Research Paper

Cambodia Banking Sector

29 April 2011 1 | P a g e




PHNOM PENH SECURITIES
FIRM PLC.
No. 32, Monivong Bld, Phnom
Penh, Cambodia
Tel: +855-23-426-999
Fax: +855-23-426-495
Website: http://www.pps.com.kh



In this Paper:
Executive Summary Page 01
Overview of Banking Sector Page 02
Banking in Detail Page 03
Cambodia Securities Exchange Page 07
Outlook of Banking and Financial Sector Page 07
Leading Banks in the Sector Page 08


EXECUTIVE SUMMARY
This Report is presenting the current development of Cambodia banking
sector, which we believe the prospects of this sector will be very strong. Over
the last two decades, banking industry has grown significantly and become
one of the key sectors of the Cambodian economy. The credit to private
sector to the countrys GDP has hugely increased from 2.4% in 1993 to 28.0%
in 2010. This growth has been reflected in increasing political stability,
soaring economic development, improving banking system, rising demand of
funds, and gradually gaining confidence from both local and foreign
customers and investors in the Cambodian financial sector. And most of
loans are offered to wholesale & retail trade, and hotel & restaurant activities,
which are also a main contributor to the economic growth.
Banking sector in Cambodia is composed of three depository institutions:
commercial banks, specialized banks, and microfinance institutions.
Commercial banks and specialized banks provide funds to big and medium
enterprises while microfinance plays an important role in savings and financial
intermediation for individuals and small enterprises, especially outside of the
main urban areas.
Very high spread of interest rate is one of the main constraints of banking sector,
so Cambodia plans to offer another source of funds and investment Cambodia
Securities Exchange to fund seekers and fund providers. With this regard, in
the long run, Cambodia banking sector will face a very high level of competition
not only within the banks but also between sectors (banks and stock market). For
the short term however, it is very profitable to invest in the sector, since the
demand of funds is excess the loans and the spread of interest rate is also quite
high. Therefore, investing in Cambodian banking sector is a great opportunity to
higher profit with lower risk, and PPS is here to help all investors.


BANKING SECTOR IN CAMBODIA



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Cambodia Banking Sector

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OVERVIEW OF BANKING SECTOR
Since 1975 The Khmer Rouge period, Cambodia has already transformed
banking system several phases (figure 01) for the purpose of efficiency
through the efforts of privatization and consolidation.
Figure 01: Development of National Bank of Cambodia





































And due to the absence of financial market, Commercial banks are primary
sources of funds, and the National Bank of Cambodia (NBC) is solely a
regulatory and supervisory agency. To date, Cambodia has 30 commercial
banks including 3 international banks CIMB of Malaysia, Bank of China,
and Vietnam Bank for Agriculture and Rural Development operated last
year 2010, 7 specialized banks, and 25 microfinance institutions. With this
regard, banking sector has become more market-oriented although the
2002 - Present
- The banking reformed process continues
- FTB is privatized, and new foreign banks arrived particularly from Australia, Korea, and Japan
- Min. capital of US$37.5 M and US$7.5 M is for commercial banks and specialized banks
1998 - 2001: Banking System Reformed
- Introduced under the new Governor H.E. CHEA Chanto
- Abolishment of required 15% NBC stake in private owned/ foreign banks
- Classification of financial institutions into three categories: full commercial banks (min. US$13M paid-up
capital), specialized banks (min. US$2.5 M paid-up capital), and registered microfinance institutions (no
information on paid-in capital)
1992 - 1998: Private Owned and Foreign Subsidiaries
- Minimum capital of foreign subsidiaries initially was required of US$5 M and 15% owned by the NBC.
- By 1998, 32 commecial banks were licenzed.
1979: End of Khmer Rouge Rule and Transition
- The National Bank of Cambodia (NBC) was established as the central bank
- Commercial banking services was first provided by the Foreign Trade Bank (FTB)
- Cambodia currency, the Khmer Riel, was introduced in 1980
1975: The Khmer Rouge Rule of Cambodia
- Money is abolished and all banks are closed



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Cambodia Banking Sector

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0%
5%
10%
15%
20%
25%
30%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

















