End of debt restructuring, time to tackle rising NPL ratio

The Cambodian banking system has just completed a 26-month debt restructuring exercise in which dozens of loan accounts were reviewed, classified and provisioned as the rate of non-performing loans rose, causing slight unease related to the credit risk

Implemented in April 2020, the Covid-19 debt restructuring measures ended in June this year as the economy began to improve.

The number of active restructured loans as of June 30, 2022 was 308,500 accounts, representing an active restructured loan balance of $4.2 billion, according to data from the Credit Bureau (Cambodia) Co Ltd (CBC).

Last year, the National Bank of Cambodia (NBC) said that accounts and the value of restructured loans (which fluctuated throughout the period) amounted to 310,746 accounts and 20.1 trillion riels ( approximately $4.9 billion), respectively.

In its 2021 Financial Stability Report, the central bank said microfinance deposit-taking institutions (MDIs) carried out the highest loan restructuring last year, at 136,220 loan accounts.

In comparison, commercial banks restructured fewer loans, although the value was higher at 16.6 trillion riels.

Extended several times (final extension ended June 30, 2022), the loan restructuring plan as well as the classification and provisioning of loans significantly supported the banking sector, which had revised 12.9% of loans by the end of 2021 .

For example, the regulatory forbearance measures (loan restructuring exercise) allowed banks to restructure loans without changing their loan classification, which ‘delayed the formation of non-performing loans (NPLs)’.

Similarly, loan classification and provisioning revealed that 63% of “special mention” loans indicated that a majority of restructured loans were considered viable by banks.

Noting these findings, the BNC wrote in its Financial Stability Report that the “broader classification” of NPLs suggested that the impact of the pandemic on banks’ asset quality was “somewhat contained.”

At the end of 2021, the agriculture, forestry and fishing sector constituted the “largest outstanding size of NPL in absolute terms” at 577 billion riels ($140.5 million), followed retail trade (423 billion riels) and construction (271 billion riels). ).

While most sectors recorded new NPLs, the hotel and catering sector saw the largest increase in NPLs at 108 billion riels ($26.3 million). At the same time, the NPL ratio in the sector has also increased due to difficult circumstances.

Three-year high

In its mid-year global banking outlook report, Here Comes The Rain Again, credit rating agency S&P Global Ratings forecast an NPL ratio of just above 2.5% at the end of 2021, given the extended restructuring program.

He also estimated that “a tenth to an eighth” of restructured loans are “weak” and borrowers may not be able to “resume repayment after the moratorium expires”.

In particular, a lag in the tourism and real estate sectors could push the NPL ratio to around 3.5% by the end of 2023, said Singapore-based Ivan Tan, an analyst at S&P Global Ratings.

He said that while the economy is on the road to recovery, some sectors have lagged, particularly tourism and hospitality.

BNC Financial Stability Review 2021

“Tourist arrivals remain significantly below pre-covid levels, and will have negative implications for cash flow and the ability of these businesses to repay their loans,” Tan told The Post.

In addition, S&P forecast an increase in “credit losses” of 100 to 150 basis points in 2022 and 2023, compared to around 75 basis points in 2021, reflecting additional provisioning costs for expected higher NPLs for the banking sector. .

Sharing his views on this, Oeur Sothearoath, CEO of Credit Bureau (Cambodia) Co Ltd (CBC), concurred with the report’s forecast of sustained credit growth and credit risks which are currently at elevated levels.

However, CBC observed that the pandemic, volatility in the global economy and geopolitical tensions have prompted financial institutions to be more cautious and adopt more prudent management practices.

Apparently necessary in the current circumstances, given that the 30+ DPD (more than 30 days past due) ratio (an NPL indicator) for the consumer loan portfolio stood at 2.69% as of June 30, 2022, the highest in the last three years since 2020.

The total outstanding loan balance for consumer loans, which includes business loans to individuals, was $44.03 billion. The NPL ratio also suggested a decline in credit quality of 2.57% in the prior quarter ended March 31, 2022.

Although it reports a “much higher level of credit risk”, Sothearoath said it is apparently lower than many ASEAN countries.

“Credit risks remain in the market, but based on our data trends, we see early signs of a gradual decline in credit risks and expect credit quality to improve in the second half of the year.

“In fact, the adoption of the code of conduct [this March] by the financial sector was a constructive move to help manage potential risks through supply-side discipline,” he said by email.

Deploy measures

Cambodia has experienced high and sustained credit growth for several years, thanks to a growing middle-income population, strong youth demographics, new entrants and competition in the banking sector, and economic activity and growing investments, said Oudom Cheng, an economist at NBC.

