Cambodia investment Review
ACLEDA Bank Plc’s proactive risk management and conservative strategy are expected to sustain its financial resilience, despite challenges posed by Cambodia’s uneven economic recovery. This is according to S&P Global Ratings, which affirmed the bank’s rating at B+/Stable/B after reviewing its second-quarter results for 2024.
The results, which covered the period ending June 30, aligned with the rating agency’s expectations, reinforcing confidence in ACLEDA’s management capabilities to navigate economic stress in several sectors. “Management has the skills and capabilities to navigate the strains of an uneven recovery in sectors of the Cambodian economy that are under pressure,” the report stated.
Strong Funding and Deposit Growth Amid Economic Pressures
The economic sectors most affected, including tourism and construction, are trailing behind the broader recovery, leading to a notable rise in nonperforming loans (NPLs) across Cambodia’s banking industry. As of June 2024, gross NPLs had climbed to 6.8% for the sector, a significant increase from pre-pandemic levels of 2%. Microfinance institutions (MFIs) faced even greater strain, with NPLs surging to 8.3% from 0.8% in 2019.
Despite these challenges, ACLEDA has demonstrated more robust credit quality than many of its peers, reporting a lower NPL ratio of 5.7%. According to S&P, this comparatively better performance reflects the bank’s conservative underwriting standards and the diversity of its customer base. “ACLEDA’s reported NPL ratio of 5.7% is lower than the industry average, a testament to its better underwriting standards and a more diversified and granular customer base,” the report added.
One of ACLEDA’s key strengths lies in its funding base, underpinned by its position as one of Cambodia’s oldest and largest banks, with the most extensive branch network in the country. This broad network allows the bank to mobilize deposits efficiently and maintain strong customer loyalty. ACLEDA also plays a crucial role as the primary bank handling the Cambodian government’s payroll.
The bank’s deposits saw a healthy growth of 9% in the first half of 2024, and by the end of the year, it had achieved a 97% loan-to-deposit ratio, compared favorably to the sector average of 120%. “ACLEDA continues to show strong funding capabilities, with its extensive network and critical role in the government’s payroll system driving a 9% growth in deposits,” said Ruchika Malhotra, another S&P analyst from Singapore.
Addressing NPL Ratio Breaches and Covenant Challenges
However, some headwinds remain. ACLEDA’s NPL ratios fell out of compliance with debt covenants on certain borrowings as of June 30, 2024. Despite this breach, S&P Global Ratings maintains confidence in the bank’s financial fundamentals and its ability to secure waivers from its lenders. “We believe ACLEDA will weather this episode of covenant breaches with no major dent in its financial risk profile. The bank is expected to secure the necessary waivers from lenders, given its sound financial fundamentals,” the report stated.
As Cambodia continues to recover from the economic effects of the pandemic, certain sectors remain under strain, impacting overall credit conditions. ACLEDA has maintained a prudent stance on loan growth, recording a modest annualized increase of 1.9% in the first half of 2024. This cautious approach is expected to help maintain the bank’s capital buffer. S&P projects ACLEDA’s risk-adjusted capital (RAC) ratio to remain comfortably between 6%-7% over the next two years.
According to S&P, ACLEDA’s focus on maintaining stability amid challenging conditions will be critical for navigating ongoing uncertainties in the Cambodian economy. “We expect ACLEDA to maintain a modest growth appetite amid the challenging economic conditions in Cambodia, with its risk-adjusted capital ratio projected to remain stable over the next two years,” it concluded.
The current landscape, coupled with ACLEDA’s conservative approach, positions the bank well to maintain its financial health while the broader economy stabilizes. The overall tone from S&P remains confident in the bank’s ability to manage through the lingering effects of the pandemic and other pressures, such as those felt in Cambodia’s key economic sectors.
