Trials reflect weak economic ground for Cambodian banks

Wide credit-to-GDP elevate risks linked to economic imbalances.

Economic pitfalls to Cambodia’s banking sector remain high, reflecting the country’s feeble income level, underdeveloped economy, and stifled monetary and fiscal flexibility, a S&P Global Ratings report revealed.

Hefty private sector debt, concentrated lending, relaxed underwriting standards, a very weak payment culture, and potential latent asset quality issues underscores credit risk in the country.

Risks linked to economic imbalances are also elevated on the back of a widening credit-to-GDP whilst the property market has become progressively vital to growth, S&P said.

Cambodia also plays host to a frail banking regulatory framework with passive regulation and inhibited both fiscally and politically. Regulatory initiatives only result in marginal advancements over time and are not in pace with the speedy development of the banking system, the report noted.

In addition, risk-adjusted returns are limited by an oversupply of banks and financial institutions. For S&P, the country’s bank failures have compromised depositor confidence and deposit stability.

“We understand that uncertainty about COVID-19 has led to a flight to quality in deposit funding, resulting in some financial institutions having to substantially increase deposit rates to attract and retain customers.”

Industry risks are stable for Cambodian banks as the sector will maintain a very simple business mix and manageable risk appetite, which cuts risks from high loan growth. Customer deposits will still be the sector’s main funding source, although some lenders will increase external funding.

New listings on the domestic stock exchange and the issuance of local currency bonds has gradually improved domestic markets. However, despite the central bank's initiatives to stimulate the interbank market, it will take time before any increase in system-wide access to external funding will materialise.

Moreover, Cambodian banks' profitability will weaken due to declining margins and rise in credit costs arising from the COVID-19 pandemic, the report concluded.