While credit growth has also been driven by leverage and speculation, the signal for growth is that there is more “real demand” and “productive absorption”, he added. .

Citing NBC’s 2022 semi-annual report, Oudom said banks’ NPL ratio in April this year had risen slightly – a “lagging” indicator that implied “repayments have not been benign”.

At the same time, sectors supporting the economy have improved, although they remained subdued in the first half of 2022, he said, citing the report.

“While the expansion of the Cambodian economy has accelerated following the reopening of borders, it is likely to be dampened by an expected slowdown in global growth,” he noted, highlighting the outlook ahead. the decline of the International Monetary Fund (IMF) for the second half of 2022.

Since Cambodia is a “small open economy” dependent on global demand, it is therefore expected to be hampered by the bleak global outlook.

Taken together – the IMF forecast, the slightly elevated NPL ratio and the expiration of the loan restructuring exercise – these factors appear to support S&P’s view of credit losses in the banking sector, he said.

Nevertheless, Oudom said, the overall health of the banking sector remains sound, which is reflected in its high capital and liquidity position.

“At this stage, the authorities should be more vigilant to continue to maintain financial stability while standing ready to deploy a mix of policy measures to protect the economy and the financial sector from external shocks,” he added. .

Good quality credit

There is no doubt that the banking sector, which includes MDIs and Microfinance Institutions (MFIs), has recorded steady credit growth, albeit at a dizzying pace.

According to NBC, the credit-to-gross domestic product (GDP) ratio came in at 174% in 2021, causing the gap to “spike” to nearly 43%.

While that’s a concern, NBC attributes it to the “pandemic-induced contraction” in Cambodia’s GDP.

“Additionally, the rapid pace of credit drawdown can be attributed to an increasing degree of financial deepening as banks expand their reach and, consequently, credit disbursement,” the central bank said in its report on financial stability last year.

The private sector was the sole beneficiary of bank credit, up 26.4% year-on-year, with the corporate sector – the largest borrower at 119 trillion riels (about $29 billion), followed by households (36,300 billion riels).

During the first half of this year, with the economic recovery on track, the assets of the banking system (commercial banks, MDIs and MFIs) increased by 17.5% to reach 305.4 trillion riels (75.2 billion), NBC reported.

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NBC Financial Stability Review 2021

Of this amount, consumer loans soared 23.4% to 209 trillion riels ($51.5 billion), while consumer deposits amounted to 32.3 trillion riels ($8 billion). dollars), after increasing by 16%.

As of June 30, 2022, banks and financial institutions have restructured 268,042 loan accounts, equivalent to 18 trillion riels or $4.5 billion.

Despite the headwinds, the central bank maintained that the banking system is stable and resilient due to capital strength, high liquidity, good credit quality and reasonable profitability.

For example, the year-over-year ratio of the banking institution’s return on assets and return on equity was 1.5% and 7.7%, respectively, and 3.4% and 15 .5%, respectively, for microfinance institutions.

“Maintaining profitability has also strengthened the resilience of banking and financial institutions to crises, as well as their ability to expand their financial services,” he said.

As for the NPL ratio – banks (2.9%) and MFIs (2.3%) – which the BNC noted as being “slightly higher” in the first half of 2022, it nevertheless indicated that “credit in the banking system was of good quality. and strong”.

“Strong Foresight”

Returning to the likelihood of an increase in the NPL ratio to 3-4% by the end of 2023, as projected by S&P, Raymond Sia, president of the Banking Association of Cambodia, expressed difficulty in making an estimate. exact rate.

He said it is subject to a number of factors, with borrowers’ ability to repay being the main objective, which in turn depends on their business performance, economic conditions and other factors.

While Cambodia is returning to some level of normality with open borders, thanks to the government’s “strong foresight” to ensure high vaccination rates, many countries in the region and around the world are still affected by the pandemic.

Sia said new variants of Covid-19 are still being discovered amid the emergence of monkeypox alongside supply chain disruption, high inflation and oil prices caused by war in Ukraine.

“Cambodia is an open and business-friendly economy with key industries such as tourism, clothing and footwear production largely dependent on other countries – their economic conditions [which affect demand] travel restrictions.

“Despite the challenges and headwinds encountered, Cambodian banks are well capitalized and managed under the careful oversight of NBC. For this reason, the Cambodian banking sector can look to the future with confidence anticipating a stable and encouraging outlook,” he said.

Sallie R. Loera