Cambodia Investment Review
As Cambodia eyes upper middle-income status by 2030, experts urge banking sector consolidation to boost efficiency, reduce risk, and drive long-term financial stability.
Cambodia’s crowded banking sector may soon face a wave of consolidation, as a new report by Yuanta Securities (Cambodia) warns that a fragmented system of 59 commercial banks is increasingly unsustainable. The report, titled “Cambodia’s Banking Industry: Why Size Matters”, presents a compelling case for mergers and acquisitions (M&A) to create stronger, more efficient financial institutions capable of supporting the country’s long-term economic ambitions.
The study highlights persistent challenges facing smaller banks, including high operating costs, weaker risk management, excessive reliance on non-deposit funding, and shrinking profitability—issues that pose a threat to sector-wide resilience and financial stability.
Why Bigger Banks Are Better Positioned
According to the report, larger banks in Cambodia consistently outperform smaller players across key indicators such as profitability, cost-efficiency, and financial stability. For example, the Top 5 banks—accounting for 49% of total banking assets—have maintained a cost-to-income ratio (CIR) of around 47%, compared to 66% for the rest of the sector. Their return on average equity (ROAE) reached 8.9% in 2024, while the broader industry averaged just 0.7%.
This performance advantage stems from economies of scale, diversified funding bases, and stronger digital infrastructure. These banks also control 64% of total deposits, 62% of the CASA market, and operate 70% of all ATMs nationwide—giving them an edge in customer acquisition and service delivery.
“In a market where smaller banks face rising leverage and vulnerability to interest rate shocks, larger banks offer more stable funding and the capacity to invest in technological innovation,” the report notes.
Risks of Fragmentation and Overleveraging
The current structure of Cambodia’s banking system, with its proliferation of small players, has led to inefficiencies, intensified competition, and systemic risks. Between 2015 and 2024, non-deposit borrowing by smaller banks rose to $15.5 billion—nearly 70% of total non-deposit debt—raising concerns about liquidity and sustainability.
Compounding these pressures is a rapid increase in credit growth, with Cambodia’s credit-to-GDP ratio reaching 133% in 2022—well above the ASEAN average of 86%. While this indicates high financial inclusion, it also signals risks of overleveraging, especially as non-performing loans (NPLs) tick upward.
In 2024, NPLs at smaller banks averaged 7.5%, with some exceeding 36%, compared to 6.9% among the top five. “If left unaddressed, the vulnerabilities of smaller banks could trigger wider liquidity strains,” YSC warns.
Consolidation as a Strategic Solution
To tackle these challenges, Yuanta Securities recommends a proactive policy shift toward consolidation, both through market-driven M&A and regulatory facilitation. It suggests the National Bank of Cambodia (NBC) play a central role by offering temporary regulatory flexibility—for example, adjusting capital adequacy requirements during the post-merger transition period—to incentivize banks to merge.
“Consolidation would not only reduce operational inefficiencies but also enable banks to invest in digital transformation, risk management systems, and innovative financial products,” the report states.
International case studies from South Korea, Malaysia, and Nigeria reinforce this strategy. Each country undertook aggressive banking consolidation following financial crises, leading to stronger institutions and reduced systemic risk. In Indonesia, the 2021 merger that created Bank Syariah Indonesia (BSI) led to a 16% asset growth in 2024 and a CIR improvement from 54% to under 49%.
Looking Ahead to 2030
With Cambodia aiming to achieve upper middle-income status by 2030 and a projected GDP of $71 billion, Yuanta Securities argues that banking reform is not just about financial sector health—it’s about national development. A consolidated banking sector can better support infrastructure projects, develop more advanced credit tools, and contribute to sustainable economic growth.
“Smaller banks may either integrate into stronger institutions or exit the market,” Yuanta Securities concludes. “Each player—large or small—has a role to play in reshaping Cambodia’s financial system.”
For more on the state of Cambodia’s financial sector, see the full Yuanta Securities report: Cambodia’s Banking Industry: Why Size Matters.
