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Bank profits at risk, IMF says

Bank profits at risk, IMF says

‘Too much money’ replaces too little as key risk for local banks.

ASHORTAGE of “attractive” lending opportunities is posing profitability risks for the Kingdom’s banks given a growing deposit base and high interest rates, the International Monetary Fund said last week.

The international financial organisation made the warning Wednesday as it presented its findings from two weeks of discussions with government ministers and senior officials on economic and financial developments in Cambodia.

David Cowen, the deputy division chief in the IMF’s Asia and Pacific Department, told reporters that “healthy deposit growth” meant there was “ample liquidity” in the banking system, but that high rates on deposits could dent profitability given a slowdown in new lending.

“We have expressed some concern that these high deposit rates may have some impact on bank profitability going forward if banks are not able to intermediate this liquidity into new lending opportunities,” he said.

“Much of the deposits that have come in this year are currently being held in the banks’ excess reserves at the NBC [National Bank of Cambodia], and those reserves are remunerated at a very low level.”

Stephen Higgins, chief executive officer at ANZ Royal Bank, said the lack of an interbank market, where banks make surplus funds available for other banks to borrow, and the low return offered by the NBC were an issue.

“In a normal interest-rate environment, where we were earning a decent return on our surplus funds, we wouldn’t be complaining about too much money,” he said.

“In the current environment, where the NBC pays something close to zero, because it is dictated by the US federal funds rate, yet we are offering customers a lot more than that, then yes, you could say we have too much money. That is why we’ve reduced our deposit rates over the last few months, to try and bring our surplus liquidity position to a more efficient level.”

Higgins added that the lack of “attractive lending opportunities”, which he defined as customers with sufficient cash flow to finance repayments, was the biggest problem facing the sector.

“There are some [attractive lending opportunities] out there, and we have a fairly attractive pipeline of opportunities, but not enough to absorb the surplus liquidity that we have,” he said.

The IMF’s findings came in stark contrast to its last fact-finding mission, which concluded in November last year. At the time, the fund warned that the country’s banks were facing liquidity shortages due to a sharp slowing in external inflows and deposit growth. Cowen said last week the NBC had done a “good job” in terms of helping manage liquidity risks over the last year but added that “it remains a concern going forward for us given still volatile conditions in global financial markets”.

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