Banking during economic decline

Photo by: HENG CHIVOAN
ANZ Royal CEO Stephen Higgins says that the Cambodian banking sector is in good shape to deal with the global financial crisis.

The Phnom Penh Post

Written by George McLeod
Wednesday, 25 February 2009

The Cambodian banking sector has taken a lot of criticism in recent weeks, but the sector has undergone improvements that can help weather the slump, says ANZ Royal CEO Stephen Higgins

The World Bank and the International Monetary Fund released reports on the Cambodian banking sector that warned of potentially serious problems with liquidity and nonperforming loans. What is your reaction to those reports?

Firstly, in terms of the banking sector, I think they were a little on the harsh side. Cambodian banks aren't as developed as in other parts of the world, but they compensate by maintaining strong capital ratios ... and they have to put 12 percent of their deposits on reserve with the National Bank of Cambodia....

I wouldn't be quite as pessimistic as the World Bank and IMF.

I think there is concern, however, about the economy as a whole - with demand falling and some of the country's key sectors in slowdown. One of Obama's advisers said recently that we are seeing the most serious economic contraction since the Great Depression, and the effects of the current slowdown have been even more rapid than the depression of the 1930s, it is inevitable that there will be quite an impact on Cambodia.

The two reports also said that transparency is an issue in Cambodian banks. Do you think the figures being provided by Cambodian banks are accurate?

Its hard for us to comment on other banks - ANZ Royal is certainly transparent, and other banks like ACLEDA are quite transparent....

If the banks are stable, then what is the most serious issue facing the economy today?

The general economic slowdown is the most serious issue ... if you go back one year, people were making a lot of money from property, allowing them to buy cars and other consumer goods. Now the property market has dropped and that has taken a toll on demand.

The Economist Group came out with an assessment of the Cambodian economy that said growth would slow to only one percent, and Thailand said recently that growth would be negative, so we are seeing the effects of the global economic crisis.

Do you expect nonperforming loans (NPLs) to increase?

NPLs will certainly increase in Cambodia as they are everywhere else in the world, as you would expect, but the big issue is that the Cambodian banks have large capital buffers ... and the NBC has been doing a good job monitoring the banking sector.

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The big issue is that the Cambodian banks have large capital buffers.
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What is your deposit ratio?

It is about 150 percent, well above the sector average, which is now 100 percent - the bank is in a strong position.

Are you prepared to extend loans to property developers?

Not really. It's a question of where you're going to lend to. You can develop a property at the moment, but the question is whether there are buyers there to buy, so it's too risky to lend right now.

Even with the economic downturn, Cambodia hasn't seen many foreclosures. Do you expect many this year?

There will be some ... but, in general, people in Cambodia don't have a lot of debt. This is not a heavily leveraged society, so I don't expect it to be too serious.

Last month, your partner company, Royal Group, was surrounded by police, causing rumours about internal disputes. Did this affect your relations with Royal Group?

This was an internal matter for Royal. It did cause a lot of rumours, but we have reassured customers that it hasn't anything to do with ANZ Royal. ANZ Royal is majority owned by ANZ and our management team is entirely from ANZ. So no, our relationship with Royal hasn't changed.

What about reports that there was a mini-run on ANZ Bank following the incident?

Actually, our deposits went up on that day, so any rumours were under control.

If local operations hit trouble, are your deposits backed by the parent company?

There is nothing legally forcing ANZ to back the deposits of ANZ Royal, but, of course, ANZ's name is on the bank, which is important.... That means the company's reputation is backing our clients.

Do you sense there is general nervousness about the banks?

There is a degree of nervousness, but it's general nervousness and it's appropriate, given the challenges in the global economy. There is an economic tsunami headed this way. Fortunately, the government and the NBC have been doing a good job in managing things, but there is still going to be an impact. Cambodia is fortunate that what is happening now didn't happen eight years ago when banking rules and monitoring weren't as strong as they are today.