As Local Banking Sector Grows, Return on Equity Shrinks

Cambodia’s rapidly growing banking sector produced woefully low returns on equity (ROE) last year, with all but five of 43 banks in the country “effectively destroying value for their shareholders,” according to a report released Wednesday.

The report, “Cambodian Banks High Growth Opportunity vs Low ROE Conundrum,” compiled by investment and advisory fund Mekong Strategic Partners, says that among the banks, the return on equity—which measures a company’s ability to generate profit with shareholder equity—was low, averaging just 11 percent in 2013.

Aside from the major lenders—Acleda, ANZ Royal, Canadia, Maybank and First Commercial Bank, which all earned more than 15 percent—“banks have achieved results that are simply appalling,” the report says, citing heavy competition and the banks’ small-scale operations as the main causes.

“The single biggest issue for individual banks is lack of scale,” the report says. “[T]hey need a loan book of at least $150m to generate sufficient profits to get an ROE of 15% or more.

“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,” it says.

Grant Knuckey, CEO of ANZ Royal, said low returns on equity were a “cause for concern” for shareholders.

“[R]eturns in the banking sector here are very low for an emerging market, and trending down,” Mr. Knuckey said in an email.

“Banks here are not generally employing risk-adjusted returns models in measuring their performance, they are just looking at revenues and cash profits,” he said.

Acleda CEO In Channy called the report a “fair assessment” and said the proliferation of banks in the country has created a degree of competition that is eating into their revenues.

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Correction: A previous version of this story incorrectly stated that there were 48 banks in the country last year. There were 43.

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