Cambodia’s banks are looking beyond the coronavirus crisis in search of growth during 2020, thanks to international backing. Peter Janssen reports.

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In spite of the coronavirus crisis and its inevitable impact on the Cambodian economy and banking system, in March 2020, Acleda Bank launched its initial public offering procedures to list on the Cambodia Securities Exchange (CSX).

The initial book bidding on March 14 was oversubscribed by 3.2 times. When listed on the CSX, scheduled for May 2020, Acleda – Cambodia’s largest commercial bank – will be the first bank to join the local bourse, which currently has only seven companies.

Acleda president In Channy is sure the bank will weather the Covid-19 storm, and whatever else hits Cambodia this year. The first reason for his confidence is Acleda’s foreign shareholder list, which comprises international heavyweights Sumitomo Mitsui Banking Corporation, Cofibred, Orix Corp and Triodos Group – who hold 49% of total equity. “We have very strong strategic investors and they are ready to support the bank in any event,” he says.

The second reason is the bank’s strong performance over the past 27 years. “It depends on our business model too; what we are. This bank is very different from the other commercial banks,” adds Mr Channy. 

From small beginnings

Acleda started out as a microfinance institution in the early days of Cambodia’s war-ravaged economy, formed in 1993 from an amalgam of five donor-driven non-governmental organisations. It graduated to a ‘specialised bank’ in 2000 and became a full commercial bank in 2004. Acleda has grown organically with the Cambodian economy, which averaged 7.2% growth between 2013 and 2018. It has also grown in tandem with its huge client base, many of whom have been with it since its microfinance days and are now small businesses. 

“We have 400,000 active borrowing customers, of which 75% are small businesses and the rest are medium sized,” says Mr Channy. The average loan size is $9000. Acleda also stands out in the size of its lending to the agricultural sector (40% of Cambodia’s 16 million population are employed in agriculture). Out of Acleda’s total loans outstanding in 2019 of $3.9bn, some 19.5% (or $757m) was agriculture-related.

“So 20% of Acleda’s loan portfolio is to the agricultural sector, compared with 14% for the whole banking sector,” says Mr Channy. Acleda provincial outreach has been helped by its large physical presence in Cambodia, with 313 branches and offices, 683 ATMs and 4289 point-of-sale terminals. 

While most commercial banks shy away from loans to the agricultural sector because of the high risks involved – including drought, floods, disease and global price fluctuations – Acleda has made a success of its rural loans. First, after decades of know-your-customer experience in the rural areas it has a fairly good idea of which farmers are reliable. Second, more than 40% of its agricultural loans go to farmers practising mixed agriculture, or engaging in three different activities: crops, livestock and vegetables. If the chickens die, for example, the farmer still has their rice and vegetables to sell. 

Repeating pattern

Acleda has repeated this successful model in Laos, where it has set up a subsidiary bank with provincial branches, and in Myanmar where it runs a microfinance operation. “Non-performing loans [NPLs] in Cambodia in 2019 were 1.19%, in Laos the figure was 1.3% and in Myanmar it was just 1%,” says Mr Channy.

As in Cambodia, Acleda targets small, rural-based borrowers in Laos and Myanmar and grows with them. “We grow together, we don’t grow alone,” says Mr Channy, who believes the agricultural sector is a safe one to be in during the Covid-19 crisis. “For agriculture now I think it is the safest because they are supplying the local market,” he adds. 

The listing on CSX should lower Acleda’s taxes in 2020, though the benefit is small as only 2% of its total shares were sold. “Companies listed on CSX are eligible for up to 50% tax deduction on profit for three years, depending on the size of the issuance and the type of securities, and are exempted from prior tax debt for up to nine years,” says Kim Sophanita, CSX director of market operations. Seven companies, mostly financial institutions, are expected to join CSX in 2020, Covid-19 permitting.

Vulnerable sectors

The coronavirus pandemic will hit Cambodia’s two main dollar-earning sectors: garments and tourism, and the outbreak has already decimated international tourism. Garment production, accounting for 60% of Cambodia’s exports, has been hurt by textiles shortages from China due to manufacturing slowdowns there. The garment industry faces another hit in August, when Cambodia will partly lose its quota-free, low-tariff privileges in the EU under the Everything But Arms scheme, from which the country was dropped earlier in 2020 in response to prime minister Hun Sen’s poor human rights record.

Most garment factories in Cambodia are owned by Chinese, Taiwanese and South Korean investors, and most use banks in their home countries to finance their factories, so the immediate impact on Cambodian banks should be minimal. 

“There may be limited exposure to the garment factories, but if you’ve got a big chunk of your population that is out of work or doing less work, that feeds through to retail expenditures, personal consumption and that’s where some of the banks have really been rising up,” says Michael Puli, associate director at S&P Global Ratings in Singapore. S&P rates only two commercial banks in Cambodia, Acleda and ABA Bank.

ABAs rise

Launched in 1996, ABA Bank was initially owned by South Korean investors before being bought out by Kazakhstan investment bank Visor Capital in 2009. National Bank of Canada began buying equity in the bank in 2014, upping its stake progressively to 100% in 2019. The Canadian bank, looking for a one-off investment in south-east Asia, was drawn to Cambodia as an emerging market and was attracted to ABA’s dynamic business model. ABA had an annual growth rate of 50% between 2016 and 2019, rising from being Cambodia’s 11th largest bank in 2012 to its third largest in 2019, behind Acleda and Canadia Bank. 

