Overhead ratio for Cambodia’s top banks remain unchanged in five years

Overhead ratio for Cambodia’s top banks remain unchanged in five years

The overhead ratio (OHR) for the Kingdom’s top five banks have remained unchanged during the past five years, a white paper on the performance of Cambodia’s banking sector for the years up to 2024 reveals.

The white paper produced by YCP in association with Confluences titled ‘The Declining Profitability Trend in Cambodia’s Banks: The Impact of Rising Costs and NPLs’, observed that the stagnation in OHR continues to exert pressure on the profit margins of top five banks in the country – ABA, ACLEDA, Canadia, KB Prasac and Sathapana.

The OHR is the ratio between operating expenses and operating income and is considered to be a key measure of efficiency in the functioning of banks.

The white paper, which calls for examining the factors that are leading to declining profitability trends, focus on overheads costs as a key area to consider. “By understanding the composition and trends of overhead costs, we can identify potential areas for improvement and cost optimisation, which could help banks maintain their financial health in a challenging market environment.”

It pointed out that the top five banks, the OHR has remained largely unchanged over the past five years, with a few banks improving their efficiency. “Notably, Sathapana’s OHR spiked sharply from 51 percent to 76 percent in 2023, possibly linked to its transition from microfinance to commercial banking.

“This shift may have resulted in an income lag while operating expenses remained high, potentially compounded by depreciation associated with their move to a new corporate building, likely depreciated over a 25-year period.

“While OHR may not be the primary cause of declining profitability, its stagnating nature continues to exert pressure on profit margins. Given this, banks must focus on optimising their operating expenses to improve financial performance.”

The white paper emphasised that banks’ operating expenses can be divided into two main categories: discretionary costs and committed costs. “Discretionary costs are expenses for which banks can obtain quotes from multiple external vendors, making them important for financial reporting and supply chain management as they represent direct expenses that can be tracked and optimised.

“On the other hand, committed costs are associated with long-term agreements and commitments. These are usually fixed and allow for predictable expense planning, but often require strategic negotiation to ensure favourable terms.

“On average, discretionary costs made up 16.6 percent of total operating expenses for the top five banks in 2023. Although these costs are relatively small, they can often be reduced without disrupting operations.”

The research found that the proportion of discretionary costs to total operating expenses has been increasing for all top five banks since 2021 and this suggests a shift towards more flexible spending, with greater investments in areas like marketing, advertising, repairs, and maintenance.

“For example, ABA has increased its marketing and advertising spending by over 300 percent and its repairs and maintenance spending by over 50 percent from 2021 to 2023. This pattern is seen across all five banks, indicating an industry-wide push to expand physical distribution and market presence.”

The white paper advises the banks to adopt comprehensive procurement and supply chain strategies to optimise operations and reduce costs. It quotes Hor Bunthe, Deputy Chief Executive Officer of Wing Bank, who said: “To sustain growth and safeguard our market positions, we must embrace innovation in cost management and adopt advanced technologies to enhance operational efficiency while navigating a challenging competitive environment.”

Speaking to Khmer Times, a senior banking professional said banks in the country have been spending huge amounts for adopting latest technologies and innovation. “Almost all banks in the Kingdom have been partnering fintech firms based in India, Singapore, Malaysia or Hong Kong. And a lot of money is spent on technological adoption and cybersecurity.”

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