Cambodia’s Banking Sector Ripe for Consolidation

The banking sector in Cambodia, which is highly fragmented with several small banks facing high operating costs, making it ripe for consolidation, according to the Cambodian unit of Taiwanese brokerage group Yuanta Securities.

In its recent report entitled “Cambodia’s Banking Industry: Why Size Matters,” Yuanta securities said that 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, their share increased to 49%, a level maintained last year, the report said.

According to the report, smaller banks were struggling to grow due to their lower competitiveness compared with the larger banks as the number of commercial banks in the country grew from 42 to 57 in the five years to 2022.

Huge Competition

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 explained.

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, the report said.

“To improve efficiency, resilience and long-term sustainability, a more consolidated banking sector with larger, well-capitalised institutions is crucial,” the report said while looking at other metrics such as cost-to-income and operating expense ratios.

The top five Cambodian banks consistently outperformed smaller peers in operational efficiency with expenses averaging 47% of operating income compared with 66% for smaller banks between 2016 and 2023. During the same period, the operating expense ratio, 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 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,” the report said.

Return on Average 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 highlighted the superior profitability and operational resilience of the leading banks, particularly in a year characterised by macroeconomic pressures and sector-wide margin compression.

“Smaller banks, facing challenges beyond scale, struggle to match this performance, highlighting their vulnerability to economic pressures,” Yuanta noted.

Deposits

As far as deposits are concerned, the top five banks 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 benefiting from their extensive branch networks, strong online presence and ability to serve diverse customer needs,” the report pointed out.

On the other hand, smaller banks rely excessively on non-deposit funding, as the average industry-wide loan-to-deposit ratio of 497% between 2015 and 2024, whiched its peak at 1,223% in 2020. That compares with only 96% for the top five.

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.

Overall, the banking situation in Cambodia presents a significant opportunity for consolidation in the sector, the report said.

“The fragmented nature of the market creates potential for strategic mergers and acquisitions, which can unlock significant value. By restructuring operations to achieve greater scale and scope, banks can leverage synergies and enhance their competitiveness within this fragmented landscape,” the report felt.

Assets                  

In terms of assets, foreign banks such as 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%).

These five banks were followed by Bank of China (Hong Kong) and Malaysia’s Cambodian Public Bank  (each with 2.8%), Foreign Trade Bank of Cambodia (2.6%), Malaysia’s Maybank (2.3%) and China’s ICBC (2%).