The non-performing loan (NPL) ratio is expected to surpass five percent in 2023, possibly the highest in recent years, following the end of the regulatory forbearance period in June last year, with a likelihood of it easing in 2024.

The projection by investment and advisory firm, Mekong Strategic Capital (Cambodia) Co Ltd (MSC), was made on the back of increased provisioning by the banking sector as loans were reclassified during the two-year repayment moratorium.

Against this backdrop, loan growth might compress to a single digit compared to a 17 percent increase in 2022 and return to a double-digit expansion in 2024, as predicted in MSC’s latest report on the sector, Scale: Measuring What Matters.

To date, the banking sector comprises 58 commercial banks, 82 microfinance institutions, four microfinance deposit-taking institutions (MDIs), 16 leasing firms and nine specialised banks.

It reported a total net profit of $1.2 billion in 2022, marginally lower than $1.3 billion a year ago due to higher credit costs and expenses, as revenue climbed to $4.1 billion from $3.5 billion in 2021.

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The sector’s return-on-equity slipped to 8.4 percent in 2022 from 10.2 percent a year ago.

‘Fight for deposits’

Last year, loan growth outpaced that of deposits (eight percent), amid liquidity tightening, which resulted in a “sharp increase in interest rates and a deterioration of loan-to-deposit ratio”.

To be sure, loans have been expanding for five years straight, putting pressure on banks to fill a “funding gap of approximately $11 billion”.

Noting that loan-to-deposit ratio rose to 129 percent in 2022, which “until recent years was traditionally around 100 percent”, MSC opined that the difference might ease in coming years.

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Back in 2012, deposits made up 90.5 percent of banks’ funding mix while borrowings and subordinated debts comprised 8.1 percent and 1.5 percent, respectively.

Ten years on, deposits have fallen to 85.1 percent, with borrowings rising to 13.07 percent and subordinated debts inching up to 1.8 percent.

This has created a situation where banks “fight for deposits”, meaning that they need to lure customers with attractive interest rates, where MSC has seen banks switching to term deposit accounts from transaction accounts.

In doing so, cost of funds have increased by 100 basis points, or 39 percent, between June last year and this year, which has inadvertently pushed up loan interest rates.

“A third of the increased funding cost is due to the change in mix from transaction or savings [accounts] to term deposits [fixed] and two-thirds are due to rising deposit rates.

“Due to liquidity tightening, banks are fighting harder for deposits, with some offering up to 10 percent on term deposits,” MSC said, pointing out that ABA Bank, ACLEDA and Canadia Bank held the top three positions in the deposit market.

Banks are increasingly looking for offshore borrowings to cover the “growing gap” between loan growth and deposits.

While doing so, environmental, social and governance (ESG) principles are becoming important as international lenders and investors assess sustainability.

“The liquidity crunch would contribute to the slowdown of the sector’s loan growth,” MSC asserted.

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Sizable exposure

The report, which analysed the sector’s performance last year with an outlook this year, showed that 42 percent of banking loans in Cambodia were approved by ABA Bank, ACLEDA, Canadia and Prasac, which MSC called the “big four”.

Canadian-owned ABA Bank led the leaderboard with $6.4 billion loans, followed by ACLEDA ($6.2 billion), Canadia ($4.6 billion) and Prasac ($4.3 billion).

According to MSC, NPL grew to 3.1 percent in 2022 from one percent in 2021, with the real estate segment accounting for 26 percent.

In that, the real estate sector represented 33 percent of the total loans last year, growing intensely at over 52 percent or by nearly $16 billion in the last five years, the investment and advisory firm stated.

According to MSC, the sector possesses the highest volume of NPLs at $445 million compared to others, albeit the NPL ratio of 2.9 percent was considered “reasonable”.

The sector’s one-third focus in real estate indicated a “sizable” exposure to the asset classes.

“This concentration has a limiting effect on a bank’s appetite to continue supporting the sector at current growth rates,” it said, adding that the top 10 financial institutions in Cambodia held 55 percent of the real estate sector loan book. “But are otherwise relatively well-diversified.”

Real estate loans in 2022 were mainly supported by landed property developments, construction and home loans.

“Fortunately, most banks do not have material exposure to high-rise commercial or residential developments,” MSC said.

The NPL rate for the retail sector, which was the second largest growth sector, stood at 3.4 percent, indicating that exposure to the two largest asset classes (including real estate) is being “well-maintained”.

“As expected, with the travel restrictions and lockdowns during Covid-19, the hotels and restaurants sector reported a highest sector NPL at 10.7 percent,” MSC said.

Going forward, MSC maintained that the banking sector is “very well-capitalised” in the region, with capital adequacy ratio at over 22 percent. “This positions the sector well to absorb an economic slowdown.”

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