Cambodia Investment Review
The Cambodian banking sector is currently navigating through a complex and challenging landscape, marked by a notable deceleration in credit growth. This trend is largely attributed to weakening demand and more cautious lending practices by financial institutions.
According to the National Bank of Cambodia’s Fiscal Stability Report 2023, the structure of the banking system as of December 2023 comprises 58 commercial banks, holding the majority share of assets at 91%, followed by microfinance deposit-taking institutions (MDIs) and microfinance institutions (MFIs), which account for 5.4% and 2.2% of total assets, respectively.
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Cambodian Credit Growth Has Sharply Decelerated
The report indicates that credit growth has sharply decelerated, reflecting the weakening demand and cautious lending practices. This deceleration is evident in the overall banking system’s performance metrics, where the growth in deposits, assets, and loans has seen a downward trend over the past few years.
Despite the high level of dollarization, there has been a slight increase in the share of local currency within the banking system. The National Bank of Cambodia has been advocating for greater use of the local currency to enhance monetary policy effectiveness. This incremental increase in local currency usage is seen as a positive sign for the country’s monetary policy objectives.
Bank credit remains predominantly directed towards the private sector, with corporate entities receiving approximately three-quarters of the total credit. The distribution of bank credit highlights a concentration in specific sectors such as retail trade, mortgages, and personal loans. Corporates continue to be the primary recipients of bank credit, underscoring the sector’s pivotal role in the economy.
Credit risk has visibly increased across various sectors and institutions, with non-performing loans (NPLs) posting a sharp increase. The specific provisions for NPLs have also risen in tandem, reflecting heightened risk management practices. The rise in NPLs is a concern, but the corresponding increase in specific provisions indicates that banks are taking necessary measures to mitigate risks.
A Significant Decline In Profitability Metrics
The profitability of banks has been adversely affected by greater interest expenses and higher provisions. Net profits have plummeted, with commercial banks experiencing a significant decline in profitability metrics. Higher interest expenses and increased provisions have significantly impacted banks’ profitability, presenting a challenging time for the sector.
Read More: Spotlight – $416M+ in Profit Wiped From Cambodian Banks in 2023
Liquidity within the banking system has generally improved, and capital adequacy ratios have inched up, providing a buffer for banks to withstand various economic shocks. Improved liquidity and higher capital adequacy ratios are reassuring, as they provide a cushion for banks in these uncertain times.
Nevertheless, the risks remain elevated, requiring continuous monitoring and vigilant supervision. The National Bank of Cambodia emphasizes the importance of proactive measures to address potential vulnerabilities. Continuous monitoring and vigilant supervision are crucial to ensure the stability of the banking sector, with timely actions necessary to address any emerging risks.
