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Covid-19 loan restructuring driving bank profitability

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Source: Credit Bureau Cambodia (Data as of April, 2021)

Covid-19 loan restructuring driving bank profitability

Cambodia’s banking system reported higher earnings despite the pandemic as strong fundamentals sustain growth

In late March, a momentum for loan restructuring slowly built up, culminating in some 16,000 microfinance loans approved for revision within two weeks in May, when only 2,000 to 4,000 applications are commonly recorded monthly.

It is a figure that is likely to increase as weeks go by, said Kaing Tongngy, communications director of Cambodia Microfinance Association (CMA), as they monitor their members’ continued support for affected clients.

"The February 20 event”, which marked the beginning of Cambodia’s most challenging community transmission wave, bludgeoned the economy as movement restrictions – month-long curfew, lockdowns and austere colour-coded zones – were strictly imposed due to surging case numbers and fatalities.

Up to June 3, as cases surge again in the capital, 236 people have passed away while positive Covid-19 cases stood at 32,189. Some 24,763 have recovered so far.

Against this recent backdrop, particularly between end-February and mid-May, microfinance institutions (MFIs) swiftly restructured loans with $200,000 outstanding.

Altogether, as of mid-May 2021, 319,244 loan accounts worth $1.6 billion were approved for restructuring by 114 CMA members, including four banks, Tongngy shared.

Loan restructuring, ordered by the National Bank of Cambodia (NBC), is among a range of monetary measures that was implemented to raise liquidity in the banking system.

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Reducing debt servicing, extending payment deadlines, loan conversion - for example to interest-only repayments, and waiving or reducing collateral requirements were part of the loan restructuring process, Moody’s Investors Service Inc mentioned in a note last month.

The NBC called on banks and MFIs to continue restructuring loans until the end of the year, a move that has been extended several times in the past year to reduce the financial stress on affected individuals and business sectors.

While credit demand dropped in the period, as Tongngy pointed out, the restructuring process had spared a huge blow to the balance sheets of financial institutions, offsetting the assumed loss from lower loan applications in the MFI segment.

Accordingly, the entire banking system locked in only a 17 per cent credit growth in 2020, a major portion of that to retail and wholesale trade, compared to 27 per cent a year ago, which is why the loan restructuring policy is viewed as a small mercy for financial institutions.

In Channy, chairman of the Association of Banks in Cambodia said the extension of the loan restructuring period helped banks and financial institutions with continued liquidity, so that they can support their customers.

“In short, it is good for the bank and the customer,” he told The Post via a social messaging app.

Increased profitability

Internal data by Credit Bureau Cambodia (CBC) showed that 421,935 bank and MFI loan accounts worth $4.9 billion were restructured as of April 30, 2021, with 76.4 per cent of that belonging to banks.

In a year since May 2020, outstanding balance had grown to $34.2 billion, representing 3.5 million bank and MFI loan accounts, which set the non-performing loan (NPL) rate at 2.24 per cent in April.

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“NPLs are certainly going to increase once the restructuring period ends but the finance sector has enough of a cushion in terms of underlying earnings and capital to absorb the impact,” said former banker Stephen Higgins in reference to the initial March 2021 deadline.

Higgins, who is co-founder and managing partner of investment and advisory firm Mekong Strategic Partners Co Ltd, added that the feedback from industry participants in March was that a large portion of those who initially requested a loan moratorium had returned to paying status.

Asked if high NPL could affect lending trends of banks, he opined that some banks might exercise caution on further lending while others may not have the balance sheet capacity to increase lending.

“[Although] some banks may pull back on their lending, the sector overall should be in a position to meet loan demand,” he added.

Evidently the least affected sector in the pandemic, the financial sector in Cambodia emerged relatively unscathed compared to its peers in Southeast Asia which reported weak weighted average on return on assets (ROA) in 2020 as businesses recoiled over the period.

The banking system in Cambodia portrayed a more buoyant display with increased profit, averaging 38 per cent in first quarter of 2021, and marginally stronger ROA than last year as revealed by several banks and MFIs in their filings with Cambodia Securities Exchange.

For instance, public-listed Acleda Bank Plc’s net profit for its first quarter ended March 31, 2021 (1Q21) rose 31 per cent to $44.1 million from $33.6 million in the corresponding period last year, while revenue grew eight per cent to $156 million.

Its net interest income from lending activities and deposits was up 12.6 per cent at $101.3 million compared to $90 million last year while return on average assets was 0.66 per cent versus 0.54 per cent in 1Q20.

Similarly, 1Q21 net profit for Sri Lankan-based microfinance deposit-taking institution (MDI) LOLC (Cambodia) Plc, whose corporate bonds are listed on the local bourse, gained 24.5 per cent at $11.6 million versus $9.3 million in 1Q20. ROA came in at 1.09 per cent compared to 0.92 per cent in 1Q20.

Hattha Bank Plc, upgraded to commercial bank status from MDI last year, posted a 63.9 per cent increase in net profit with ROA up at 0.67 per cent.

