Low Lending Could Harm Banks’ Profits

Strong growth in bank deposits so far this year could put a dampener on profits at local banks as lending activity fails to keep pace with savings, banking officials and economists said yesterday.

Growing bank deposits are a sign of increasing confidence in Cambo­dia’s financial services, but the economy needs to grow at a level that sti­mulates a healthy demand for credit or the industry will lose mo­ney, banking officials said.

“In general, the loan demand is still not as high as most of the banks expected,” Dieter Billmeier, vice president at Canadia Bank, said yesterday.

Currently, Canadia has more than $720 million in deposits, marking a 30.9 percent jump on the end of last year when deposits stood at $550 million, Mr Billmeier said. Lending, however, is up just 15 percent compared to 2009, amounting to a total loan portfolio of $420 million.

To reduce the losses from rising deposits, Canadia, like other banks, has been gradually reducing its interest rates on deposits. At Cana­dia, the interest rate on 12-month fixed deposits has come down to 5.25 percent from nearly 7 percent last year.

“In a nutshell, there is still too much liquidity in the system. We’ve already dropped both de­posit and lending rates by varying amounts,” Steven Higgins, CEO of ANZ Royal Bank said in an e-mail yesterday. The “major challenge for this year will be profitably deploying that excess liquidity.”

Mr Higgins could not provide figures on both loan and deposit levels at ANZ Royal as he was abroad on a business trip.

For the banking sector at large, deposit growth in the first quarter of 2010 rose by 6.9 percent while loan growth grew by 5.4 percent, said In Channy, CEO of Acleda Bank.

“We don’t like to see that [de­posits] grow too much,” said Mr Channy. “Too much liquidity means that the bank pays too much interest on the deposits.”

At Acleda, the strain on profits is being felt with the bank lowering its interest rate on 12-month fixed deposits another 0.5 percent to 5 percent earlier this month.

Since the beginning of May, Acleda has seen deposits grow from $769 million to $795 million currently.

Still Mr Channy said that with GDP projections estimated at between four and five percent in 2010, bank profits should surpass those of 2009 when most banks saw a dip in earnings.

Officials at Cambodian Public Bank, another of Cambodia’s largest banks, could not be reached.

Annual profits at Acleda Bank fell by 49 percent to $9.9 million in 2009, while loans grew at 16 percent. Likewise, earnings last year at Cambodian Public Bank fell by 58 percent to $12.8 million, while Canadia Bank saw its profits decline by 30 percent to $27.5 million.

“We want to see lending increase, but increase in a good and healthy way,” Tal Nay Im, director general of the National Bank of Cambodia, said yesterday.

Because Cambodia is a dollarized economy the national bank cannot play with interest rates, which can be used as a tool to control levels of lending in the economy.

Thus, “it is up to the banks to decide by themselves” if they increase the amount of lending in the system, Ms Nay Im said.

“If the economic activity increases the lending will increase accordingly,” she said.

John Nelmes, resident representative of the International Monetary Fund in Cambodia, said the key challenge for the banking system remains in recognizing and provisioning for bad loans at a time when profitability continues to be pressured by competition for deposits.

Mr Nelmes said that the IMF was sticking to previous projections released in December showing loan growth to reach around 17 percent year-on-year by the end of 2010. According to figures at the National Bank of Cambodia, loan activity in the banking sector grew just 3 percent in 2009.

Mr Nelmes also noted that even as the economy recovers this year, banks would probably find the level of non-performing loans increase slightly as debts go unpaid in the aftermath of last year’s recession.


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