National Bank stands by investment even after EU trade sanctions on Cambodia
Move sparked by human rights concerns could affect some lenders, analyst says
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.