Na­tional Bank stands by in­vest­ment even af­ter EU trade sanc­tions on Cam­bo­dia

Move sparked by hu­man rights con­cerns could af­fect some lenders, an­a­lyst says

Ottawa Citizen - - Financial Post - GEOFF ZOCHODNE

TORONTO Na­tional Bank of Canada says its prospects for Cam­bo­dia, a key in­ter­na­tional growth mar­ket, re­main solid, even af­ter the Euro­pean Union de­cided it will slap trade sanc­tions on the south­east Asian coun­try be­cause of its hu­man-rights record.

Mon­treal-based Na­tional owns Cam­bo­dia’s Ad­vanced Bank of Asia Ltd., or ABA, which has more than 75 branches, 350 ATMs and hun­dreds of thou­sands of cus­tomers in the coun­try of 16 mil­lion.

The Euro­pean Com­mis­sion on Wednesday said that “due to se­ri­ous and sys­tem­atic vi­o­la­tions of hu­man rights,” it had de­cided to with­draw some of the duty-free ac­cess that Cam­bo­dian ex­ports are granted to the bloc through the EU’s Ev­ery­thing But Arms (EBA) regime.

Cam­bo­dia’s gov­ern­ment could take ac­tion to mit­i­gate the im­pact, but the EU sanc­tions might still af­fect con­sump­tion and banks ex­posed to small and medium-sized busi­nesses, such as Acleda Bank and ABA Bank, ac­cord­ing to S & P Global Rat­ings an­a­lyst Michael Puli.

“These banks have a highly di­verse cus­tomer base, which means they are ex­posed to gen­eral eco­nomic con­di­tions, but pro­tected from in­dus­try-spe­cific is­sues (such as con­struc­tion),” he said.

The EU is Cam­bo­dia’s big­gest trad­ing part­ner, ac­count­ing for 45 per cent of the coun­try’s ex­ports in 2018, a press re­lease from the bloc said.

Yet the “du­ra­tion, scale and im­pact of Cam­bo­dia’s vi­o­la­tions of the rights to po­lit­i­cal par­tic­i­pa­tion and to the free­doms of ex­pres­sion and as­so­ci­a­tion left the Euro­pean Union with no other choice than to par­tially with­draw trade pref­er­ences,” Euro­pean Com­mis­sion vice-pres­i­dent Josep Bor­rell said in a press re­lease.

Europe’s de­ci­sion comes af­ter Na­tional, Canada’s sixth-largest bank, in­creased its ex­po­sure to the fast-grow­ing Cam­bo­dian econ­omy, which has been ex­pand­ing around seven per cent an­nu­ally.

Na­tional last Oc­to­ber said it had spent an­other $83.5 mil­lion to buy the 10 per cent of ABA it did not al­ready own, push­ing its to­tal in­vest­ment in the bank to $424 mil­lion. ABA was es­tab­lished in 1996 and is the third-largest com­mer­cial bank in Cam­bo­dia, ac­cord­ing to Na­tional Bank’s 2019 an­nual report.

“We follow closely growth fore­casts for Cam­bo­dia, which are sound,” a spokesper­son for Na­tional Bank said in an email fol­low­ing the EU an­nounce­ment. “ABA Bank fo­cuses on do­mes­tic bank­ing and is a driver of eco­nomic and so­cial growth in Cam­bo­dia. It mainly sup­ports small busi­nesses, in­di­vid­u­als and fam­i­lies with their fi­nan­cial needs.”

Al­though Na­tional re­mains con­fi­dent in Cam­bo­dia, the coun­try’s gov­ern­ment has drawn in­ter­na­tional con­dem­na­tion and, now, eco­nomic reper­cus­sions loom.

Cam­bo­dian Prime Min­is­ter Hun Sen has been in power for more than three decades, and his rul­ing party was re-elected in July 2018 af­ter a cam­paign “widely rec­og­nized to have been marred by voter in­tim­i­da­tion and ma­nip­u­la­tion of the polls,” the Cana­dian gov­ern­ment said at the time. The main op­po­si­tion party had been dis­solved be­fore the vote and its leader im­pris­oned.

The Cam­bo­dian bank­ing sec­tor has been af­fected by past po­lit­i­cal de­vel­op­ments: nearly US$630 in de­posits was with­drawn dur­ing the coun­try’s 2013 elections, ac­cord­ing to S & P Global Rat­ings.

“A sim­i­lar oc­cur­rence was avoided for the 2018 elec­tion be­cause of sen­ti­ment that the gov­ern­ment would be re-elected and un­rest limited,” S & P said in De­cem­ber in a bank­ing-in­dus­try risk as­sess­ment of Cam­bo­dia. “How­ever, we be­lieve that there re­mains an in­her­ent lack of de­pos­i­tor con­fi­dence.”

Europe is tak­ing aim at around one-fifth, or one-bil­lion-eu­ros’ worth, of Cam­bo­dia’s an­nual ex­ports to the EU.

The EBA with­drawal, bar­ring any ob­jec­tions from the EU par­lia­ment or gov­ern­ments, will kick in Aug. 12, 2020, and af­fect cer­tain gar­ments and footwear and all travel goods and sugar from Cam­bo­dia.

Puli said the par­tial sus­pen­sion of EBA priv­i­leges has “some neg­a­tive im­pact” on Cam­bo­dia’s econ­omy, which was al­ready facing the prospect of less for­eign in­vest­ment from coro­n­avirus-stricken China.

“In re­gards to ABA Bank, we don’t ex­pect the EBA agree­ment to un­der­mine its cred­it­wor­thi­ness and put into ques­tion our cur­rent rat­ing,” the Sin­ga­pore-based an­a­lyst said in a writ­ten re­sponse. “We cur­rently at­tribute no sup­port from the Na­tional Bank of Canada and, given the im­ma­te­rial size of ABA Bank to the wider group, ex­pect any sup­port pro­vided to ABA would un­likely im­pact the group’s cred­it­wor­thi­ness.”

ABA is a rel­a­tively small part of Na­tional Bank’s over­all business, but the Cana­dian lender’s earn­ings have been lifted by the growth in both un­der-banked Cam­bo­dia and at Phnom Penh-based ABA.

CIBC World Mar­kets an­a­lyst Robert Se­dran in De­cem­ber noted man­age­ment was call­ing for “sus­tained earn­ings mo­men­tum” at ABA as well as dou­ble-digit growth at Credigy, Na­tional’s U.S.-based spe­cialty-fi­nance sub­sidiary.

For the fis­cal year end­ing Oct. 31, ABA Bank’s net in­come was $128 mil­lion, up 86 per cent from the pre­vi­ous year. Na­tional’s to­tal net in­come for its fis­cal 2019 was ap­prox­i­mately $2.3 bil­lion, up four per cent from 2018.

“With the outlook (for) ABA still ro­bust and man­age­ment guid­ing to­wards a bet­ter F2020 for Credigy, this smaller por­tion of the bank will make an out­sized con­tri­bu­tion to earn­ings growth next year,” the CIBC note pre­dicted.

(The) du­ra­tion, scale and im­pact of Cam­bo­dia’s vi­o­la­tions ... left the Euro­pean Union with no other choice than to par­tially with­draw trade pref­er­ences.


Con­struc­tion sites are idle in Phnom Penh, Cam­bo­dia, on Thurs­day. Na­tional Bank is not wor­ried about the im­pact of EU trade sanc­tions against Cam­bo­dia. It re­cently in­creased its ex­po­sure to the fast-grow­ing Cam­bo­dian econ­omy. It owns Cam­bo­dia’s ABA.

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