Chairman's Report

"2009 has been the most challenging year in the nearly ten years since the bank commenced operations in 2000. In the face of the worst economic conditions in recent memory ACLEDA Bank Plc nevertheless turned in a creditable performance with profits close to the second highest ever levels recorded in 2007."

The Cambodian Economy in 2009

After a decade of strong economic growth (8% per year on average), the global economic crisis has hit hard in light of its high level of openness and highly concentrated growth base. Garments, construction and tourism, which had been the main economic driving forces, have been adversely affected but this has been mitigated to some extent by the strong performance of the agricultural sector.

In November 2009, the World Bank predicted that GDP will contract by 2.2% against their earlier forecast, in April, of a contraction of just 1%. The IMF also scaled back its projections for GDP to minus 2.75% from minus 0.5% in March. Similarly the Asian Development Bank, in September, downgraded its prognosis for the economy, saying it would contract by 1.5% — much lower than their original prediction of 2.5% growth. However, the Government stood by its forecast of 2.1% growth in 2009 based on agriculture (+5%) services (+3.2%) offset by declines in the garment industry (-3.9%) and construction (-2.6%). The latest unofficial figures released in February suggest that their optimism may have been partly justified.

Inflation has declined sharply from 12.5% at end — 2008 and is expected to stabilize at 5.3% — much the same level as 2004. Falling prices of food and beverages, property, water, power and transportation have contributed to the downward trend.

The Khmer Riel depreciated slightly against the US dollar by around 2.3%, trading at an average of KHR4,154 per US dollar. A relatively large fluctuation occurred in August and September due to both seasonal and external factors. The lower demand for the KHR after the harvest and the reduction in tax assessments due to falling profits resulted in surplus KHR in the market and the slowdown of foreign capital inflows have all contributed to the depreciation of the local currency.

The banking sector in Cambodia is not exposed to 'toxic assets' but is affected by the slowdown in economic activity bringing a sharp reduction in deposit and loan growth. Deposits in the sector increased only 32.7% from US$2.47 billion to US$3.28 billion compared with 3.7% in 2008. Nevertheless, an encouraging feature was the growth in the number of depositors with bank accounts which rose 63.9% from 609,987 to 999,987. Credit increased only 3.4% from US$2.34 billion to US$2.42 billion with the number of borrowers increasing 15.7% from 230,114 to 266,299. However from October lending has started to show a tentative increase to more normal levels.

The broad money supply grew 21.1% compared with only 4.8% in 2008 while international reserves increased a surprising 25.2% to more than US$2.6 billion at the end 2009 due to sharply reduced imports and tighter government control over expenditure. Foreign exchange reserves now cover 4 months of imports.

Balance of Payments

The preliminary estimates of Cambodia's Balance of Payments for 2009 posted a surplus on the overall balance of US$70.2 million, a decline of 79.7% compared with 2008. Domestic exports amounted to US$3,619 million a decrease of US$804.7 million (or 18.2%) compared to 2008. The decline of US$716.2 million in garments and textiles and US$88.4 million in other domestic exports are the main factors contributing to the unfavorable export performance. The exports of agricultural products decreased 6.2%. The decrease in the price of rubber, fish, paddy rice, cassava and other agricultural products were the contribution to the decrease in other domestic exports. The estimated of retained imports was US$5,208.2 million a decrease of US$1,063.2 million or 17% compared to the estimated of retained imports for 2008.

Economic Outlook for 2010

Looking to 2010, there are some hopeful signs that the global downturn may be bottoming out. A pickup in external demand is expected to lead to a modest recovery in Cambodia’s economy. Growth in 2010 is projected at about 4.3% by the International Monetary Fund (given the positive signs of recovery in the country’s main economic drivers) whilst the World Bank and Asian Development Bank predict 4%, Ministry of Economy and Finance 3% and the National Bank of Cambodia 4.3%.

The brighter prospects for the economy and the prospects for the establishment of the stock exchange in 2010 have attracted foreign investors to enter the financial sector. In the face of this interest the authorities have implemented measures to strengthen the banking system. These include: maintaining the current high level of foreign currency deposit reserve requirements at 12%; establishing a 'lender of last resort' facility to provide liquidity to banks in need; strengthening the classification and provisioning requirements for loan portfolios and sharply raising minimum capital requirements from US$13 million to US$37 million. In addition, the National Bank has made great progress in improving its supervision and monitoring capacity.

