NongHyup Bank Increases Capital of Cambodian Subsidiary by $20 Million... MDI Application Next Year (Comprehensive)

If Capital Exceeds $30 Million, Requirements for Small Loan Financial Institutions Met
Plan to Request MDI Promotion Next Year... Aim to Convert to Commercial Bank Within 10 Years

[Asia Economy Reporter Kangwook Cho] NH Nonghyup Bank has decided to inject an additional capital of 20 million USD (approximately 24 billion KRW) into its Cambodian local subsidiary, Nonghyup Finance Cambodia. Furthermore, within this year, it plans to increase Nonghyup Finance Cambodia's capital to over 30 million USD and request an upgrade next year to a Microfinance Deposit-taking Institution (MDI) authorized to accept deposits by the local authorities. In particular, the bank has set a goal to convert it into a commercial bank within 10 years and actively expand its financial business in Cambodia as a retail hub in Southeast Asia.

According to the financial sector on the 8th, Nonghyup Bank recently held a board meeting and approved a capital injection plan of 20 million USD for Nonghyup Finance Cambodia. Nonghyup Finance Cambodia is the first overseas subsidiary established through mergers and acquisitions (M&A) by Nonghyup Bank. In August 2018, Nonghyup Bank acquired the local Cambodian microfinance institution 'Samic (SAMIC)' and then established Nonghyup Cambodia Finance in September of the same year.

Immediately after the acquisition, the initial capital of the local subsidiary was 5 million USD. Since then, retained earnings have been accumulated, raising the current capital to the high 8 million USD range, and with this additional injection, the capital will reach the high 28 million USD range. If retained earnings are accumulated without dividends this year, Nonghyup Finance Cambodia's capital will easily exceed 30 million USD. This will satisfy the minimum capital requirement for upgrading from a general microfinance institution (MFI), which currently only offers loans, to a higher-level financial institution, MDI. Nonghyup Bank plans to request the MDI upgrade from the local regulatory authorities after internal decision-making in the first half of next year.

An official from Nonghyup Bank said, "Through this capital increase, we will meet the minimum requirements for the upgrade and consider applying for MDI conversion next year," adding, "It will take at least 1 to 2 years to complete the upgrade after the local authorities' review."

Kim Yong-gi, Head of Global Business Division at NongHyup Bank (7th from the right), and Seo Jun-yong, Head of NongHyup Finance Cambodia Corporation (8th from the right), are taking a commemorative photo with local employees immediately after the "2020 1st NongHyup Finance Cambodia Board Meeting" held on January 14.

Although Nonghyup Finance Cambodia has been operating for less than two years since its launch, it has achieved remarkable performance. After its official launch in September 2018, its net profit at the end of that year was 164,000 USD (approximately 200 million KRW). Although this was less than half compared to 439,000 USD (approximately 525 million KRW) at the end of the previous year, it still recorded a profit considering the initial selling and administrative expenses after acquisition. The net profit of Nonghyup Finance then surged to 1.222 million USD (approximately 1.463 billion KRW) by the end of last year, just one year later. This is an increase of more than seven times in one year.

Typically, overseas subsidiaries of financial companies incur initial business costs and operate at a loss for several years. However, with a significant increase in profitable earnings, it is now evaluated that the company has entered a growth phase after stabilizing.

It is analyzed that Nonghyup Bank's unique agriculture-specialized business model worked well in Cambodia, an agricultural country. The strategy to discover locally optimized agricultural finance models such as farmer-specialized loans, agricultural machinery installment financing, and agricultural credit guarantee was effective. Especially after acquisition, Nonghyup Bank's head office investment finance department borrowed 33 million USD as low-interest funds and operated them with high margins, leading to significant growth in loan assets and profits.

Nonghyup Bank has set a plan to continuously develop Nonghyup Finance Cambodia as a core ASEAN profit center in the future. In particular, it aims to convert it into a commercial bank within 10 years. Currently, Nonghyup Finance Cambodia has 21 branches in 11 out of Cambodia's 25 provinces. Before acquisition, it had 19 branches in 9 provinces, so 2 branches were added. Additionally, 2 more branches are planned to open within the fourth quarter of this year. The number of employees also increased from 240 to 266. After acquisition, a credit management department was established to improve asset soundness, resulting in the non-performing loan (NPL) ratio dropping from the 3% range before acquisition to 1.08% at the end of last year. Recently, internal control functions have been continuously strengthened in line with domestic and international environmental changes such as risk management, anti-money laundering (AML), and compliance monitoring.

Son Byung-hwan, President of NongHyup Bank

Despite the COVID-19 pandemic, Nonghyup Bank's aggressive overseas market expansion through increased investment appears to be driven by the strong will of NH Nonghyup Bank President Byunghwan Son, who took office in March. President Son, who previously served as head of the global business division, emphasized qualitative growth of global business and expressed his intention to accelerate overseas market expansion in his inauguration message to employees.

An official from Nonghyup Bank explained, "President Son emphasizes not only external expansion and profitability improvement but also incorporating the identity as a representative Korean cooperative into the business to provide practical financial support locally," adding, "Nonghyup Finance Cambodia's collaboration with non-governmental organizations (NGOs) to improve rural water supply and drinking water projects is part of these efforts."