The Declining Profitability Trend in Cambodia’s Banks
The Impact of Rising Costs and NPLs
On October 23rd, at The Tribe Hotel in Phnom Penh
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The Cambodian banking sector has long been a story of rapid growth, driven by modernization and increasing economic activity. However, recent trends reveal a worrisome decline in profitability, posing significant challenges to banks across the country. This blog explores the factors behind this decline, particularly the rising costs and non-performing loans (NPLs), and provides insights into what lies ahead for Cambodia’s financial institutions.
Understanding the Decline
In the last few years, Cambodia’s leading banks have faced a sharp decrease in two key performance metrics: Return on Assets (ROA) and Net Profit Margins (NPM). Between 2019 and 2023, the top five banks saw their ROA fall from 2.3% to 1.2%, and NPM from 26.6% to 16.5%. These numbers tell a clear story of declining efficiency and profitability.
Rising Costs and External Factors
One major reason for this trend is the rapid rise in refinancing costs since 2022. As US dollar interest rates surged, Cambodian banks, many of which hold fixed-rate loans, were unable to fully pass on these cost increases to customers. This created a situation where profits were squeezed, as banks struggled to balance their books. Furthermore, operating expenses remained stagnant, putting additional pressure on profitability.
The Non-Performing Loans (NPL) Challenge
The second major factor driving down profits is the sharp rise in NPLs. Following the end of favorable pandemic conditions, which included government support and moratoriums on loan repayments, many businesses and consumers began struggling to meet their debt obligations. This resulted in a wave of defaults, with NPL ratios climbing from 2% to 5% among Cambodia’s top banks by 2023.
The rise in personal loans during the pandemic is particularly concerning. While these loans allowed banks to increase their portfolios, they came with heightened risks. Today, many borrowers find themselves unable to repay, driving up the NPL rates further.
Strategic Adjustments Needed
To counter these challenges, Cambodian banks need to adopt strategic measures. Cost management will be critical. With discretionary costs accounting for a significant portion of banks’ operating expenses, focusing on optimizing these costs through improved procurement strategies could help regain some profitability.
Additionally, the growing NPL burden requires a multifaceted approach. Banks must refine their risk management strategies, improve consumer credit assessments, and explore partnerships with NPL investors. Utilizing technology, such as AI-powered valuation tools, could also offer banks more precise insights into how to handle these risky loans.
The rise in personal loans during the pandemic is particularly concerning. While these loans allowed banks to increase their portfolios, they came with heightened risks. Today, many borrowers find themselves unable to repay, driving up the NPL rates further【5†source】.
#### **Strategic Adjustments Needed**
To counter these challenges, Cambodian banks need to adopt strategic measures. Cost management will be critical. With discretionary costs accounting for a significant portion of banks’ operating expenses, focusing on optimizing these costs through improved procurement strategies could help regain some profitability【5†source】.
Additionally, the growing NPL burden requires a multifaceted approach. Banks must refine their risk management strategies, improve consumer credit assessments, and explore partnerships with NPL investors. Utilizing technology, such as AI-powered valuation tools, could also offer banks more precise insights into how to handle these risky loans【5†source】.
#### **What Lies Ahead?**
Cambodia’s banking sector is at a crossroads. While the economic environment remains competitive, banks will need to carefully balance expansion with risk management. Increasing their exposure to personal loans might help capture market share, but it will also increase the risk of further profitability declines. Ultimately, the ability to manage costs and address the NPL crisis will determine whether Cambodia’s top banks can maintain their position in this evolving financial landscape【5†source】.
For investors and stakeholders in Cambodia’s banking industry, it is essential to remain aware of these trends and consider how regulatory changes, such as stricter reserve requirements, could impact profitability further. Banks that are able to adapt, innovate, and strategically manage their risks will likely emerge stronger and more competitive in the years to come.
