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Logo of Phnom Penh Post newspaper Phnom Penh Post - Cambodia’s underperforming banks providing little joy for shareholders

Acleda is one Cambodia’s few highly profitable banks, with an ROE of 25 per cent. Hong Menea

Cambodia’s underperforming banks providing little joy for shareholders

Outside of the big four, the average return on investment for the Kingdom’s banks is only 6 per cent – with some not even able to cover their operating costs – and analysts warn small players could become irrelevant

The majority of Cambodian banks are underperforming, providing poor returns on their shareholder investment, a new analysis has revealed.

Outside of Cambodia’s big four banks – Acleda, Canadia, Cambodia Public Bank and ANZ Royal – the average return on equity (ROE) last year for the remaining 39 banks was just 6 per cent, according to a report by investment firm Mekong Strategic Partners (MSP). Some banks who have been in the market for 20 years are not earning enough revenue to cover their costs.

“If these banks do not improve their ROE, they will not be able to fund the level of credit growth we expect in Cambodia going forward – 15 per cent to 20 per cent pa – without asking shareholders for additional capital,” the MSP report says.

“This will either lock them into a downward spiral in market share, becoming increasingly irrelevant, or will increase the pain for shareholders who have to come up with ever increasing amounts of capital.”

Given Cambodia’s risk profile, MSP says that an ROE of 15 per cent is an acceptable level for banks to target. But last year, just five banks posted an ROE greater than 15 per cent. The industry average in 2013 was a return of 11 per cent. This compares to an average greater than 20 per cent in Cambodia’s microfinance (MFI) sector.

MSP did not name the industries under performers.

But when analysed by Post Weekend, data from the National Bank of Cambodia (NBC) showed that Cambodia Mekong Bank and Cathay United Bank (formally SBC) had the lowest ROE. The two banks had negative returns and were established in Cambodia more than 20 years ago so fall into MSP’s “the ugly” category.

The Post also found Cambodian Commercial Bank, Union Commercial Bank (UCB), Cambodia Asia Bank and Cambodia Public Bank fell into the “the ugly” group. UCB were the only bank to respond to the Post for comment.

Most banks fell below the 10 per cent ROE mark. While some are relatively new entrants to the market and need time to develop, the majority have been in Cambodia for five years or more.

“When I first arrived in Cambodia in mid-2012, after some basic analysis, one of the things I couldn’t rationalise was why returns were so low here – incredibly low for an emerging market with the risk profile that entails,” said ANZ Royal Bank chief executive Grant Knuckey.

Knuckey describes the poor returns of his competitors as a “vexing” issue in the industry. He said that some Cambodian banks don’t see it as a measure of performance like banks in the developed countries do.

“But the market will catch up to that over time,” he said.

Content image - Phnom Penh Post

So what is the cause of such poor results?
Greater competition comes into it. Average lending rates fell from 15.2 per cent in 2008, when there were 31 banks in the market, to 11.1 per cent in 2013, when there were 43 banks, lowering revenues. But according to MSP, the wide range of ROEs suggest that poor management of individual banks rather than enhanced competition has cut into profits.

“The biggest single issue for individual banks is a lack of scale,” the MSP report says.

Under NBC requirements, Cambodian banks must hold a minimum of $37.5 million. MSP says that to generate enough profits to achieve an ROE of 15 per cent, Cambodian banks need a loan book of at least $150 million.

But at the end of last year, just 12 banks had achieved this growth in their loan portfolio.

Different banks have different reasons for underachieving loan books, but MSP notes some common elements among the underperformers, including lending policies with too many requirements, poor people management, a lack of experienced staff to bring in business and bad marketing.

Union Commercial Bank has been in Cambodia since 1994, and last year recorded an ROE of just 7.9 per cent. UCB acknowledges that 15 per cent is an acceptable level. In late 2013, E Sun Commercial Bank bought a 70 per cent stake in UCB and inherited $3 million in “doubtful” loans, which they attribute to the underperformance last year.

But, thanks to the larger and more experienced Taiwanese investor, the bank has since improved its marketing efforts and enhanced its IT infrastructure. UCB says it has grown its loans and deposits by over 40 per cent and expects to see an ROE greater than 15 per cent this year.

Content image - Phnom Penh Post

“The heart of the low ROEs in many banks is simply because they are too small in terms of capital base, resources and total assets,” said UCB chairman Yum Sui Sang.

“Owing to the smallness in size, they are unable to avail themselves of low funds and faced increasing competition from international, bigger bank names that may be able to tap lower cost funds from their parent companies or the international markets through their parent companies,” he added.

Market forces would suggest that mergers and acquisitions are inevitable, yet the number of banks in Cambodia has continued to grow rather than come together.

“I noted it has been like this for more than five years already, and I haven’t seen signs of consolidation yet,” said Acleda CEO In Channy.

MSP too notes the stubbornness among the smaller underachievers:
“While merging or selling would be the obvious solution, there is a curious lack of willingness to do so, and/or particularly unrealistic price expectations, even for banks that do not earn enough revenue to cover their costs, let alone make a modest profit.”

But it is not just small banks that are at risk.

According to Jayant Menon, lead economist for the Office of Regional Economic Integration at the Asian Development Bank, the sector’s poor returns show that Cambodia’s industry requires greater oversight from regulators to ensure economic stability.

“Although having freedom of entry can be a good thing, the weak regulatory environment combined with lax requirements for setting up a bank have produced far too many players,” he said.

“Unless the requirements are tightened, and better prudential supervision is put in place, this is a meltdown waiting to happen.



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