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Leader Talks: Stephen Higgins on Cambodia’s post-COVID financial sector outlook

Harrison White

Founder and Managing Partner of Mekong Strategic Capital, Mr. Stephen Higgins spoke with CIR Leader Talks about his financial advisory firms latest market report detailing Cambodia’s financial sectors strong loan growth during COVID-19, the emergence of the new ‘Big 4’ and rising interest rates coupled with tightening liquidity.

According to the Navigating New Normal report released in December 2022, the Cambodian Finance Sector performed surprisingly well during the pandemic, helped in large part by very sensible Government and National Bank of Cambodia actions and policies with loans growing around 20% per annum as total loans rose over $45 billion and total deposits over $38 billion.

In turn, the report found the finance sector was able to support the broader economy by keeping credit flowing, while also supporting a rapid take up of digital payments to meet consumer demand. Additionally, overall, the sector performance over the past three years compares very well against ASEAN peers in terms of growth and financial stability.

Strong loan growth during the pandemic

“The ability of banks to restructure loans over the pandemic basically meant they didn’t get the run-off in their loan books that they would normally get, so any new lending was going straight to growing the loan book rather than replacing loans that were being paid off,” Stephen Higgins said.

He added that a number of NBC actions such as reducing reserve requirements pumped billions of liquidities into the system, which helped support that growth.

“Loan growth like the 22% we saw in 2021, and likely near 20% in 2022, however is simply not sustainable, particularly after being around that level for much of the past two decades, and you’re not going to see that in the coming years,” Stephen said.

Stephen Higgins (second from right) at the 10 Year Anniversary CBC panel discussion.

“We expect loan growth to fall back to around 10%, which should be in line with nominal GDP growth. This in turn should mean the end of the rapid increase that we’ve seen in the debt-to-GDP ratio, which is definitely a positive,” Stephen Higgins added.

Read more: NBC implements third phase of COVID 19 debt relief measures

Like most countries in the region and many countries globally, Cambodia is now seeing tighter liquidity, and higher non-performing loans (NPLs).

However, the report also stated that Cambodian financial institutions enter this period with very strong capital levels, a low starting point in terms of NPLs averaging around 2.1% as an industry, and a level of profitability that means they’re well positioned to navigate this new environment.

Cambodia’s new ‘Big 4’ emerge

Cambodia’s major four financial institutions recorded a total 2021 profit of $596 million accounting for 47% of total annual profits for the industry:

  • ABA Bank ($216m)
  • Prasac Microfiance ($137m)
  • Acleda ($125m)
  • Canadia Bank ($118m)

“I think a smaller number of bigger banks is better from both a regulatory perspective and a consumer perspective. As a regulator, having to monitor 150 banks and MFIs really stretches your resources. And as a consumer, a lot of the smaller banks simply don’t have the scale to invest in the products and services that consumers want, or be able to invest in a convenient branch network,” Stephen Higgins said.

However, Stephen reflected that while there are 4 big banks at the moment, it’s actually fairly fluid. If you go back 10 years, ANZ Royal and Campu were in the big 4, while ABA and Prasac were still fairly small.

Stepeh Higgins speaks on a panel discussion about digitization in Cambodia’s banking sector in 2020.

“What has been consistent though is that whoever the big banks were at the time, they had a strong distribution network in terms of branches, ATMs, and POS devices, and we think that is key to success in this market. ABA for example is rightly lauded for the quality of their app, but the importance of their POS network, branches, and ATMs shouldn’t be underestimated,” he added.

Read more: ABA Bank continues record growth while maintaining prudent loan-to-deposit ratio

According to the report ABA has emerged as a clear market leader in terms of profit, contributed by their market-leading Cost of Income of around 1% and a reasonable CTI in the low 30%. Additionally, if the remaining FIs reduce their CTI and COF to match ABA, the favorable impact on NPAT would be significant.

Ongoing need for consolidation as interest rates rise

Reflecting on the ongoing discussion around both consolidation in a market that has 54 commercial banks and 79 Microfinance lenders Stephen believes the regulator should look to increase the minimum capital deposits set at $75 million and just $1.5 million respectively

“Consolidation in the sector is absolutely needed, but unfortunately the smaller players just don’t want to sell or merge, often for reasons like pride, or wanting the reputational benefit that goes with saying you own a bank,” Stephen Higgins said.

“To be honest, some of the smaller operators seem to have no discernible legitimate reason for existence, and they certainly don’t add anything to the overall financial system. At some point we expect the NBC to increase minimum capital again, a point that was also urged by the IMF, and this will make life more painful for some of the smaller players,” he added.

The latest offerings to business for commercial banks are lending at around 9% and offering upwards of 8% for term deposits over 36 months.

Read more: Cambodia’s finance industry launch new self-regulatory guidelines

Stephen Higgins was the former head of ANZ Royal a joint venture between Cambodia’s Royal Group of Companies and the Australia and New Zealand Banking Group.

“We’re already seeing liquidity dry up in the local market, meaning bank deposits aren’t growing, and interest rates are increasing. Banks have also seen a big shift in their deposit mix, with depositors shifting from current accounts to higher rate term deposits, so banks are losing on the mix as well,” Stephen Higgins said.

“This means they will need to increase lending rates, after more than a decade-long trend of declining rates. This is likely to be a bit of a shock to many businesses that simply aren’t used to interest rates increasing,” he added.

Future outlook of Cambodia’s banking sector

Looking to the future Stephen thinks that overall, 2023 will be challenging for the sector in terms of really low balance sheet growth, and an increase in bad loans, so profits are going to fall. But added that longer-term he was still pretty optimistic and thought the sector is still worth investing in.

“Capital levels are strong, and the starting point for profits is also strong so the sector has a pretty good ability to absorb those higher bad debts,” Stephen Higgins said.

Stephen Higgins at the AmCham Capital Markets keynote in Phnom Penh in 2022.

Read more: Cambodia’s most pressing risks for 2023 are from rising private debt; conditions in key large economies; and inflation says the IMF

However, according to the report over the last five-year loan growth has outpaced deposit growth resulting in an increased Loan to Deposit ratio of 117% for 2021 or a $6.1 billion funding gap while ESG factors are increasingly becoming more relevant for local banks, as international banks and investors access for sustainability.

“In summary, the bigger financial institutions are pretty well run and should be able to pick up market share gains over this period. We also expect a shift from a loan growth mindset to a profitability mindset, which long term should benefit investors and be a lot more sustainable,” Stephen Higgins added.

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