Year: 2025
Type: article
Abstract: This study investigates the dynamic determinants of bank profitability in Cambodia using a Panel Vector Autoregression (PVAR) framework covering commercial banks from 2010 to 2024. Profitability—measured through Return on Equity (ROE), Return on Assets (ROA), and Profit Margin (PM)—is examined as a systemic outcome shaped by interactions with credit risk (Non-Performing Loans (NPLs)), intermediation efficiency (Net Interest Margin, NIM), and capital strength (Capital Adequacy Ratio, CAR), alongside funding structure and operational efficiency. Descriptive evidence shows that Cambodian banks remain moderately profitable but face rising cost pressures and uneven risk governance. Correlation patterns confirm profitability’s sensitivity to credit quality, cost efficiency, and capital buffers. Panel Vector Autoregression (PVAR) estimation reveals that profitability is highly persistent, with strong positive effects from lagged returns, interest margins, and capitalization, while higher NPLs and elevated cost-to-income ratios significantly depress earnings. Liquidity and deposit-based funding provide stability but generate diminishing marginal returns when excessive. Impulse Response Functions highlight that credit-risk shocks have immediate and persistent negative effects on profitability, whereas capital and liquidity shocks initially stabilize returns before gradually tapering. Forecast Error Variance Decomposition shows that NPLs, CAR, and NIM are the dominant drivers of profitability dynamics, emphasizing the centrality of risk control, capital adequacy, and pricing strength. A sectoral extension shows that lending to agriculture contributes positively to net profit, while exposure to mining, retail trade, and telecommunications reduces profitability due to volatility, narrow margins, and high capital intensity. Granger-causality tests reinforce that credit risk, capital buffers, and liquidity positions predict future profitability more strongly than the reverse. Overall, the results demonstrate that durable bank profitability in Cambodia depends not on balance-sheet expansion alone but on prudent credit-risk management, efficient intermediation, disciplined cost control, and targeted sectoral lending. These findings offer practical insights for bank executives and policymakers seeking to strengthen financial stability and optimize risk-adjusted returns in an evolving banking landscape.
Authors: Dy Davuth, Manaranjan Behera
Institution: Build Bright University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W7116772444