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Is there a looming credit risk in Cambodia’s banking sector?

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An elderly woman in a Phnom Penh market sells salted fish, a small business that relies on micro credit to ensure sustainability in a soft economy. Heng Chivoan

Is there a looming credit risk in Cambodia’s banking sector?

As the moratorium on debt repayment comes off sometime this year, the pressure of meeting loan repayment obligations might pose a risk to both loan providers and takers

For many, the Covid-19 pandemic brought their years of business to its knees.

In Siem Reap, the tourism capital of Cambodia which posted a 97 per cent year-on-year fall in tourist arrivals as at end-November last year, saw nearly 1,500 hospitality-related outlets close down by September that year.

As for garment manufacturing, an industry that has held up Cambodia’s economy for decades, some 130 facilities have ceased operation.

A check around Phnom Penh would reveal shuttered businesses dotting the streetscape. What’s more, the negative impact is still unfolding as retail businesses, be it a coffee shop, local restaurant or convenient store, progressively ceased operation as the New Year rolled in.

Seemingly a delayed reaction to reduced consumer spending due to job losses, salary cuts and short-term restriction orders – the latter caused by intermittent spikes in Covid-19 cases – it is undeniably a sign that many could not hold off the pressure of rising debts amid lower sales.

It is also a sign of a looming credit risk flowing from the moratorium on debt repayment that is likely to come off in the middle of 2021, assuming the period is not extended.

As of December 31, 2020, a total of $4.2 billion loans of 285,074 borrowers had been restructured. Additionally, outstanding loan balance has shot up to $32.7 billion as of January 31, 2021, the latest Credit Bureau Cambodia (CBC) data showed. If loan obligations are not met in the second half of 2021, a spike in non-performing loans (NPL) is in the offing.

Economist Dr Chheng Kimlong seemed to think so. “It is likely that NPL has increased to some extent among loan-taking individuals and private businesses.”

In fact, the most recent Covid-19 community transmission that bumped up total cases to 909, has raised some concerns for Cambodia Microfinance Association (CMA), which oversees a $6 billion market, as it expects an uptick of loan restructure requests in the coming months.

While CMA waits to see the real impact, it does not expect the application volume to be anywhere big compared to that in mid-2020 because many trade or business activities are operating albeit at a slower pace, said its communications head Kaing Tongngy.

“People seem to be experienced with such an outbreak and are continuing their daily lives [in a cautious manner],” he added.

Turnout is unclear

Overall, banks’ NPL expanded to 2.7 per cent last year from 2.2 per cent in 2019, whereas the ratio for microfinance institutions (MFIs) nearly doubled to 1.8 per cent from one per cent a year ago.

For Association of Banks in Cambodia (ABC) chairman In Channy, the rising NPL would depend on the sectors that the individual banks focus on.

If it focusses on the impact sector such as hotels, restaurants, transportation or real estate and property development, there is a likelihood of a negative impact on loan asset quality in the second half of this year.

“However, not all of them would have poor loan asset quality,” said Channy.

To date, estimates shared by the government in recent months show that more than 50,000 people in the tourism and manufacturing sectors are jobless. The government has been providing aid to them as well as poor households under the IDPoor national poverty scheme.

Separately, it is understood that scores of employees who faced salary cuts over the course of 2020 have yet to record a reinstatement of their previous salaries, which puts pressure on household income.

Early this year, the National Bank of Cambodia (NBC) revealed that customer credit rose 14.8 per cent year-on-year to $37.3 billion in 2020. This rounded up the value of total bank assets to $60 billion, up 15.7 per cent from 2019. Deposits increased 15.4 per cent to $33.8 billion in 2020.

Meanwhile, outstanding consumer loan balance was highest at 7.2 per cent quarter-on-quarter, totalling $9.8 billion in the last quarter ended December 31, 2020, CBC data stated. Of that, 52 per cent was personal finance while mortgage came in around 47.4 per cent.

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Although loans growth is positive for the economy, the central bank did not rule out headwinds that could derail the upward momentum in the banking and microfinance sector such as a prolonged pandemic, soft global economy and sluggish tourism growth.

For now, it is difficult to predict the outcome if credit risk unfurls in the financial institution sector, especially among microfinance institutions (MFIs) which restructured over $1 billion loans last year.

“It remains unclear how it will turn out,” said Kimlong, who is vice president of independent think tank Asian Vision Institute.

That being said, he indicated that the moratorium might see an extension as the pandemic has not subsided.

“Given its devastating impact on society and economy [as well as] production, supply chain, income-poverty dynamics and the private sector, the NBC and government is likely to extend the moratorium,” he opined.

However, he added, “if and only if”, the loan moratorium ended, MFI loan takers will face a financial hurdle on loan repayment obligations.

Broader loss allowance

This overall risk uncertainty is somewhat unnerving, particularly as some commercial banks have reported stellar financial results, underpinned by strong net interest income and return on assets.

But what is understated is that they have had to widen their allowance for expected credit losses (ECL), an accounting framework of the International Financial Reporting Standard 9 (IFRS 9) that requires banks to recognise impairment of loans.

For instance, Acleda Bank Plc, the only Mainboard-listed commercial bank on the Cambodia Securities Exchange, saw net profit grow 17.1 per cent to $141.5 million for its financial year ended December 31, 2020 (FY20), as revenue gained six per cent year-on-year at $578 million.

While total assets inched up to $6.6 billion in FY20, which included $4.5 billion net loans and advances, from $6.2 billion in FY19, its loan-to-deposit ratio was at its highest in three years at 97.7 per cent.