Events in 2009

The group's profit after tax for the year ended December 31, 2009, was US$9.2 million down 54.8% reflecting the increased interest charges on the 43.9% growth in deposits while loans grew by only 18%.
The dividend declared for the 2009 is US$0.054 per share representing 40% of net profit after tax. This compares to US$0.163 for 2008.
In order to strengthen the capital base and preserve liquidity the 2008 dividend of US$8,150,000 was issued in the form of shares in lieu of cash. In addition a further US$10,000,000 was raised by means of a rights issue bringing the total capital up to US$68,150,000.
In December JSH Asian Holdings Limited which is a subsidiary of Jardine Strategic Holdings Limited, a publicly listed member of the Jardine Matheson Group, agreed to acquire FMO's entire stake of 12.25% in ACLEDA Bank Plc. Jardines brings to ACLEDA more than 175 years of experience in commerce and banking in Asia and we look forward to a long-term partnership in building our business and playing a leading role in Cambodia's economic development.
Early in the year Moody's placed ACLEDA under notice of possible downgrade in our local currency deposit ratings. However, after further consideration they withdrew the notice and re-affirmed all our original ratings. In the light of the economic situation prevailing at the time and against a background of widespread bank rating downgrades throughout the region and the world, we consider this as something of an achievement. Standard & Poor's have maintained their ratings and both agencies presently classify them as 'stable'.
ACLEDA Bank Lao Limited continues to grow and is on track to meeting its targets. During the year 9 new offices were opened bringing the total to 12 in 4 provinces by the end of 2009 with a total of 246 staff.

Shareholders' Meeting

The Annual General Meeting of shareholders was held on May 18, 2009 at the bank's Headquarters and in addition four resolutions were passed by email during the year. Notice of Meeting together with the Annual Report, the Meeting Agenda and the Board's recommendations were delivered to the shareholders in advance according to the bank's Articles of Association and government regulations. Other resolutions by the Shareholders between Annual General Meetings were passed as provided for by Article 15 of the Articles of Association.

The key matters approved were:

The Annual Report for the year 2008.
The audited Financial Statements for the year 2008.
The payment of a dividend of 40% NPAT of fiscal year 2008 in the form of stock dividend at US$0.163 per share and automatically transfer the remaining balance to the general reserve.
The appointment of KPMG as the external auditors for 2009.
Amendments to update the Memorandum and Articles of Association of ACLEDA Bank Plc.
Amendment to the Subscription and Shareholders Agreement.
Capital increases of US$10 million by a rights issue and US$8,150,000 in the form of stock dividend in lieu of cash.

Board Performance

The Board Self Appraisal exercise which commenced in 2008 was completed in 2009 and has produced some very useful results.

Mr. Joe Hoess resigned from the Board of ACLEDA Bank Plc on December 03. Joe has been a most active Director since 2004 having chaired the Audit Committee since 2005 and more recently was the co-ordinator of the Board Self Appraisal program. We thank him for his significant contribution to the bank and wish him well in the future. I am happy to say, however, that we have not lost his services entirely as he remains on the Board of ACLEDA Bank Lao Limited as Vice-chairman. He will be replaced on the Board of ACLEDA Bank Plc by Mr. Alain Cany, Group Country Chairman of Jardine Matheson Vietnam to whom we extend our warmest welcome.

With a tried and tested management team, a healthy capital position, abundant liquidity and strong and supportive shareholders the outlook for ACLEDA Bank in 2010 is positive and we expect a steady return to the profitability growth of previous years.

Once again it is my pleasure to thank my colleagues on the Board of Directors for their support, cooperation and contribution in 2009 and on behalf of all of us I express our appreciation to the CEO and his management team and the staff for their outstanding efforts in sustaining the bank through a difficult time.

In conclusion on behalf of the bank I must also thank our customers, shareholders, investors, regulators, suppliers, the general public and in particular the Royal Government for their continued trust and support.