Will the financial sector continue to buck Covid-19 headwinds?

Cambodia’s banks and financial institutions are least affected by the economic conditions but a prolonged pandemic could knock the wind off its wings

THE banking industry in Cambodia has remained resilient over the months, having bucked the crippling effects of the coronavirus pandemic on the back of strong fundamentals, and stimulus measures implemented by the government and central bank.

But industry players are uncertain whether this buoyant predicament, where profits are estimated to have risen about 20 per year-on-year in the first half of 2020, will sustain if current economic conditions prolong.

The risk level is being monitored by financial institutions as pressure on three economic pillars – tourism, construction and exports – piles on, a move echoed by Moody’s Investors Service Inc, which opined that the global outlook for banks has turned “decisively negative”.

“At this stage, nobody expects the global economy to fully recover by 2021. [The impact on the sectors] will certainly affect bank portfolios,” said In Channy (pictured), chairman of the Association of

Banks in Cambodia (ABC).

He cautioned that the increase in profit is to be compared with an average yearon-year profit growth over the past eight years.

“[ When set against each other] growth has significantly slowed in the first two quarters of 2020 [although] profitability is still positive,” Channy said.

This is so, seeing that profitability also stems from banks continuing to earn interest income from existing restructured loans.

Cambodia’s monetary measures are unlike its regional peers, Thailand, Malaysia and Singapore, which granted a grace period of six to 12 months on principal and interest payments.

Undeniably, National Bank of Cambodia (NBC)’s decision was a saviour for the players in the sector, so to speak. For instance, public-listed Acleda Bank Plc, where Channy serves as president and group managing director, maintained a steady year-on-year rise in net interest income (NII) and profit. It posted a 10.2 per cent growth in NII at $177.1 million in the cumulative six months period ended June 30, 2020 as opposed to $160.7 million last year.

Total loans and advances inched up 0.7 per cent to $3.87 billion in the same period from $3.85 billion in 2019.

Taken together, this growth partially contributed to a 9.6 per cent gain on Acleda’s net profit of $63.7 million for the first half this year compared to $58.2 million a year ago.

Overall, loans in the Kingdom to consumers and businesses climbed nearly 20 per cent to $34.4 billion as of June 30 this year, partly spurred by the low interest loans offered under Covid-19 circumstances. Although in August it dipped to $1.6 billion from $1.8 billion a year ago.

Bank and financial institution assets totalled $54.1 billion in the first half of this year. They consisted of loans (about 60 per cent), deposits with the central bank (22 per cent) and loans to other financial institutions (10 per cent). The remaining components were made up of cash, gold, securities and fixed assets.

At the same time, overall deposits expanded by 12.3 per cent to $30.5 billion while bank capital gained 10.8 per cent at $6 billion.

Looking at the figures, it is no surprise that the financial institution sector is none too perturbed as oftentimes it is one of the most stable sectors in a country.

“Banks by and large are robust, thanks to 10 years of broadly benign economic conditions and relentless regulatory pressure to reinforce balance sheets, most banking systems are in good shape.

“They have the capacity to withstand an inevitable rise in bad debts over the coming months as individuals and companies begin to default,” Moody’s said in a note on September 24.

But one cannot dismiss the notion that the sector is not without risks.“The key threat to banks is a meaningful second wave of the pandemic, leading to either a new round of blanket lockdowns, with further severe implications for economic activity, or to selfimposed changes in behaviour with a similar if milder effect.

“In this case, bank creditworthiness would likely suffer a more durable erosion,” Moody’s wrote.

Stimulating the sector

For now, regulatory policies that were enhanced by NBC after the 2008 global financial crisis have somewhat helped to shore up requirement reserves and capital conservation buffers against any system shock.

Based on its data, the solvency