The Cambodian banking system has just completed a 26-month debt restructuring exercise where scores of loan accounts were revised, classified and provisioned as the rate of non-performing loans inched up, sparking a slight credit risk unease

Implemented in April 2020, the Covid-19 debt restructuring measures came to a close in June this year, as the economy started to improve.

The number of active restructured loans as of June 30, 2022, was 308,500 accounts, representing an active restructured loan balance of $4.2 billion, Credit Bureau (Cambodia) Co Ltd (CBC) data showed.

Last year, the National Bank of Cambodia (NBC) said restructured loan accounts and value (which fluctuated throughout the period) amounted to 310,746 accounts and 20.1 trillion riel (about $4.9 billion), respectively.

In its Financial Stability Report 2021, the central bank said microfinance deposit-taking institutions (MDIs) conducted the highest loan restructuring consisting 136,220 loan accounts last year.

In comparison, commercial banks restructured fewer loans, though the value was larger at 16.6 trillion riel.

Extended several times (final extension ended on June 30, 2022), the loan restructuring scheme as well as the classification and provisioning of loans supported the banking sector substantially, which had revised 12.9 per cent of loans by the end of 2021.

For instance, the regulatory forbearance measures (loan restructuring exercise) allowed banks to restructure loans without changing their loan classification, which “delayed the formation of non-performing loans (NPLs)”.

Similarly, the classification and provisioning of loans, revealed that 63 per cent of “special mention” loans indicated that a majority of the restructured loans were considered viable by banks.

Noting these findings, the NBC wrote in its financial stability report that the “broader classification” of NPLs suggested that the impact of the pandemic on banks’ asset quality was “somewhat contained”.

As at end-2021, the agriculture, forestry and fishing sector made up the “largest size of NPLs outstanding in absolute terms” at 577 billion riel ($140.5 million), followed by retail trade (423 billion riel) and construction (271 billion riel).

While most sectors saw new NPLs, the hotel and restaurant sector recorded the biggest jump in NPLs at 108 billion riel ($26.3 million). Alongside, the NPL ratio in the sector also went up due to challenging circumstances.

NBC Financial Stability Review 2021

Three-year high

In its mid-year Global Banking Outlook report, titled Here Comes The Rain Again, credit rating agency S&P Global Ratings projected NPL ratio to end 2021 slightly higher at 2.5 per cent, given the extended restructuring scheme.

It also estimated that “one-tenth to one-eighth” of the restructured loans are “weak” and that borrowers might not be able to “resume repayment after the moratorium expires”.

In particular, delay in the tourism and property sectors could raise NPL ratio to around 3.5 per cent by end-2023, said Singapore-based Ivan Tan, an analyst at S&P Global Ratings.

He felt that while the economy is on the path to recovery, some sectors have continued to lag, in particular tourism and hospitality.

“Tourist arrivals remain significantly below pre-covid levels, and will have negative implications on cash flows and the ability of these businesses to repay on their loans,” Tan told The Post.

In addition, S&P predicted rising “credit losses” of 100 to 150 basis points in 2022 and 2023 from about 75 basis points in 2021, reflecting additional provisioning costs for higher expected NPLs for the banking sector.

Sharing his views on this, Oeur Sothearoath, CEO of Credit Bureau (Cambodia) Co Ltd (CBC), agreed with the report’s forecast on sustained credit growth and credit risks which are presently at high levels.

However, CBC observed that the pandemic, volatility of global economy and geopolitical tensions have prompted financial institutions to be more cautious and adopt more prudent management practices.

Seemingly necessary under current circumstances, seeing that 30+ DPD (over 30 days past due) ratio (an NPL indicator) for consumer loan portfolio stood at 2.69 per cent as of June 30, 2022, the highest in the last three years since 2020.

Total outstanding loan balance for consumer loans, which includes business loans to individuals, was $44.03 billion. The NPL ratio also suggested a drop in credit quality from 2.57 per cent in the previous quarter ended March 31, 2022.

While it signalled a “much higher level of credit risk”, Sothearoath assured that it is apparently lower than many ASEAN countries.

“Credit risks remain in the market but based on our data trends, we see preliminary signs of gradual lowering of credit risks and expect an increase in credit quality in the second half of the year.

“In fact, the adoption of the code of conduct [this March] by the financial sector was a constructive initiative to help manage potential risks through supply side discipline,” he said via email.

Deploy measures

Cambodia has experienced sustained high credit growth for several years, thanks to an expanding middle-income population, large young demography, new entrants and competition in the banking sector, and increasing economic activity and investments, said NBC economist Oudom Cheng.