In fact, the positive quarterly fiscal results is a continuation of earnings growth the banking sector achieved in 2020.

Among them, Advanced Bank of Asia Ltd (ABA) posted nearly 20 per cent increase in net profit at 617.3 billion riel ($151.6 million) in its financial year ended December 31, 2020 from 516.7 billion riel in 2019.

In its first financial quarter 2021, 10,498 loans were restructured with $537 million outstanding, naking up 13 per cent of its total portfolio. ABA termed those loans “high quality” as 90 per cent of their clients requested a grace period for loan principal but continued paying the interest.

Meanwhile, NBC found that despite the unprecedented shock, the banking system in Cambodia has been resilient with strong capital and liquidity buffers for both banks and MFIs, it wrote in its Financial Stability Review (FSR) 2020.

It said the capital and liquidity positions of the system were adequate, reflected by its capital adequacy ratio and liquidity coverage ratio (LCR), which are above the regulatory requirement.

Overall profitability remained sustainable for the banking system with a slight decline in the return on asset and return on equity, it said.

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“For banks, the ROA and return on equity [ROE] dipped to 1.7 per cent and 8.7 per cent in 2020 from 1.9 per cent and 9.8 per cent a year ago.

“MDIs’ ROE slipped to 14.8 per cent from 17.7 per cent as ROA stayed the same at 2.9 per cent,” NBC said, adding that MFIs experienced similar cuts in ROA and ROE.

Freeing up funds

Total assets in the banking system for 2020 rose 13.9 per cent, with banks covering most of the share at $50.5 billion, up 17.6 per cent from $43 billion in 2019, NBC stated.

Separately, Moody’s puts the total assets of banks and MFIs at almost 200 per cent of gross domestic product in 2020, having grown from around 50 per cent of GDP in 2010.

It said the attractiveness of Cambodia’s financial sector to foreign investors is driven by the country’s relatively early stage of development and its liberal foreign-investment regime.

“Despite experiencing such rapid growth, the financial system’s funding profile remains conservative and is predominantly deposit-funded,” said Moody’s, which assigned a ‘ba’ risk score for the banking sector.

The score on the sector, which it described as “large, both in absolute terms and relative to its peers”, was judged as having “speculative elements and are subject to substantial credit risk”.

While it flagged concerns on rapid credit growth in the construction and real estate sectors, which moderated in 2020, it noted that a key risk in Cambodia’s credit profile is the impact that a sudden reversal in the availability of credit would have on real GDP growth rates and the potential long-term economic problems stemming from a sustained collapse in real estate prices.

The adverse impact of the coronavirus pandemic on Cambodia’s economy poses severe risks for the asset quality in its financial system, Moody’s cautioned.

“MFIs, with total loans of around $6 billion or 23 per cent of 2020 GDP as of March 2021, are particularly exposed, with a large share of their lending to families that receive income from employment in pandemic-vulnerable sectors such as garments and tourism,” it said.

Here is why NBC is deemed to have rolled out measures to preserve the banking system’s asset quality, Moody’s said, which was by urging banks and MFIs to restructure loans of clients in key economic sectors.

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That being said, the overall growth and resilience of Cambodia’s financial sector is presumably a reflection of NBC’s micro prudential regulations in the past, which includes raising the minimum registered capital and LCR.

Its ongoing macroprudential policies have effectively helped support the sector. One such example was its Covid-19 intervention measure in April last year when it lowered the reserve requirement rate in riel and foreign currencies to seven percent.

This resulted in the freeing up of $1.8 billion which ensured liquidity risk management, provision of credit and loan restructuring.

NBC also reduced the interest rates on liquid-providing collateralised operation and negotiable certificate of deposits, tools that encourage financial institutions to lend in riel and foreign currency.

This meant that institutions were able to raise more funds to handle the situation, although it should be noted that deposits remain the dominant source of funds for banks, or about 67 per cent of the total in 2020.

On the contrary, MFIs still rely on borrowings and capital as its source of funding, which was around 54 per cent last year, NBC said.

Keeping a close watch

As the pandemic rages on, a close watch is being kept by NBC over the Covid-19 spread and the current level of lending and if it might end up causing excessive credit relative to the real economy.

“[This is if] the disease has a deeper and longer impact that [could] lead to a substantial decline in the growth rate of the economy,” NBC said in the 2020 review.

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As it is, the overall credit-to-GDP ratio has increased to 140 per cent in 2020 from 120.6 per cent in 2019, despite the moderation in domestic credit growth.

“The increase largely reflects the decline in the GDP due to the sharp economic downturn, rather than a significant increase in credit levels,” it said, hence the necessity to monitor the contagion.

However, it explained that the high credit was because Cambodia mainly relied on the banking sector to finance its economic activities, given that it is a fast-growing economy and the financial market is still at an early stage of development.

As such, NBC said the financial and banking sector would continue to play a crucial role in supporting economic recovery, which meant safeguarding the financial sector’s health and resilience.

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