Despite challenging global conditions, Cambodia’s finance sector delivered a reasonable performance in 2022 with a strong balance sheet growth, offset by higher expenses and credit costs.

Credit costs are expected to remain high in 2023, according to a latest report on the financial sector by Mekong Strategic Capital.

The report said Cambodia has 58 commercial banks, nine specialised banks, five microfinance deposit-taking institutions (MDIs) and 82 microfinance institutions (MFIs) and 16 leasing companies.

Total loans stood at $53.2 billion in 2022, up from $45.4 billion with total deposits rising to $41.9 billion from $38.8 billion amid non-performing loan (NPL) ratio at 3.1 per cent from 2.1 per cent in 2021.

In 2022, total revenue rose to $4.1 billion from $3.5 billion while net profit slipped to $1.2 billion from $1.3 billion with return on equity (ROE) down at 8.4 per cent from 10.2 per cent.

The report pointed out that system liquidity tightened in 2022, driving up funding costs, which would continue into 2023. Fortunately, the system remains very well capitalised, it said.

“Banks with bigger contribution networks are winning, driven by rapid emergence of the mass-market segment in the past decade, made up of growing middle-income and small and medium enterprises.

“Banks that traditionally focussed on low-yield multinational corporations and high net worth customers and did not expand to service the mass market lost out to those that did,” the report mentioned.

Stephen Higgins, founder and managing partner of Mekong Strategic Capital who authored the report, stressed that commercial banks and MDIs held 97 per cent of the sector’s $53.2 billion total loan book, with the remaining three percent represented by nine specialised banks and 82 MFIs.

Sector loan growth of 17 per cent continued to outpace deposit growth (eight per cent) year-on-year.

The tightening of liquidity has seen a sharp increase in interest rates and deterioration in loan-to-deposit ratio (LDR) while the real estate sector makes up approximately 33 per cent of total system loans, having grown significantly over the past 10 years.

The top 20 institutions recorded an average ROE of 10.6 per cent while other institutions averaged two per cent.

Industry operational indicators for 2022 include LDR of 127 per cent with a strong solvency ratio of 31.3 per cent and return on assets (ROA) of 1.7 per cent.

“Cambodia’s financial sector performed reasonably well in 2022 given the onset of an inflationary economic environment, with revenue up 16 per cent but profit was down six per cent from the previous year.

Deterioration of the bottomline was largely due to increased credit costs and expenses,” Higgins stated.

Former National Bank of Cambodia (NBC) governor Chea Chanto said in early August that the banking system has been strengthening, with its stability playing an active role in promoting economic activity and maintaining financial stability.

“Despite global financial conditions being tight and three US banks collapsing early 2023, which raised concerns in the international financial markets, the Cambodian banking system remains strong and resilient,” he added.

Capital and liquidity continued to be higher than NBC’s regulation, Chanto remarked, sharing that the NPL ratio increased slightly, but it did not pose a risk to financial stability.

He alluded the banking system’s stability to NBC’s push for proactive macro- and micro-prudent policy, regular inspections and tests on the strength of the banking and financial institutions.

Meanwhile, Higgins explained that in most markets globally, the banking sector tends to consolidate to four to five large banks, with other banks reduced to small niche players.

“Applying our crystal ball to 2030, we see two near certain candidates in the top five positions, [they are] ABA Bank and Acleda, with the remaining three positions very much up for grabs.”

He said ABA has a strong transaction banking capability, which is driven by market leading digital offering and ideal size distribution network.

“Unlike most subsidiaries of international banks, they have substantial autonomy to offer products and services that suit the local market.

“[As for] the challenges they would face regarding the longer term, it is not clear to us that National Bank of Canada is a natural owner of a bank in Cambodia. While ABA’s corporate banking capabilities have improved recently, there is scope for further improvement,” he added.

At the same time, Acleda has the biggest physical distribution and high levels of trust among the Cambodian population.

The challenge they face involves the need to improve efficiency, including right-sizing branch networks and also strengthen corporate banking capabilities.