Bank sector at risk: S&P

A woman holds a mobile phone in front of an ATM in Vietnam
A woman holds a mobile phone in front of an ATM in Vietnam last year. A risk assessment of Cambodia’s banking sector ranked it alongside Vietnam with both countries scoring an extremely low nine out of 10. BLOOMBERG

Bank sector at risk: S&P

The National Bank of Cambodia (NBC) lacks the resources to enforce regulatory standards and bail out underperforming banks during times of need, credit ratings agency Standard & Poor’s says.

Cambodia’s banking sector was labelled high-risk, with a score of nine out of 10 on S&P’s 2014 Banking Industry Country Risk Assessment, re­leased Friday.

The Kingdom’s score is on par with Mongolia, Papua New Guinea, Vietnam and Argentina.

Cambodia’s relaxed banking underwriting, lending and disclosure standards, weak rule of law, poor repayment culture and the NBC’s lack of capacity as a regulator or bank-of-last-resort were all cited as reasons for the high-risk classification.

“Several banks failed in the past decade and the supervisor lacked the capacity to address the problems in time or provide necessary support,” the report stated, attributing the NBC’s limitations to low staffing levels.

“The government has historically allowed weaker banks to fail. Assistance provided to troubled banks has been restricted to promoting their restructuring or encouraging them to be taken over by foreign players.”

With 44 banks (including specialised banks) in Cambodia, return on equity averaging 8.1 per cent between 2009 and 2013, credit growth increasing about 30 per cent per year and loan-to-deposit ratios nearing 100 per cent, S&P concluded that the banking sector will remain vulnerable as competition intensifies and margins narrow.

“We expect Cambodia’s banking industry to remain ‘moderately unstable’ over the next two years given the overcapacity in the system and low earning capacity. This is mainly a result of too many banks in a small economy.”

The global ratings firm suggested the NBC restrict new licences and encourage mergers between new and existing financial firms, and provide better data collection to improve risk assessment resources in the absence of regulatory restrictions on loan and credit growth.

According to S&P, the NBC is reviewing a proposal to impose a moratorium on new bank licences due to its limited supervisory capacity and inadequate resources.

Chea Serey, director-general of the NBC said the regulator imposes higher loss absorbing capital requirements on local banks in case of crises and that only banks that are well qualified and well run are allowed to take customer’s deposits.

“Like in any businesses, those who are not well run, will fail,” she said, adding that Cambodia’s loss-absorbing capital requirements are 15 per cent, almost double the international average of 8 per cent.

“Our job is to make sure that those who fail will fail in an orderly manner and do not cause disruption to the banking system and the economy.”

Local banking representatives have contested S&P’s analysis of the Kingdom’s banking regulator, saying that Cambodia’s banking laws and the NBC’s regulations support vulnerable firms from failing.

“They [the NBC] won’t allow you to stay weak,” In Channy, CEO of Acleda Bank said.

Cambodia’s banking laws allow licence holders to downgrade from commercial to specialised banking status when minimum paid-up capital (MPC) requirements are no longer met. The law demands that commercial bank licence holders have capital equivalent to $37 million and specialised banks have $7.5 million.

Unlike commercial banks, which are permitted by law to hold savings and give loans, specialised banks in Cambodia are only licensed to give loans.

“By allowing banks to downgrade from commercial to specialised, the bank can continue to serve its customer with different category, and it continues to solve its problems if any with their customers as well as adhering to the regulation required,” Channy said.

Grant Knuckey, CEO of ANZ Royal, similarly rallied support for the national regulator saying that the NBC’s attitude towards providing banks with public bail outs was the right method.

“If banks that are weak had the expectation of support, this just creates moral hazard and even weaker standards,” he said.

Knuckey added that while lending standards in Cambodia were too loose and did need regulatory curbs to prevent credit growth from tipping too far beyond deposits, S&P’s views on Cambodia’s “weak repayments culture” were incorrect.

“That isn’t apparent, and it’s at odds with the continued low non-performing loans levels despite huge credit growth.”

Stephen Higgins, managing partner of investment firm Mekong Strategic Partners, said S&P’s analysis was out of date and that Cambodia’s regulatory environment, while still hampered by the highly dollarised economy, had improved.

“In looking at the regulatory supervision and enforcement track record, they [S&P] are going back 15 years to when banks last collapsed here. The system has changed markedly in that time,” he said.

“One of the side effects of having a highly dollarised economy is that the NBC’s ability to bail out a failing bank would be constrained as they can’t simply print US dollars, but they compensate for this by requiring quite high capital levels,” he said.