Evaluating the Profitability Implications of IFRS 9 in Cambodian Banking Institutions

Abstract

This research adds to the existing literature by examining the impact of IFRS 9 in a context where accounting reforms, prudential regulation and credit growth are strongly intertwined. Studies examining the impact of IFRS 9 implementation on profitability for banks provide inconclusive evidence. We find that our results are both robust to static panel estimators and strengthened by dynamic specifications. The transition from an incurred loss to an expected credit loss (ECL) model thus entails short-term profitability costs by bringing forward credit impairment recognition, increasing provisioning and lowering reported earnings. Results show that NPLs and leverage have a persistent negative impact on ROA, while a larger bank size and cash contribute positively to profitability. Liquidity is negatively related but statistically insignificant, indicating that its role is primarily a prudential rather than an earnings component. Given that, in dynamic models, higher GDP and inflation lead to lower profitability at the macroeconomic level, and expansionary conditions do not improve bank performance even if expected loss recognition increases or operating expense falls. IFRS 9 is hence a possible source of major institutional reform with real influence on financial outcomes, risk appetites and the strength of Cambodia’s banking sector in general.