bank of South Pacific and its subsidiaries 4 Impairment of goodwill on acquisition of Papua New Guinea Banking Corporation on 9 April Impairment of goodwill on acquisition of net assets of Habib Bank Ltd, Fiji operation, Dec Impairment of remaining goodwill in respect of acquisitions of Capital Stockbrokers Limited (2005), Habib Bank Ltd - Fiji Branch (2006) and National Bank of Solomon Islands (2007) 7 Dividends are paid in July of each year; Dividend per share has been adjusted for 1/10 share split BANK SOUTH PACIFIC I ANNUAL REPORT 2007

33 OVERSEAS BRANCHES AND SUBSIDIARIES Summary Financial Information All amounts are expressed in K'000 Net Profit Total Total After Assets Liabilities Turnover Tax Solomon Islands 197, ,793 18,136 3,946 Fiji 59,322 48,563 2, Niue 28,568 28, BSP Capital 21,678 13,095 8,055 2,645 RETAIL BANK - OVERSEAS BRANCHES 2007 Highlights The acquisition of 100% of the shares of National Bank of Solomon Islands Limited was completed in April. This gave us a bank that is similarly positioned to Bank South Pacific with the widest representation in the country of 7 branches and 8 agencies. Between April & August, we completed the necessary transitional tasks to convert this operation to a branch of Bank South Pacific. The team in Honiara produced a fantastic financial result in 2007 despite the additional pressures posed by the acquisition and transition to a branch. Our operation in Fiji had its first 12 months operating as a branch of Bank South Pacific. Despite difficult business conditions, the branch posted growth of over 20% in its business volumes and prepared well for the challenges ahead in Challenges In January 2008 in Fiji we will have successfully upgraded our banking platform to the ICBS platform which is run in Papua New Guinea. This will be closely followed by the introduction of electronic banking alternatives of ATM's & EFTPOS. We will have officially opened our new Nadi branch in February. These are impressive premises that signal our intention to be a major player in the Fiji market. It also positions us in the center of the tourist town of Nadi and close to the Nadi Branch, Fiji Islands BANK SOUTH PACIFIC I ANNUAL REPORT

34 OVERSEAS BRANCHES AND SUBSIDIARIES Solomon Islands Customer Service industrial hub of Lautoka. It is our intention to leverage off these initiatives and strongly grow our business in In the Solomon Islands we will move to upgrade the banking system and introduce the electronic banking alternatives of ATM's and EFTPOS. We will also be focusing on identifying alternative premises to house our main Honiara branch & Head Office. We are well positioned to continue our strong growth performance in the Solomon Islands. We also expect to convert our Niue operation to the ICBS banking platform and introduce ATM's and EFTPOS. We will continue to explore the possibility of further expansion opportunities in the Pacific. BSP CAPITAL LIMITED BSP Capital Limited, a subsidiary of Bank of South Pacific, offers services in stock broking, funds management, capital raisings and corporate advice was another positive year for the company. Financial Performance: BSP Capital finished 2007 with a profit of K2.7million, a significant amount over budget and 49% above the 2006 calendar year. Healthy demand from both existing and new customers was a key feature. Financial markets: Commodity prices hit one record high after another thanks to several factors including: growth in Asia; droughts in global crop growing regions; overseas inflation fears and stock and credit market volatility. Stronger commodity prices flowed through to healthy industry in our country. Our stock market was also strong, despite worries in the global markets. As other markets retraced, many of the local shares powered ahead including our own BSP which moved from K4.01 to K7.26 over the year, a gain of 81%. Investment products: Debt market products proved popular over the 2007 year with our short term notes raising approximately 70 million Kina. The interest from the market was wide spread with customers ranging from mums and dads to the large institutions. The strong demand is indicative of a healthy financial market in what really is a growth phase. Looking ahead: Strong conditions are expected to continue in financial markets, particularly while commodity prices remain high will be an exciting year for BSP Capital and our customers as we look to offer new financial products and investment opportunities within Papua New Guinea and the global market. 32 BANK SOUTH PACIFIC I ANNUAL REPORT 2007