Cambodian Banks Face Higher NPL in 2023

Slow recovery to key economic segments and the end of the forbearance period could result in higher credit losses, forcing banks to recognise increased non-performing loans
Banks in Phnom Penh, September 19, 2022. Kiripost/Siv Channa
Banks in Phnom Penh, September 19, 2022. Kiripost/Siv Channa

Cambodian banks will be increasingly forced to recognise non-performing loans (NPLs) starting this year, with the likelihood of them rising to 2.9 percent from two percent in 2021, and upward to 3.6 percent in 2023, S&P Global Ratings stated.

The higher NPL reflects “increased asset quality recognition post forbearance amid brisk credit growth, thus masking the recognition,” said primary credit analyst Ruchika Malhotra in Singapore in S&P’s latest global country-by-country outlook for 2023.

“At the end of 2021, total restructured loans formed about 10.5 percent of banking system loans and largely in stressed sectors affected by the pandemic, such as garment, tourism, construction, transportation, and logistics.

“The key to their repayment capacity post moratorium remains [with] the pace of recovery in tourism and property sectors,” she said.

S&P forecast that credit losses for Cambodian banks will increase to about 120 to 140 basis points (bps) in 2022 and 2023, from about 68 bps in 2021, reflecting additional provisioning costs for higher expected NPLs with the end of forbearance.

“Strong funding from foreign parents will provide support for Cambodian banks to benefit from being largely deposit-funded and backed by foreign parents. This mitigates pressure on funding conditions as a result of rate hikes by the US Federal Reserve and tightening liquidity in emerging markets,” Malhotra said.

Growth intact

Economic recovery will continue amid a challenging macroeconomic environment, which could pose risks to the country’s growth drivers, namely exports demand, tourism and investment flows.

Real gross domestic product (GDP) growth has been forecast at 5.5 percent in 2022 and to expand to six percent in 2023, supported by recovery in demand and resumption of international travel.

“The country's vaccination continues to progress well, which has facilitated its reopening and reinvigoration of foreign investments,” Malhotra said.

However, external headwinds and geopolitical risks make it hard for the country to achieve its average annual growth of eight percent growth seen during the past two decades.

Nevertheless, S&P believes that Cambodia's long-term growth story remains intact, given its competitive cost structure and young population.

Elevated credit risks

Next year, she expects high underlying credit risks because of continued brisk credit expansion, noting that banks have “aggressively” grown their balance sheets from a low base amid high GDP growth.

“The recession in 2020 resulted in a temporary slowdown in loan growth, but we believe credit expansion will remain brisk,” she added.

Sector-average loan growth is projected at 23 percent in 2023, while sector-average return on average assets for next year is forecast at 1.6 percent.

She also pointed out that the system's large share of high-risk exposures, particularly construction and real estate, might leave banks exposed to a sharp correction.

However, credit growth will remain strong as the country stays open.

In the meantime, the ratio of private sector debt-to-GDP might continue rising in 2023 to exceed 180 percent.

“We believe the risks to the microfinance sector, which accounts for 13 percent of systemwide loans, are elevated, reflecting inherently higher credit risks and more aggressive lending practices,” Malhotra said.