The banking sector in Cambodia is overcrowded with too many small lenders with high operating costs, making it ripe for consolidation, according to a recent report, which argues that “size matters”.
With the growth of smaller competitors between 2018 and 2022, Cambodia’s top five banks saw their share of total banking assets fall from 52% to 46%; however, by 2023, their share had clawed its way back up to 49%, a level maintained last year, finds the special report, Cambodia’s Banking Industry: Why Size Matters”, released earlier this month by the Cambodian unit of Taiwanese brokerage group Yuanta Securities.
“Smaller banks are struggling to grow due to their lower competitiveness compared with the larger banks,” the report states, adding that the number of commercial banks in the country grew from 42 to 57 in the five years to 2022.
Highly competitive environment
“This trend [of more banks entering the market] highlights a further fragmentation of the market, with the growing presence of smaller banks creating a highly competitive environment,” the report shares. “However, this also introduces challenges, such as high costs and operational inefficiencies, and a lack of economies of scale – factors that are critical for long-term growth and stability.”
To improve efficiency, resilience and long-term sustainability, “a more consolidated banking sector with larger, well-capitalized institutions is crucial,” highlights the report, which also looked at other metrics like cost-to-income and operating expense ratios.
The five top banks, between 2016 and 2023, consistently outperformed smaller peers in operational efficiency with expenses averaging 47% of operating income compared with 66% for smaller banks.
During the same period, the operating expense ratio – that is, measuring expenses as a percentage of average interest-earning assets – was 3.4% for the top five and 5.8% for smaller banks.
“The consequences of these inefficiencies,” Yuanta says, “are evident where larger and mid-sized banks in Cambodia consistently outperform smaller banks in profitability, benefiting from economies of scale, cost control and stronger brand positioning.”
In 2024, for example, net interest margins – that is, net interest income as a proportion of average interest-earning assets – were 4.5% at the top five compared with an industry average of only 3.1%.
Stark divergence in returns on equity
The gap was even wider for return on average equity, which was 8.9% for the top five last year, compared with an industry average of only 0.7%.
“This stark divergence highlights the superior profitability and operational resilience of the leading banks, particularly in a year characterized by macroeconomic pressures and sector-wide margin compression,” Yuanta shares. “Smaller banks, facing challenges beyond scale, struggle to match this performance, highlighting their vulnerability to economic pressures.”
In terms of deposits, the top five captured an average of 55% of the total between 2015 and 2024, reaching 64% in 2023.
“Larger banks are well-positioned to attract deposits from a broad customer base,” the report points out, “benefiting from their extensive branch networks, strong online presence and ability to serve diverse customer needs.”
Unique market
On the other hand, smaller banks rely excessively on non-deposit funding – as reflected in the average industry-wide loan-to-deposit ratio of 497% between 2015 and 2024 ( peaking at 1,223% in 2020 ). That compares with only 96% for the top five.
“This trend exposes the sector, particularly smaller banks, to significant liquidity risks,” Yuanta states. “However, some smaller banks’ borrowings are medium- to long-term loans from either the parent company or shareholders, which helps mitigate liquidity risk.
“This presents a unique market situation in Cambodia. Nevertheless, there is a pressing need for improved liquidity risk management, diversified funding sources and stronger regulatory oversight to ensure the long-term financial stability of Cambodia’s banking sector.”
Strategic M&A potential
Overall, the banking situation in Cambodia presents a “significant opportunity for consolidation” in the sector, the report concludes. “The fragmented nature of the market creates potential for strategic M&A [mergers and acquisitions], which can unlock significant value,” it argues. “By restructuring operations to achieve greater scale and scope, banks can leverage synergies and enhance their competitiveness within this fragmented landscape.
“Each bank – whether large, medium or small – will play a pivotal role in driving the consolidation of Cambodia’s banking sector through mergers and acquisitions.”
In terms of assets, Canadian-controlled Advanced Bank of Asia is the largest bank in Cambodia with 15% of total assets at the end of 2023, followed by Acleda Bank ( 12% ), Canadia Bank ( 10% ), South Korea’s KB Kookmin-owned KB Prasac Bank ( 8% ) and Japanese-owned Sathaphana Bank ( 4% ).
Rounding out the top 10, the next five biggest are Bank of China ( Hong Kong ) and Malaysia’s Cambodian Public Bank ( both with 2.8% ), Foreign Trade Bank of Cambodia ( 2.6% ), Malaysia’s Maybank ( 2.3% ) and China’s ICBC ( 2.0% ).