Branching Out

Growth in Cambodia’s financial sector has banks talking expansion

Philip Heijmans
December 11, 2013

Growth in Cambodia’s financial sector has banks talking expansion

A Canadia Bank staff member counts US dollars in Phnom Penh
A Canadia Bank staff member counts US dollars in Phnom Penh

Along the northern end of Phnom Penh’s busy Monivong Boulevard, construction crews are hard at work on a $45m tower to house the new headquarters of locally grown Acleda Bank. Having opened the first foreign-owned microfinance subsidiary in Myanmar in January, Acleda only days earlier continued its expansion at home by opening a new branch in northeastern Mondulkiri province.
Though Acleda is the country’s largest bank, they are not the only one making noise – Malaysia-based CIMB Bank recently completed an expansion consisting of 11 branches across the country, while Vietnam’s Sacombank, one of the most recent banks to offer commercial services in Cambodia, opened their fifth branch in Phnom Penh.
Deposits in the banking sector in 2012
At the same time, ANZ Royal Bank and Canadia Bank are hushed about future expansions in terms of new subsidiaries, services and real estate endeavours.
In a country where fewer than two million people – or just under 15% of the population – have bank accounts, Cambodia’s 32 operational commercial banks and dozens of microfinance institutions (MFIs), have made it their mission to firmly plant financial services in Cambodia. They are succeeding, but there are risks.
According to the National Bank of Cambodia, total deposits in the banking sector in 2012 grew 24.89% to reach $6.22 billion, compared with $4.98 billion in 2011. At the same time, new loans grew an eyebrow-raising 34.2% last year to reach a total of $5.89 billion, the same data shows.
“Growth in the banking sector is reflected by the continuous strong growth of the country’s economy, particularly in the private sector. The banking sector expects a continued expansion and we [expect]… new players to enter into the market as the population still remains largely banked,” said CIMB’s head of strategy and finance, Heng Vuthy. He added that CIMB experienced a tripling of revenues to $4.5m last year compared to the year before, as their loan portfolio doubled to a total $85m.
Canadia Bank, one of the largest banks in the country, also achieved substantial revenues last year, as its operating income jumped more than 35% to reach $70m, while achieving annual deposit growth of 22% to reach $1.28 billion last year, according to the bank’s CEO Michael Lor. The bank’s loan portfolio grew nearly 20% to $880m.
Canadia Bank loans
“As a rapidly developing economy, Cambodia continues to offer much attraction and [many] opportunities to financial institutions that are looking to invest in this region,” Lor said. “This will of course heighten competition amongst the banking participants. However, it is pertinent to highlight that, whilst the credit growth had been significant during the past few years, access to formal credit in Cambodia is still quite under-penetrated.”
The situation is not just a by-product of growing economic wealth, but a fundamental shift in Asia’s banking paradigm toward a consumer banking scheme that was all but ignored leading up to the 1997 Asian financial crisis, when less than 15% of the banks’ balance sheets came from retail services.
Despite Cambodia’s recent growth in banking activities, many bankers are worried that the sheer number of competing commercial banks, along with several MFIs planning to convert to fully-fledged banks by 2015, will saturate the market and threaten revenue sustainability.
“If we look at the experience of the other regional countries, one would have to conclude that consolidation of the financial sector would have to naturally take its course. This is pertinent as the banking institutions would have to become more efficient in order to remain relevant,” Lor said.
He added that the establishment of the Asean Economic Community, expected in 2015, may be a catalyst for such consolidation, as financial institutions would need to compete with larger and stronger regional banks. “The potential need to adopt international statutory and accounting standards would also hasten the need for smaller banks to merge in order to maintain a reasonable scale,” Lor said.
Organisations such as the World Bank and International Monetary Fund (IMF) have also repeatedly warned that escalating credit growth in the Cambodian banking sector is creating a number of risks.
“While inflation is expected to remain low, private credit has continued to grow rapidly with limited availability and use of instruments of control,” the IMF stated in a January report. “Continued rapid credit growth could jeopardise macroeconomic and financial stability, and increase contingent fiscal liabilities.”
Grant Knuckey, CEO at ANZ Royal Bank, said one of the main factors contributing to credit risk is banks only granting loans within a small pool of investors, reducing any cushion from non-performing investments and creating unhealthy competition.
“At the moment credit growth is mainly contained within a relatively defined pocket of the economic community in Cambodia, so essentially its additional lending is to people who are already borrowing,” he said.
Knuckey added that banks might be inclined to lower their lending standards, loosen terms and conditions, and offer longer term loans and fixed interest rates in order to steal clients. “Frankly, I am beginning to see more of this, so that is a warning sign.”
Knuckey said that this small group of borrowers led to a substantial 2% drop in lending rates sector-wide over the last year, with those rates continuing to drop.
“[The credit growth rates are] definitely not sustainable forever and one reason for that is the compression in lending rates…. We know all banks will be faced with margin compression, and for some banks that will already be at a level that is uncomfortable relative to their cost of deposit funds,” he said.
ANZ Royal Bank’s lending portfolio grew below the industry average at just 10% in 2012, while deposits grew 20% and revenues by 8%, Knuckey said, although he would not give dollar amounts.
Nevertheless, there are ways to avoid some of the risk created by rapid lending, said In Channy, CEO of Acleda Bank. He said that the key to keeping credit risks under control is to make prudent short-term loans. Luckily, with the export market on an incline, returns can be achieved quickly since transactions are completed promptly.
“Trade cash turnovers are high with export loans and the loan period is short. That is compared to risky housing credits with loan periods between 10 to 15 years and payments made only once a year,” Channy said, adding that the trade sector makes up 40% of his bank’s portfolio, followed by the service and agriculture sectors at 21% and
18% respectively.
“Most of our loans go toward business productivity and development where, if compared to other countries, those loans go toward consumer goods that don’t generate revenue, so that is good for us,” Channy said, adding that Acleda now holds 92% of the total number of bank customers in Cambodia. Despite this figure, Acleda’s loan portfolio is $1.23 billion, or 21% of all loans.
Acleda Bank’s net profits after taxes last year reached $64.64 million, up 28.97% from the year before, while total deposits climbed 27.29% to $1.46 billion, according to audited data from the bank.
“You can see how accounts to loans ratio condenses – the rest of the banks have 79% of the total loan portfolio, but only 8% of the customers,” Channy said. “To me, this is a risk.”
Photo: Chor Sokunthea/Reuters

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