Did Loan Loss Provisions Become More Forward-Looking After IFRS 9? Evidence from Cambodian Commercial Banks

The purpose of this paper is to investigate if loan loss provisions (LLPs) incorporate forward-looking information regarding future changes in non-performing loans (NPLs), and whether this relationship changed after 2018. To evaluate the predictive relationship between current LLPs and future credit deterioration, fixed-effects specifications are employed with bank and year effects as well as NPL persistence and bank-specific controls. LLPs are positively and significantly related to the change in future NPLs in all of the specifications. The LLP coefficient is 0.0394 and the interaction between LLPs and a post-2018 indicator is 0.0767 in this fully controlled model, implying a post-2018 marginal effect of 0.1161. The coefficients remain significant after controlling for bank size, capitalisation, and profitability, indicating that the predictive content of provisioning is not confounded by observable bank characteristics. The change in future NPLs is characterised by a high degree of persistence, with the lagged NPL coefficient rising to 0.350 in the full specification. Larger banks are more likely to experience higher subsequent NPLs, while capitalisation and profitability have a negative relationship with future credit deterioration. Overall, these results are consistent with the information-content role of LLPs and show that its relationship to future credit risk became significantly stronger following 2018.