Cambodia Faces Proliferation of 60 Banks... Growing Calls for Mergers

Deteriorating Business Environment Centered on Small Banks... "Minimum Capital Requirements Should Be Increased"

[Asia Economy Phnom Penh Correspondent An Gil-hyun] In Cambodia's financial market, where 60 banks are competing, calls for mergers between banks are growing. As the deteriorating business environment mainly affects small banks, the argument that they need to grow through mergers is gaining traction.

According to local media on the 25th, investment advisory firm Mekong Strategy Partners (MSP) pointed out in its 'Cambodia Banks 2020 Financial Review' report that small, low-performing banks are eroding the overall profitability of banks. Although the number of banks with a return on equity (ROE) of over 15% increased from 7 in 2016 to 12 last year, the average profit margin remained at 11.7% due to the proliferation of small banks.

There are 45 commercial banks in Cambodia, with large banks having assets worth USD 6.7 billion, while small banks have assets of only USD 22.28 million, showing a significant gap. MSP stated in the report that banks need to achieve a 15% profit margin, and to do so, loan balances must be at least USD 400 million.

In addition to commercial banks, there are 15 specialized banks that handle either lending or deposits exclusively.

Stephen Higgins, co-CEO of MSP, said, "USD 400 million may seem like a lot, but as of the end of last year, only 16 banks met this level," adding, "Excluding the top four banks, the average ROE is only 8%, which means it would be better to invest in fixed deposits."

The push for mergers between banks is based on the argument that economies of scale are necessary to prepare for crises. Although the net profit of Cambodia's banking sector increased by more than 20% annually over the five years from 2015 to last year, disparities between banks are widening.

Higgins stated, "Doubling the minimum capital requirement for commercial banks by 2026 is the same approach as before," and added, "If a bank does not hold at least USD 150 million in minimum capital, its loan market share will be less than 1%, which raises questions about the bank's viability and sustainability." He further noted that if the minimum capital is raised to USD 150 million, only banks with less than 20% ROE will meet this requirement. Ultimately, his argument is that the remaining banks will have to raise additional capital or merge. Because of this, there are forecasts that a full-scale wave of mergers and acquisitions (M&A) will begin in 2024.

This content was produced with the assistance of AI translation services.