FINDING BALANCE 2019 BENCHMARKING THE PERFORMANCE OF STATE-OWNED BANKS IN THE PACIFIC AUGUST 2019 FINDING BALANCE 2019 BENCHMARKING THE PERFORMANCE OF STATE-OWNED BANKS IN THE PACIFIC AUGUST 2019 Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2019 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4444; Fax +63 2 636 2444 www.adb.org Some rights reserved. Published in 2019. ISBN 978-92-9261-704-2 (print), 978-92-9261-705-9 (electronic) Publication Stock No. TCS190360-2 DOI: http://dx.doi.org/10.22617/TCS190360-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. 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If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material. Please contact [email protected] if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB logo. Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda. Note: In this publication, “$” refers to United States dollars unless otherwise stated. ADB recognizes “China” as the People’s Republic of China, “Ceylon” as Sri Lanka, and “USA” as the United States. Cover design by Cleone Baradas. Printed on recycled paper iii CONTENTS Tables, Figures, and Boxes v Foreword viii Abbreviations ix Currencies and Exchange Rates xi Executive Summary xii I. Introduction 1 II. Overview of Pacific State-Owned Banks 2 A. Size and Market Share 2 B. Legal Frameworks and Supervision 2 C. Mandates 4 D. Ownership and Corporate Governance 5 1. Composition of the Board of Directors 5 2. Board Appointments 6 3. Director Performance Appraisal 6 4. Risk Management, Disclosure, and Corporate Planning 7 E. Banking Services and Customers Served 8 F. Funding Sources 10 G. Profitability and Efficiency 12 H. Asset Quality and Capital Adequacy 15 I. Concessional Lending 16 III. International Experience with Development Banks 17 A. Global Findings 17 B. Profiles of Successful State-Owned Banks 17 1. Business Development Bank of Canada 18 2. DFCC Bank 20 IV. The Way Forward for State-Owned Banks in the Pacific 24 A. Clarifying the Role of State-Owned Banks 24 B. Providing Strong Foundations 25 C. Improving Performance 27 D. Maintaining Relevance 28 Appendix: Profiles of State-Owned Banks in the Pacific 29 A. Cook Islands 29 1. Finance Sector Composition 29 2. Bank of the Cook Islands 29 B. The Federated States of Micronesia 31 1. Finance Sector Composition 31 2. Federated States of Micronesia Development Bank 32 3. Bank of the Federated States of Micronesia 34 C. Fiji 37 1. Finance Sector Composition 37 2. Fiji Development Bank 37 iv D. Republic of the Marshall Islands 40 1. Finance Sector Composition 40 2. Marshall Islands Development Bank 41 E. Palau 43 1. Finance Sector Composition 43 2. National Development Bank of Palau 44 F. Papua New Guinea 47 1. Finance Sector Composition 47 2. MiBank (Nationwide Microbank Ltd) 47 3. National Development Bank of Papua New Guinea 50 4. People’s Micro Bank 53 G. Samoa 55 1. Finance Sector Composition 55 2. Development Bank of Samoa 55 H. Tonga 58 1. Finance Sector Composition 58 2. Tonga Development Bank 58 I. Tuvalu 61 1. Finance Sector Composition 61 2. Development Bank of Tuvalu 61 J. Vanuatu 63 1. Finance Sector Composition 63 2. The National Bank of Vanuatu 64 v TABLES, FIGURES, AND BOXES Tables 1 Size and Ownership of Surveyed State-Owned Banks, 2017 3 2 Supervision of State-Owned Banks 3 3 Board Composition of State-Owned Banks, 2018 6 4 Allocation of Credit by Customer Group, 2017 9 5 Allocation of Credit by Economic Sector, 2017 9 6 Sources of Bank Funding, 2017 11 7 Borrowing from Multilaterals and Pension Funds, 2017 11 8 Return on Assets of State-Owned Banks, 2010–2017 13 9 Nonperforming Loans of State-Owned Banks, 2010–2017 15 A.1 Bank of the Cook Islands Performance, 2010–2017 31 A.2 Federated States of Micronesia Development Bank Performance, 2010–2017 34 A.3 Bank of the Federated States of Micronesia Performance, 2010–2017 36 A.4 Fiji Development Bank Performance, 2010–2017 39 A.5 Marshall Islands Development Bank Performance, 2010–2017 43 A.6 National