Risk-driven profitability: the role of bank capital, liquidity and credit in frontier banking markets

Purpose Cambodia’s banking sector has grown into an important part of the economy over the past 15 years, with growth in total assets, deposits, credit, capital and profitability. The sector’s 55 % profitability decline and 230bps NPL spike in 2023 indicate its challenges, despite its strong metrics. This study aims to investigate the influence of credit risk, liquidity risk and bank capital on the profitability of Cambodian commercial banks. Design/methodology/approach This study uses econometric panel data analysis and the generalized method of moments to explore the impact of bank capital, liquidity and credit risks on the profitability of Cambodian commercial banks from 2016 to 2023. Findings The authors find that return on average assets (ROAA) is increased by bank capital while using the net interest margin (NIM) does not show a significant influence. In addition, liquidity risk has an asymmetric effect, positively correlated with ROAA and negatively correlated with NIM. The impact of liquidity risk on Cambodia’s banking system seems to be influenced by profitability indicators. ROAA and NIM are hardly influenced by credit risk. Operational efficiency and bank size reduce profitability. To boost profits, bank management should emphasize capital buffers. Banks must balance liquidity management: higher liquidity prevents insolvency but lowers profitability, as NIM shows. Practical implications Policymakers should enforce capital adequacy standards and guide liquidity optimization without sacrificing profit. While highlighting the impact of liquidity and capital on profitability in frontier markets – an under-researched area – future research could explore these dynamics in other emerging markets. Originality/value To the best of the authors’ knowledge, this attempt is likely the first of its kind to delve into the dynamics driving banking profitability in a frontier banking market, such as Cambodia.