President & CEO's Report

"As I anticipated last year, the true consequences of the economic crisis only become apparent in 2009. The banking system in Cambodia has faced its biggest challenge since the reforms of 1999 but tough preventive strategies enabled ACLEDA to come out of the storm well positioned to take advantage of the upturn we are already seeing in 2010. Whilst profits were sharply reduced from the previous record year the results were broadly comparable with 2007 while the 'vital signs' such as portfolio quality, liquidity and capital strength indicate that the bank is in robust financial health."

Performance in 2009

Competitive environment

With 29 licensed commercial banks in Cambodia the environment has become extremely competitive with some significant regional newcomers entering the scene during 2009. However, four banks dominate the sector accounting for 75% of the total deposits and 72% of lending between them. Nevertheless ACLEDA's share in deposits grew from 19.8% to 21.2% and loans from 19.3% to 21.5% resulting from a 'flight to quality' effect as the market was roiled by rumours in the first half of the year. Our market position was 2^nd in both deposits and loans closely behind the leader, a foreign owned bank, with whom we had exchanged rankings several times during the year. Nevertheless, we remain the largest local bank by a substantial margin. Out of a market total of nearly one million depositors, well over half are ACLEDA customers. Our competitive advantage remains our reputation for service, financial strength, excellent systems and an unparalleled branch network extending to every province and town in the country.

Operational Performance

I indicated in my last report to you that, in facing the many uncertainties for 2009, our focus would be on maintaining loan portfolio quality and liquidity. Whilst this has kept the bank sound and well able to cope with the extreme unpredictability between the first and second halves of the year, the cost of keeping substantially higher levels of liquidity than normal and the decline in quality lending opportunities had a material impact on our earnings in the first six months although there was a significant improvement in the second half. This notwithstanding, the bank is in excellent shape to exploit the economic upturn which is already manifesting itself in 2010.

During the year the risk management function was separated from Audit into a new Risk Management Division and a new Board Committee, the Risk Committee. This has allowed us to take an independent and forward looking approach to risk management to anticipate adverse events and take pre-emptive measures.

Retail, Micro and Small Business

Threshing machine assembled by ACLEDA's client

Micro Loans grew by 15.69%, Small Loans by 14.32% and Personal Loans by 81.05%. Housing slightly decreased due to stricter property valuation guidelines introduced in the face of a weakening property market. Housing Loans represent only 8.78% of total loans outstanding — down from 10.9% a year earlier.

Retail deposits grew by 41.2% to US$687.7 million, a significant amount of which came from first time depositors such as factory employees paid through our Payroll Service and customers in rural areas where we have newly opened offices. It is satisfying to note that retail deposits cover the total loans outstanding of US$528.0 million.

An important factor in the growth of deposits was the continuing development and expansion of our automated delivery system which at the end of 2009 comprised 86 ATMs and 649 POS terminals throughout the country with nearly 295,000 cards issued.

Medium and Corporate Business

Medium and corporate lending was sluggish in the first half but showed signs of revival in the last six months finishing the year up by 17.48% led by Revolving Credits, Overdrafts and Trade Finance.

Cash Management performed strongly and in addition to the National Social Security Fund, who as I mentioned last year had appointed ACLEDA as custodian to receive employers' contributions, several new accounts were acquired in 2009 the most significant of which were the Electricité du Cambodge ATM bill payment service and the National Treasury's receipt and payments facility for Banteay Meanchey and Kandal Provinces. This has substantially augmented our Riel cash flow and has enabled us to fund our local currency loan portfolio entirely from deposits. Demand for Payroll Services was particularly strong in 2009 with a number of large local and international companies and official organisations signing up which provide excellent opportunities for cross-selling of other products.

Despite the world wide recession the sales volume of the Trade Finance Division increased 87% compared to the 2008 achievement to US$126.3 million in 2009. This includes a growth of 189% of export volume to US$33.9 million in 2009 and a 22% growth of the import volume to US$26.7 million. This led to a rise of 62% in fee and commission earnings from this division. As a result fee and commission earnings (excluding loan fees) climbed 26.61% and accounted for 10.79% of gross revenue for the year.

Treasury and International

Foreign exchange earnings continue to grow and make a valuable contribution to our Net Fee and Commission Income. As our F/X business is 'settlement only' — the bank does not trade speculatively or take positions — this is a low risk and stable source of income which has grown consistently over time, produced good margins, and built up long-standing relationships with the money changers and currency dealers.

The bank Balance Sheet has been further strengthened by consistant growth of customer deposits resulting in a healthy loan-to-deposit ratio and provides a solid platform to support our expansion in selected market segments.

We continued to strengthen and deepen our Financial Institutions' relationships and added some substantial new international correspondents to our network during the year. At the end of 2009 we had 429 correspondents covering 54 countries. In addition we have a dominant share in the market for local banks' and financial institutions' domestic accounts and provide funds transfer services for them throughout the country.

Strategic Priorities for 2010

To build on the success of our payments system to bring rural and urban customers closer together and to mobilise the nation's financial resources more efficiently by deploying surplus funds in one area to other areas where they are needed. As far as is consistent with prudent asset and liability management, to ensure that our financial resources are employed within Cambodia for the development of our customers' business and the benefit of the national economy.
To make maximum use of our ACLEDA-ASEAN Regional Microfinance Center to develop our human resources to be able to meet the increasing complexities of the financial services industry in Cambodia and to ensure that the bank continues to offer the highest standards of service.
To focus on expanding value added fee based services to diversify the income stream and reduce dependence on capital.
To control our costs which are still too high relative to our peers.
Continue to develop our electronic delivery systems to provide our customers with easier interaction with the bank and offer new automated services in new locations. The anticipated launch of 'Unity' — our mobile phone banking service — in early 2010 will be the flagship of our campaign to bring access to financial services to a wider constituency.
To undertake a feasibility study for bancassurance.
Work with our strategic shareholders to develop new capabilities and financial services.
To build upon our model as an integrated microfinance, retail and commercial bank as a solid foundation for regional expansion.
To seek opportunities in the development of a capital market in Cambodia. To this end we have applied for a securities license from the Securities and Exchange Commission of Cambodia to be able to offer brokerage services to our customers.

It is my greatest pleasure to thank all our loyal customers; my colleagues on the Board of Directors, management and staff; our professional advisors and, not least, the Royal Government and the National Bank of Cambodia who have supported us through difficult times. I wish you all the best for the coming year.