Cambodian banks breach covenants as bad loans surge

ACLEDA, Hattha Bank, and LOLC have all breached their covenants.

Three large Cambodian financial institutions have breached covenants on their borrowings, and more may follow in their footsteps as the number of bad loans rise, warned S&P Global Ratings.

Covenant breaches refer to when financial institutions fail to meet certain conditions– such as financial ratios– stipulated in borrowing agreements with institutional lenders. 

In Cambodia, ACLEDA Bank, Hattha Bank, and LOLC (Cambodia) have all breached their covenants. This follows after a spike in non-performing loans (NPLs) exhausted the buffers of the banks, said Ivan Tan, S&P Global Ratings analyst. 

“Covenant breaches could affect the availability and cost of funding for Cambodian banks. Lenders could demand immediate repayments or higher spreads for the heightened credit risk,” Tan warned.

Tan expects the number of Cambodian banks breaching their covenants may rise as NPLs continue to rise. Cambodia’s NPLs are forecasted to rise between 7.5% to 8% of total loans in 2026. 

“We expect the number of banks facing breaches could be higher than this, given that many smaller banks have reported an even sharper rise in NPLs and may be at higher risk of covenant breaches,” Tan said.

Banks’ caution on lending has helped alleviate some pressure. Liquidity in the system is also high, and the need for funds is low.

The banks who breached their covenants are expected to weather it thanks to parent support. ACLEDA, for example, has a strong foreign parent in Japanese megabank Sumitomo Mitsui Banking Corporation (SMBC).

The three banks are also in the process or have already negotiated waivers or relaxations on key financial covenants. 

“Whilst the process is taking time, our base case is that institutional lenders including multilateral agencies that lend to these banks will provide waivers and continue to maintain existing lines,” Tan said.

“In our view, the large banks we rate will ride this out, but if the current tolerance for covenant waivers abates, it could hurt smaller and weaker banks,” he added.

Asset quality of banks deteriorated in 2023 because of a slower recovery in key sectors such as construction, real estate, and hospitality, according to S&P.

Delays in recognition of weak loans and sluggish loan growth also contributed, it added.