Although Cambodia’s banking sector has traditionally been known for rapid growth and dynamic transformation, the country’s banks have experienced declines in return on assets (ROA) and net profit margin (NPM), leading to declines in profitability. According to a new paper from YCP, Japan is facing a significant decline in the says Confluence.
This decrease can be attributed to the pressure on profit margins from overhead costs, an increase in allowances for loan losses, and a sharp increase in non-performing loans (NPLs).
of report analyzes Cambodia’s banking sector and highlights the continuing challenges facing the industry.
According to the report, Cambodia’s banking sector is facing a financial recession, as evidenced by a significant decline in key profitability indicators.
From 2019 to 2023, the median ROA and NPM of the top five domestic banks declined from 2.3% to 1.2% and from 26.6% to 16.5%, respectively. Similar trends were observed among 54 small banks, with median ROA declining from 1.5% to 0.3% and NPM declining from 27.2% to 6.2%, pointing to broader challenges within Cambodia’s banking sector. has been.
Miscellaneous expenses put pressure on profit margins
To understand the causes of this decline, the report examines overhead costs, a key component of operational efficiency.
Operational efficiency is measured using the overhead ratio (OHR), which is operating expenses divided by operating income.
The OHR of the top five banks has remained largely unchanged over the past five years, although some banks have improved efficiency. Although OHR has not deteriorated, its stagnation is putting pressure on profit margins, the report said.
Looking more closely at operating expenses, the report notes that discretionary expenses, which include marketing, advertising, repairs, and maintenance, amounted to an average of 16.6% of the top five banks’ total operating expenses in 2023. There is.
These costs have been rising since 2021, reflecting increased investment in areas such as logistics and advertising and infrastructure development aimed at increasing market presence.
For example, ABA is increasing marketing and advertising spending by more than 300% and repair and maintenance spending by more than 50% from 2021 to 2023, demonstrating efforts to expand its profile and operations.
The report states that flexible discrepancy costs need to be optimized and managed more effectively, especially during periods of declining profitability. Within this category, up to 50% of these costs are considered manageable. This means you can reduce costs through strategic initiatives and improved operational efficiency.
Increasing bad debts
Another challenge highlighted in the report is the rapid increase in loan loss provisions. This trend, which has continued since 2019, is particularly pronounced in ABA and ACLEDA, where provisions have tripled since 2021. This increase highlights the financial strain banks face in bearing and absorbing risk.
The increase is driven by several factors, including increased credit losses and slower economic recovery leading to higher debt levels, the report said.
During the COVID-19 outbreak, regulators have given banks more flexibility in classifying non-performing loans, but this has temporarily hidden the true extent of credit problems. The financial impact on banks was delayed.
However, once this period ends, banks will need to recognize these deferred problem loans, resulting in a sharp rise in non-performing loans in 2023. Additionally, the increase in interest rates offered by Cambodian banks has made it difficult for borrowers to repay their debts, necessitating an increase in provisions. To cover potential losses.
As a result, the increase in provisions significantly contributed to the decline in the top five banks’ earnings from 2019 to 2023, the report said.
Furthermore, Cambodia’s top five banks have significantly increased their personal loan portfolios over the past decade, indicating increased risk tolerance to drive loan expansion.
However, the increased focus on personal loans has led to a surge in non-performing loans. The report advises banks to develop more effective consumer credit risk assessment strategies to balance expected returns and risks, ultimately maximizing potential profits.
Featured image credit: Edited from freepic