ACLEDA Financial Highlight
Income
Statement
Q1/10 Q1/11 % Chg
Net
interest
income
20.0 27.0 34.8%
Net Profit 3.9 11.4 195.3%
Balance
Sheet
Q1/10 Q1/11 % Chg
Assets 961.8 1,249.4 29.9%
Liabilities 851.3 1,108.6 30.2%
Equity 110.5 133.8 21.1%
Ratio Q1/10 Q1/11 % Chg
Net
interest
margin
2.36 2.45 3.8%
Loan to
deposit
0.82 0.84 2.4%

government has little influence on lending decision
1
. In overall however, the
sector still remains segmented and cannot fulfill the funds demanded. Thus,
banking sector is going to develop more in order to provide sufficient funds
for companies with an appropriate lending rate, while stock market to be
launched in this July 2011 (or maybe a few months delay) is a provable effort
of Cambodia to offer another sources of funds, which in turn increase the
competitive and complementary effects in the whole financial industry.
BANKING IN DETAIL
Because of the improvement, banking sector over the last two decades, as
other main sectors, has become one of the key sectors of the Cambodian
economy, as the credits to private sector has increased to 28.0% of GDP in
2010, up from just 2.4% in 1993 (figure 02). This growth has been reflected in
increasing political stability, soaring economic development, improving
banking system, rising demand of funds, and gradually gaining confidence
from both local and foreign customers and investors in the Cambodian
financial sector.
Figure 02: Credit to Private Sector/ GDP







Source: World Bank World Economic Outlook Database
In addition, even though the storm of the global financial crisis slumped the
growth in 2009, the banking industry quickly recovered and performed better
in 2010, since the lending and deposit rose by 26.7% (to reach US$3.18
billion) and 26.3% (US$4.16 billion), respectively, compared to the year
earlier; while non-performing loans (the loan that the borrower has defaulted
on payments for three months) declined to 3% by the end of 2010 from 6% at
the end of 2009. This growth is expected to have a higher rate in 2011
because of the potential demands in financial services in the near future.
ACLEDA Bank, a leading bank in Cambodia for instance, saw their loan and
deposit increase by 38.5% and 34.6%, respectively, in the first quarter of
2011.

1
According to the Index of Economic Freedom in 2011 released by Heritage Foundation



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Cambodia Banking Sector

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Loans to Different Sectors: According to the report of NBC, loans
provided to non-financial institutions importantly rising by more than 20%
in 2010 compared to a year earlier (figure 03), while credits to financial
institution and individuals seems to be stable in the same period. Among
the other sectors in non-financial institutions, loans to sectors which
significantly grew were mining & quarrying, rental & operational leasing,
wholesale trade, and manufacturing; while funds offered for real estate
activities and construction slightly increased due to the falling value and
business on property and land, and restriction on non-performance loans.
Figure 03: Loans to Different Sectors (US$ million)
Name of Sector 2009 2010* % Chg
Exchange rate of 1USD 4,165 4,075 -2%
Financial Institutions 34.7 35.2 1.3%
NBC 0.0 0.0 0.0%
Depository Institutions 2.3 4.0 72.1%
Others 32.4 31.2 -3.7%
Non-Financial Institutions 2,210.8 2,740.2 23.9%
Agriculture, Forestry and Fishing 170.2 200.2 17.6%
Mining and Quarrying 2.6 13.3 409.6%
Manufacturing 221.0 280.5 26.9%
Utilities 13.4 17.4 30.0%
Construction 217.2 230.4 6.1%
Wholesale Trade 324.8 509.1 56.7%
Retail Trade 461.5 536.1 16.2%
Hotels and Restaurants 302.9 323.3 6.7%
Transport and Storage 42.2 59.2 40.2%
Media and Telecom 74.0 77.0 4.2%
Rental and Operational Leasing 11.0 25.0 126.8%
Real Estate Activities 159.1 161.4 1.4%
Others 210.9 307.3 45.7%
Personal Essentials 274.2 292.0 6.5%
Personal Lending 179.5 173.8 -3.2%
Credits Cards 4.1 6.5 59.2%
Mortgages, Owner-Occupied Housing 90.7 111.7 23.2%
Other Lending 11.0 28.1 156.2%
Total 2,530.8 3,095.4 22.3%
Source: National Bank of Cambodia.
* Data is on November, while the figure in December is not officially announced yet.