Acleda senior executive vice president and chief financial officer Mar Amara puts this down to a bumping up in loans in the last fiscal year, which resulted in gross loan outstanding of $627.2 million, up 16.2 per cent during the pandemic.

“We made the plus out of a minus by making loan applications simple with high user experience via our Acleda mobile app. This is also applicable to deposits – current, savings and fixed term [with] flexible interest rates,” she said.

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The group lowered its loan interest rates to range between 0.4 per cent and one per cent per annum on new applications.

But while it enjoyed a positive loans growth, its NPL ratio in FY20 was among the highest in recent years at 2.4 per cent. Following the amortisation of its loans, the group had to write up an ECL allowance of $35.3 million, about six per cent more than FY19.

The ECL is based on the possibility of loans defaulting in the next 12 months.

Amara, however, indicated that the risk is low in relation to the group’s assets, seeing that they are secured and collateralised at nearly 73 per cent, higher than the previous year.

The same scenario is likely with other entities in the banking sector but the ECL allowance cannot be determined as most Cambodian banks do not publish their financial statements.

Nevertheless, the risk in the sector is imminent, noted Moody’s Analytics Inc which issued a negative outlook on the banking sector for this year in Asia Pacific (APAC).

In a report last December, it cited four drivers backing its forecast, including the moderate weakening of asset quality, with loan restructuring and moratoria delaying the recognition of new problem loans, and prevailing low interest rates as high credit costs continue to weigh on banks’ profitability.

Moody’s Analytics also stressed that private sector debt would remain high in some parts of APAC due to weak earnings while solvency concerns weigh on hard-hit companies and governments.

Obviously a red flag on the sector, NBC moved swiftly last March to implement a host of Covid-19 monetary measures to inject liquidity. Yet, it is still not taking any chances.

Three weeks ago, it asked banks and MFIs to postpone dividend payouts from profits to shareholders to preserve sector growth, stability and certainty against any economic disruptions.

In the circular seen by The Post, it also suggested that industry players draw up a feasible exit strategy for when the measures come to an end.

This, despite lauding banks’ overall solvency ratio and liquidity coverage ratio in 2019.

Testing borrowers’ paying ability

Interestingly, the MFI sector, which together with commercial banks have offered over $10 billion micro loans to 2.6 million borrowers as of December 31, 2019, has little expectation that the NPL ratio would increase sharply in the second half of 2021.

This is because requests for loan restructure in the last six months have remained steadily low, said CMA’s Tongngy, whose unit regularly monitors the NPL ratio.

Last year, 31.2 per cent of household loans were approved, followed by trading and commerce (20.9 per cent), agriculture (18.9 per cent), services (16.2 per cent), construction (3.8 per cent) and others (three per cent).

In that same period, over 2.8 million clients deposited $3.8 billion in six microfinance deposit-taking institutions.

CBC data showed that out of the $6 billion total microfinance portfolio, micro credit of less than $3,000, made up 66 per cent, with an outstanding balance of 17 per cent.

Small loans (between $3,000 and $10,000) represented 24 per cent of total loans, with an outstanding balance of 33 per cent.

Nine per cent of MFI loans featured medium-size loans, ranging between $10,000 and $30,000. This segment had the largest debt accrued at 36 per cent.

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The smallest account at one per cent is the large-size loans where borrowers are entitled to more than $30,000 credit, and where outstanding balance constituted 14 per cent.

By the end of 2020, some $1.4 billion worth of loans had been restructured but “most-affected clients” have resumed economic activities.

“CMA has been observing the trends and potential risks of the MFI sector. However, based on our data, we do not expect any big jump of NPL even after the loan restructure policy ends in mid-2021,” Tongngy told The Post via a social messaging app.

He acknowledged NBC’s directive on dividend payouts, stating that it would help shore up capital for the operation of financial institutions.

Echoing Tongngy, CBC CEO Oeur Sothearoath said the onset of Covid-19 had affected the overall economy with certain sectors seeing more significant impact.

The credit market has started showing signs of positive recovery although the performance has not reached pre-Covid-19 levels.

“Since the lowest point of [NPL] at 2.6 per cent in May 2020, there has been significant improvement to 1.7 per cent in January this year. The figures have improved for small business as well as mortgage segments,”he said.

However, he indicated that with the latest outstanding loan balance at $32.7 billion, there has to be an joint approach to see a downward revision.

“While financial institutions need to continue adopting prudent risk management practices, borrowers also need to continuously monitor their financial health so that they are fully aware of their ability to meet current and future obligations,” he stressed.

Even as there is some easing on the economy moving forward, analysts think that credit risks would play out as a gradual unwinding of extraordinary support from governments and central banks might test borrowers’ abilities to pay back their creditors.

“Asset risks could grow, and NPL may increase further. Increases in NPL in 2021 will be moderate as economic recovery kicks in and banks pursue targeted loan restructuring as loan moratoria expire,” Moody’s Analytics said in the December report.

Nevertheless, it also found that monetary policies in the APAC region would remain accommodative.

“[It would] be a negative for banks’ net interest margins but a positive for borrowers’ abilities to service their debt and banks’ asset quality,” it said.

Regardless, ABC’s Channy, who is Acleda’s president and group managing director, is confident that banks would continue to stay strong since customers would not let their own businesses down.

“Banks are like any other business, they will balance three things – cost, benefit and risk. They will find the best way to mitigate risks. They won’t put their portfolios in the [way] of bad NPL,” he said.

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