“When we established the bank, it was obvious that we could not grow organically like Acleda or Canadia because we did not have the branch network, so we just looked at technology to grow, and the digital platform is what helped us,” says ABA CEO Askhat Azhikhanov. ABA launched its full-scale mobile banking application in May 2015, after investing heavily in a team of digital technicians to develop the bank’s platform in-house.

“Our motto at ABA has been: never copy, do it yourself and adapt it to the local market,” says Mr Azhikhanov. “We did everything in-house. We have brilliant young people here, whom we have trained up over the past five years and that is our backbone. That has helped us because no one can copy us.” 

ABA’s digital platform offers clients various loan repayment channels through its own infrastructure and through co-operation with the country’s largest payment service providers that have networks of agents nationwide. “In mobile banking we processed about 40 million transactions in 2019 and in terms of the amount it was $31bn,” says Mr Azhikhanov. 

Of ABA's offering, S&P’s Mr Puli says: “Its mobile banking platform is awesome, and it is getting very high growth at low costs.” 

“You can see that 99% of our transactions by number go through digital banking and if you measure it by amount, 51% of our transactions go through digital banking and only 49% over the counter,” says Mr Azhikhanov. “And of course that brings efficiency. Can you imagine how many tellers we would need to process 40 million transaction every year?”

With 77 branches nationwide and 440 ATMs, ABA had 828,651 depositors as of 2019, compared with Acleda’s 2.6 million. “We haven’t ever grown by fixed deposits, so it was a kind of transactional banking that was driving the growth of the bank,” adds Mr Azhikhanov.

Other Cambodian banks have digital platforms. Acleda started a mobile phone banking service in 2010, when the country’s phones were still analogue, and has since upgraded to a digital platform that now boasts 1.4 million active subscribers. The platform permits bill payments, online banking and new services for corporate customers such as payroll distribution. “This has a positive impact on the bank’s local currency cash flow and has enabled Acleda Bank to entirely fund its local Khmer riel currency loan portfolio from deposits,” says Mr Channy. 

Riel vs dollars

Having a big riel deposit base is something to be proud of in Cambodia, where about 90% to 95% of all transactions are done in US dollars. Banking is still relatively new in the once war-torn country and the government’s priority has been to promote economic stability to encourage foreign investments. Cambodia’s first banking and financial institutions laws were passed in 1999, which saw 17 banks go under in 2000. The National Bank of Cambodia (NBC) has taken a pragmatic stance towards the dollarised economy, weighing the stability that comes with the US dollar against the disadvantages, such as having no local currency to use to manage monetary policy. 

But the push to de-dollarise is on. At the end of 2019, NBC required all banks to make 10% of their loans in riel. For the two largest banks, with nationwide branch networks attracting riel deposits, the requirement was easily met. For many of the other, mostly foreign-owned, banks it has been more of a challenge. 

Cambodian Public Bank (Campu), for instance, has struggled to meet the 10% riel requirement. The bank, a wholly owned subsidiary of Public Bank of Malaysia, is the fourth largest commercial bank in Cambodia but has only 31 branches nationwide, primarily in the main urban centres. “It is quite a challenge to get riel deposits,” says Campu Bank deputy general manager Ong Ming Teck. “We can’t compete with the microfinance institutions that offer much higher interest rates on Khmer riel deposits.” 

Microfinance institutions are still popular in Cambodia, especially in the rural areas as their interest rates on loans and deposits are high. “According to the NBC, the microfinance sector increased its loan portfolio by 71.22% from 2016 to 2018, compared with the commercial bank sector at 45.88% for the same period,” says Ratchada Anantavrasilpa, a senior financial sector specialist at the World Bank.

Observers fear that the microfinance institutions’ aggressive lending is leading to widespread indebtedness among the rural poor, however, which is a worry during the year of economic slowdown that 2020 promises to be. “There are legitimate concerns about indebtedness in the microfinance sector,” says Ms Anantavrasilpa.

Failing to compete with the microfinance institutions for riel deposits, banks have found other ways to comply with the NBC requirement. ABA Bank, for instance, in August 2019 raised 84.8bn riels (about $21m) with a local bond issue, the first such by a Cambodian bank. The bond, deemed a loan to the public, has pushed a riel percentage of credits up to 10% to 11%. Campu Bank has met the 10% requirement by helping the government to collect taxes in riel and then lend it to customers. “We were one of the first foreign banks to be appointed a tax collection agent by the government,” says Mr Ong. “So we are building up our riel this way.” 

Even treatment

That the government uses the 100% foreign-owned Campu Bank to collect taxes says something about Cambodia’s level playing field for foreign banks. Campu, which has been operating in Cambodia since 1992, has been a good investment for Public Bank of Malaysia in the recent years of high growth. “Campu is one of the more successful subsidiaries. In fact, last year our profit was $82.2m, up 20% year on year,” says Mr Ong.

The central bank, whose priority has been to get the Cambodian economy back on its feet as quickly as possible, has been liberal in giving licences to foreign banks and allowing majority foreign equity in existing institutions. “Out of the 45 banks, most are foreign owned – and big players in their home markets. And we are all on an equal playing field,” adds Mr Ong. 

The preponderance of foreign ownership in Cambodia’s banks is arguably a strength during a time of economic downturn. Apart from Canadia Bank – which is wholly Cambodian owned and has reportedly lent heavily to riskier sectors such as property and big-ticket infrastructure projects – S&P’s Mr Puli foresees few potential threats to the banking system’s stability.

“I don’t see a run on the banks, not for some of the better institutions such as Acleda and ABA, because they are seen as safe havens for Cambodians,” he says. “Where I think a problem could occur is with some of these foreign banks, particularly those that are exposed to construction and real estate – but frankly, they would probably just get bailed out by their parent banks.”


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