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Cambodia Banking Sector

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Interest Spread Between Loans and Deposits: Because of the
privatizations and open sky policy on banking sector, the number of
commercial and other depository institutions including microfinance
institutions has soared remarkably, especially from 2005, and the
competition degree has become very high in the market, which in turn
the interest spread is narrowing down (figure 04). This development is
very beneficial to investors/ fund providers (as the interest on deposits
increased) and also companies/ fund seekers (as the interest on loans
decreased). However, the spread is slightly rose after the global financial
crisis 2008-2009, as investors and banks demand more risk premium
due to the fear of instability of financial sector. With this regard, it means
that the increase of deposits and loans recently reflected the strong
growth of profit for banks and other depository institutions.
Figure 04: Interest Spread on Deposits and Loans
(1 year Maturity)
KHM 2007 2008 2009 2010*
Deposits 7.05 7.65 6.52 6.58
Loans 22.26 22.36 23.08 22.97
Spread 15.21 14.71 16.56 16.39
USD 2007 2008 2009 2010*
Deposits 4.91 6.34 5.32 4.40
Loans 16.02 15.79 16.43 17.12
Spread 11.11 9.45 11.11 12.72
Source: NBC, and PPS staffs estimation
Microfinance Institutions and Others: Adding to the banks activities,
microfinance has also significantly contributed to the growth of
Cambodia economy, since they play an important role in savings and
financial intermediation for individuals and small enterprises, especially
outside of the main urban areas. Furthermore, there are a range of money
lenders and money changers which play as a main intermediary in foreign
currency transmission and also small scale lending. Since 2006, the credits
granted by these institutions have hugely soared from US$91.1 million to
US$449.6 million in 2010 although the interest rate is unchanged (figure 05).
Figure 05: Credit Granted by MFI and Others
Period Exchange Rate
Outstanding Loans
(USD million)
Interest
Rate
2006 4,107 91.1 24% - 36%
2007 4,060 158.0 24% - 36%
2008 4,058 286.3 24% - 36%
2009 4,165 308.7 24% - 36%
2010* 4,075 449.6 24% - 36%
Source: National Bank of Cambodia, and PPS staffs estimation on 2010
* Data is on November, while the figure in December is not officially announced yet



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Cambodia Banking Sector

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0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2008 2009 2010 (Nov)
USD (1)
Euro (1)
Yen (100)
Sterling (1)
Exchange Rate: Cambodia has adopted a flexible but administered
exchange regime with a variation of +/- 5% of 4,000 KHR (base value) =
1USD. This means that the NBC will intervene when the exchange rate
is fluctuated over +/- 5% (below 3,800 KHR or over 4,200 KHR). Thus it
is secured to invest in KHR and more beneficial than deposit in USD. In
contrast, the loans should be done in USD instead of KHR (see figure 04
above). In addition, the exchange rate of KHR is fluctuated with other
hard currencies, but quite stable with USD (figure 06), because the
country is heavy dollarization (90% total bank deposit is saved in US
dollar).
Figure 06: Value of Khmer Riel against Other Currencies








Source: NBC
Challenges on Banking Sector: Even though the reform of banking
system has significantly helped the development of financial sector in
Cambodia, there are still some limitations. For instance, as absence of
money market or interbank market, the NBC uses foreign exchange
market intervention to inject riel liquidity necessary to meet transaction
demand, with the effect of reducing riel strengthening. Moreover, as the
country is heavy dollarization, conducting monetary policy seems not
efficient.

On the private finance side, resources mobilizations and allocations
through banking system are not effectively and efficiently to meet
sustainable economic growth. This is due to three main weaknesses.
Firstly, bank loans are not enough for the finance demand because
credit evaluation necessary for the loan review is not carried out and
banks are reluctant to give credit because of inadequate bankruptcy
process regulation; as a result, most bank loans are secured by real
estate. Secondly, the spread between lending and deposit rates of banks
is still very high although it continues to narrow. Finally, household
savings are not flowing into banks but are kept in each family, because
public trust on banks is low and there is no any guarantee for them.