While credit growth has also been driven by leverages and speculations, the signal of the growth is that there is more “real demand” and “productive absorption”, he added.

Citing NBC’s Semi Annual Report 2022, Oudom said banks’ NPL ratio as of April this year had edged up slightly – a “lagging” indicator which implied that “repayments have not been benign”.

At the same time, sectors supporting the economy have improved, though they remained moderate in the first half of 2022, he said, quoting the report.

“While the expansion of Cambodia’s economy has picked up after the reopening of the borders, it is likely to be dragged down by an expected slowdown in global growth,” he remarked, pointing towards International Monetary Fund (IMF)’s downward outlook for the second half of 2022.

Given that Cambodia is a “small-open economy” which relies on global demand, it is therefore expected to be obtruded by the gloomy global outlook.

Taken together – IMF’s prediction, the slightly high NPL ratio and the expiry of the loan restructuring exercise – these factors seem to corroborate with S&P’s view of credit losses in the banking sector, he opined.

Nonetheless, Oudom said, the overall health of the banking sector remains sound, which is reflected by its high capital and liquidity position.

“At this juncture, authorities should be more vigilant in continuing to maintain financial stability while standing ready to deploy a mixture of policy measures to guard the economy and financial sector from external shocks,” he added.

Good quality credit

Undoubtedly, the banking sector, which includes MDIs and microfinance institutions (MFIs), has recorded a steady growth in credit, albeit at a dizzying pace.

NBC Financial Stability Review 2021

According to NBC, credit-to-gross domestic product (GDP) came in at 174 per cent in 2021, causing a “sharp uptick” in the gap at nearly 43 per cent.

Although it’s a concern, NBC puts it down to the “pandemic-driven contraction” in Cambodia’s GDP.

“Moreover, the rapid pace of credit off-take can be attributed to an extent of growing financial deepening as banks extended their outreach, and in turn, credit disbursement,” the central bank said in its financial stability report last year.

The private sector was the sole beneficiary of bank credit, rising 26.4 per cent year-on-year, with the corporate sector – the larger borrower at 119 trillion riel (about $29 billion), followed by households (36.3 trillion riel).

In the first half of this year, with economic recovery on track, assets in the banking system (commercial banks, MDIs and MFIs) grew by 17.5 per cent to 305.4 trillion riel ($75.2 billion), NBC said.

Of that, consumer loans climbed 23.4 per cent to 209 trillion riel ($51.5 billion) whereas consumer deposits stood at 32.3 trillion riel ($8 billion), having increased 16 per cent.

As of June 30, 2022, banks and financial institutions restructured 268,042 loan accounts, equivalent to 18 trillion riel or $4.5 billion.

Despite headwinds, the central bank maintained that the banking system is stable and resilient due to the strength of capital, high liquidity, good credit quality and reasonable profitability.

For instance, the year-on-year ratio of return on assets and return on equity of the banking institution was 1.5 per cent and 7.7 per cent, respectively, and 3.4 per cent and 15.5 per cent, respectively, for microfinance institutions.

“Maintaining profitability has also boosted banking and financial institutions’ resilience to crises, as well as the ability to expand their financial services,” it said.

As for the NPL ratio – banks (2.9 per cent) and MFIs (2.3 per cent) – which NBC noted as being “slightly higher” in the first half of 2022, it nevertheless indicated that “credit in the banking system was of good quality and strong”.

‘Strong foresight’

Circling back to the likelihood of NPL ratio rising three to four per cent by the end of 2023, as forecast by S&P, Raymond Sia, chairman of the Association of Banks in Cambodia expressed difficulty in making an exact estimate on the rate.

He said it is subjected to a number of factors, with borrowers’ repayment capacity being the primary focus, which in turn is dependent on their business performance, economic conditions and other factors.

While Cambodia is returning to some level of normalcy with open borders, thanks to the government’s “strong foresight” to ensure high vaccination rates, many countries in the region and the world are still impacted by the pandemic.

Sia said new Covid-19 variants are still being discovered amid the emergence of monkeypox alongside supply chain disruption, high inflation and oil price caused by the war in Ukraine.

“Cambodia is an open and business friendly economy with key industries such tourism, garment and footwear production which are largely dependent on other countries – from their economic conditions [which affect demand] to travel restrictions.

“Notwithstanding the challenges and headwinds faced, Cambodian banks are well capitalised and managed under the prudent supervision of NBC. For this reason, the Cambodian banking sector can confidently look into the future with anticipation of a stable and encouraging outlook,” he said.