Development Bank of Palau Performance, 2010–2017 46 A.7 MiBank Performance, 2010–2017 49 A.8 National Development Bank of Papua New Guinea Performance, 2010–2017 52 A.9 People’s Micro Bank Performance, 2013–2017 54 A.10 Development Bank of Samoa Performance, 2010–2017 57 A.11 Tonga Development Bank Performance, 2010–2018 60 A.12 Development Bank of Tuvalu Performance, 2010–2017 62 A.13 National Bank of Vanuatu Performance, 2010–2017 65 Figures 1 Market Share of State-Owned Banks, 2017 2 2 Composition of State-Owned Bank Assets, 2010–2017 8 3 Funding Sources of State-Owned Banks, 2010–2017 10 4 Profitability of State-Owned Banks, 2010–2017 12 5 Return on Assets of State-Owned Banks, 2010–2017 12 6 Interest Rate Spreads, 2010–2017 13 7 Interest Income on Loans / Loans, 2017 13 8 Expense Ratio Commercial Banks, 2017 14 9 Average Expense Ratio / Number of Branches 14 10 Capital Adequacy (CET1 Ratio), 2013–2017 16 11 Business Development Bank of Canada Business Unit Net Income, 2018 19 12 Business Development Bank of Canada Financial Performance, 2013–2017 19 vi TABLES, FIGURES, AND BOXES 13 DFCC Bank Portfolio by Sector, 2017 21 14 DFCC Bank Product Distribution, 2017 21 15 Sri Lanka Banking Sector Assets, 2017 22 16 DFCC Bank Profitability, 2010–2017 23 A1. Bank of the Cook Islands Loan Portfolio by Sector, 2017 30 A.2 Bank of the Cook Islands Profitability, 2010–2017 30 A.3 Federated States of Micronesia Banking Sector Assets, 2017 31 A.4 Federated States of Micronesia Banking Sector Loans, 2017 32 A.5 Federated States of Micronesia Development Bank Loan Portfolio by Sector, 2017 33 A.6 Federated States of Micronesia Development Bank Loan Portfolio by Client Size, 2017 33 A.7 Federated States of Micronesia Development Bank Profitability, 2010–2017 33 A.8 Federated States of Micronesia Development Bank Revenue/Expenses, 2010–2017 33 A.9 Bank of the Federated States of Micronesia Loan Portfolio by Sector, 2017 35 A.10 Bank of the Federated States of Micronesia Loan Portfolio by Client Size, 2017 35 A.11 Bank of the Federated States of Micronesia Profitability, 2010–2017 36 A.12 Fiji Banking Sector Credit, 2017 37 A.13 Fiji Development Bank Loan Portfolio by Sector, 2017 38 A.14 Fiji Development Bank Loan Portfolio by Client Size, 2017 38 A.15 Fiji Development Bank Profitability, 2010–2017 38 A.16 Fiji Development Bank Revenue/Expenses, 2010–2017 38 A.17 Marshall Islands Banking Sector Assets, 2017 40 A.18 Marshall Islands Development Bank Loan Portfolio by Sector, 2017 41 A.19 Marshall Islands Development Bank Loan Portfolio by Client Size, 2017 42 A.20 Marshall Islands Development Bank Profitability, 2010–2017 42 A.21 Marshall Islands Development Bank Funding Sources, 2010–2017 42 A.22 Palau Banking Sector Credit, 2017 44 A.23 National Development Bank of Palau Loan Portfolio by Sector, 2017 45 A.24 National Development Bank of Palau Loan Portfolio by Client Size, 2017 45 A.25 National Development Bank of Palau Profitability, 2010–2017 45 A.26 National Development Bank of Palau Revenue/Expenses, 2010–2017 45 A.27 Papua New Guinea Finance Sector Assets, 2017 47 A.28 Papua New Guinea Credit Share by Sector, 2017 47 A.29 MiBank Loan Portfolio by Client Size, 2017 48 A.30 MiBank Profitability, 2010–2017 49 A.31 MiBank Revenue/Expenses, 2010–2017 49 A.32 National Development Bank of Papua New Guinea Loan Portfolio by Sector, 2017 51 A.33 National Development Bank of Papua New Guinea Loan Portfolio by Client Size, 2017 51 A.34 National Development Bank of Papua New Guinea Profitability, 2010–2017 51 A.35 National Development Bank of Papua New Guinea Revenue/Expenses, 2010–2017 51 A.36 People’s Micro Bank Loan Portfolio by Sector, 2018 53 A.37 People’s Micro Bank Loan Portfolio by Client Size, 2017 53 TABLES, FIGURES, AND BOXES vii A.38 People’s Micro Bank Profitability, 2013–2017 54 A.39 People’s Micro Bank Funding Sources, 2013–2017 55 A.40 Samoa Finance Sector Credit, 2017 55 A.41 Development Bank of Samoa Loan Portfolio by Sector, 2017 56 A.42 Development