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Cambodia Banking Sector

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Because of these constraints, the Royal government of Cambodia set
out a long term vision and development strategy for the financial sector,
through developing a sound market-based financial system to support
resources mobilization and broad-based sustainable growth. And the
plan for Cambodia stock market was set to launch in July 2011 after 2
times of delay.
CAMBODIA SECURITIES EXCHANGE (CSX)
Even though banking system in Cambodia is growing, it is still considered as
a fragile development with a number of limitations. Because of the presence
of the CSX, Cambodias financial system will achieve another higher level of
development through its complementary effect enhancing efficiency and
replacement effect enhancing competiveness.
In Mid of March, the authorities announced that companies seeking to list on
the CSX would be required to do so in the local currency, the khmer riel
(KHR). The decision not to permit listings in US dollars may prove to be
unpopular with some potential investors, but the fact that the authorities have
at last announced a decision has at least cleared up some of the uncertainty
surrounding listing rules. In any case, the regulator, the Cambodia Securities
and Exchange Commission (SECC), will allow settlements in both riel and
US dollars in the first three years.
Despite the governments insistence that the CSX will begin trading this July
"at any cost," shares in Telecom Cambodia (TC), one of the three state-
owned companies that the government has selected for an initial public
offering (IPO), may not be traded until the end of 2011. TCs management
has admitted that "a lot of work" remains to be done, including choosing an
independent accounting firm, law firms, and asset valuation company to
evaluate the company.
Sihanoukville Autonomous Port (PAS) was confirmed as another one of the
listings on February 22nd, along with the Phnom Penh Water Supply
Authority. But the timing of PASs listing has yet to be revealed. On March
4th the secretary of state at the Ministry of Economy and Finance, HANG
Chuon Naron, claimed that over ten private companies and two other state-
owned firms had expressed intentions to list, although he declined to give
their names.
OUTLOOK FOR BANKING AND FINANCIAL SECTOR
According to the important figures above, it is obvious to expect that the
banking and financial sector in Cambodia will continue its growing although
there are some constraints in the short-term. Frankly speaking, the issues
mentioned above has been being resolved because of the Cambodian
economic growth, which always generates positive effect to financial sector.



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Cambodia Banking Sector

29 April 2011 8 | P a g e

For instance, the change of attitude toward using banks/ depository
institutions as a fund intermediary, for both fund seekers and fund providers,
is mainly because of the increasing investment opportunity donated by
strengthening political stability and soaring economic development.
Companies/ fund seekers need more capital to expand their business
although the interest is very high while savers/ fund providers want to keep
their money in efficient and beneficial way as it is better than keep their
money at home. With this regard, more new banks are coming into the
market in order to share the cake, and then competition in banking industry is
increasing, and in the long run, loans from banks/ depository institutions will
meet (or even exceed the demand from investors and the interest spread will
decrease to a very low level, which there are only some big banks can offer
only. Therefore, it is the best time now to invest in banking sector, since the
current challenges (lack of loan and high spread of interests) are translated
into great opportunity for investors. Thats why a lot of foreign banks start
investing in the sector recently.
If the economic growth meets the projection (figure 07), the banking growth
will also follow and even at a higher rate, since both are correlated (see
figure 02 above).
Figure 07: Cambodian Economy Projection
%
2010 2011 2012
Real GDP
6.0 6.5 6.5
Inflation
3.1 6.5 4.1
Source: World Bank World Economic Outlook
LEADING BANKS IN THE SECTOR
Because of the investment opportunity of Cambodia banking industry, it has
attract a lot of new entrants recently, especially international recognized
banks from Australia, Japan, Malaysia, China, Korea, Vietnam, and so on.
For the time being however, 6 leading banks are local such as ACLEDA
Bank Plc, ANZ Royal Bank Ltd, Cambodia Public Bank, Canadia Bank Plc,
Foreign Trade Bank of Cambodia, and Vattanac Bank Ltd. And they are
interested in going public. Therefore, it is the best chance for investors who
want to invest in the banking sector. Join them is more secure and
convenient, as this strategy provide mutual growth and benefits. And PPS is
here to help you through acting as smart assistant and best partner!








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Cambodia Banking Sector

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Contact
PHNOM PENH SECURITIES FIRM PLC.
No. 32, Monivong Bld, Phnom Penh, Cambodia
Tel: +855-23-426-999
Fax: +855-23-426-495
Website: http://www.pps.com.kh


Disclaimer
This information contained herein, including any expression of opinion, is based upon sources carefully
considered and believed to be reliable, but their accuracy and completeness are not guaranteed. Even though
the opinions are fair and reasonable in the circumstances prevailing at the time, the use of this document shall
be solely risk of the users. PPS accepts no liability for any damage caused by using this paper.