President & CEO's Report

"A doubling of our loan portfolio, which for the first time was fully funded by deposits, which grew 180%, supported by a reduction in Non-performing Loans from 0.10% to 0.06% and a 1.5% fall in our administrative costs ratio contributed to another excellent year and places the bank in a good position to face the challenges of 2008."

Performance in 2007

Continuing GDP growth which has averaged double digits since 2003 has benefited the banking sector generally and ACLEDA Bank in particular. Our periodic capital raising since 2003 and our investment in new technology and the branch network has enabled us to fully exploit the opportunities presented by this favourable economic climate. A doubling of our loan portfolio, which for the first time was fully funded by deposits which grew 180%, supported by a reduction in Non-performing Loans from 0.10% to 0.06% and a 1.5% fall in our administrative costs ratio contributed to another excellent year and places the bank in a good position to face the challenges of 2008.

Competition amongst the 'big 4' banks in Cambodia is at an all time high which is good news both for the public as well as having a stimulating effect on the banks themselves. Additional competitive pressure is coming from the larger microfinance institutions ('MFIs') who have recently been permitted by the National Bank of Cambodia to take deposits and a number of them are known to be considering applying for a banking license. In spite of this we have increased our market share in deposits, from 9.4% to 14.7% and improved our share in lending from 17.7% to 20.0%. Out of the 17 licensed commercial banks operating at the end of 2007 we stood at 4^th (5^th in 2006) and 3^rd (2^nd) places respectively. Whilst we still hold the high ground in a number of key areas — particularly our systems and branch network — we must be alive to the need to ensure that the bank's strategy and balance sheet are robust enough to face the competition. The decision to increase the capital from US$30 million to US$50 million in January 2008, is a first vital step towards this.

During the year Total Assets increased by 111.9% to US$473.1 million whilst Net Profit After Tax rose by 46.1% to a record US$9.7 million. This translated into a Return on Equity of 19.6% an improvement on the previous year's 15.7%. Significant factors affecting our results were:

1. Whilst maintaining a comprehensive rural network serving the needs of the people in the countryside entails high delivery costs, improved control over spending reduced our Operating Expense ratio from 59.2% to 57.7%. Cost reduction remains a high priority for the future.
2. Our loan portfolio continued to expand reaching US$310.7 million, a 98.4% increase over 2006 and for the first time ever deposits covered loans ending the year with a Loans-to-Deposits ratio of 1:1.1 against 1:0.8 the previous year. This significantly reduced our funding costs and enabled us to absorb a reduction in our overall average lending rates due to competitive pressure from the MFIs in the higher earning segment and the relative growth of the lower priced (but higher fee generating) commercial and housing loan segments.
3. Whilst Gross Income rose 60.2% overall non-interest income's contribution remained steady at 11.1% of gross income with fee and commission earnings almost doubling. This was mainly due to growth of 132.6% and 185.1% in Domestic and Overseas Funds Transfers respectively and a doubling of trade finance revenues.
4. The successful launch of our ATM network in May and the high profile opening of our new headquarters in the same month had a dramatic effect on deposit gathering with the daily rate of new accounts opened and average balances both almost doubling. The instatement of Bankers' Blanket Bond cover and the uptick in our Moody's Foreign Currency Issuer Rating from B2 to B1 underpinned growing public confidence in ACLEDA.
5. A survey conducted of our customers revealed very high service satisfaction with a high proportion of respondents indicating that service quality was the main reason for their banking with us.

Network

During 2007 our network in Cambodia grew from 156 to 204 offices, mainly in the rural and suburban locations, bringing banking services to new areas of population and substantially increasing our catchment area. In addition we installed ATMs in ten provinces and plan to provide them in all provincial cities by the middle of 2008. Our ATMs disburse cash in both USD and KHR. Through a partnership with Telekom Malaysia International, who operate the 'Hello 015/016TM' cellphone network we provide a mobile phone top-up service through our ATMs. In December we commenced rolling out Point of Sale terminals, with 'Cash Out' service, to selected outlets in Phnom Penh and some provincial capitals. This service will be greatly expanded in the coming year. By year end nearly 57,000 'ACLEDACards' had been issued to customers and transactions through the ATMs now exceed those across the counter and demand for our cards is continuing strong into 2008.

It was with a great sense of pride that our work in bringing financial services to the whole countryside was recognised by the Governor of the National Bank of Cambodia with the award of a special Certificate of Appreciation at the Annual Dinner of the Association of Banks in Cambodia in December.

Trade Finance and Financial Institutions

Our Trade Finance Division enjoyed another successful year with both transactions and fee income doubling over 2006. By establishing more trade finance units in provincial centres we are bringing the benefits of direct trade between Cambodian buyers and sellers with their foreign counterparts rather than through informal arrangements with third country middlemen. Our Financial Institutions Unit, who have built up a comprehensive web of correspondents around the world covering 85 banks in 48 countries with 790 corresponding branches, has been an important ingredient in the development of our trade finance capability as well as the remarkable performance of our international funds transfer business.

Information Technology

Following the upgrade of our core banking system to Temenos T24 in 2006 we embarked on a major systems analysis using an external consultant to ensure that we could make best use of the capabilities of this powerful software. More offices were brought on-line using satellite technology as well as fibre optic, landline and microwave links and as the communication network develops we expect to eventually bring all our branches into the system within the next two years.

Risk Management

During 2007 we gave particular attention to risk management and our board Audit and Risk Committee ('ARCO') together with our external auditors, PricewaterhouseCoopers, took a number of initiatives to ensure that risk analysis and internal controls were robust enough to withstand the stresses inherent in our continuing rapid growth. The Risk Management Committee, which was set up as an independent function in 2006 reporting to the Executive Committee and ARCO, underwent a comprehensive revision of its Terms of Reference. In addition management is taking measures to spread risk through diversification and imposing caps on our exposure to individual segments of the business portfolio.

Building the Brand

Riding on the publicity attracted by the move to our iconic new HQ ACLEDA has begun a long term program to 'build a brand' based on its distinctive façade. In addition to using the image on our ATM cards and our advertising and promotional material, our offices around the country are progressively being refurbished in a matching style which makes a striking impression and gives great visibility particularly in the provincial areas. This has attracted much favourable comment from both the public and government authorities. At the same time new uniforms have been issued to staff and our counter design standardised to harmonise the image throughout the branch network.

Laos

Following an intensive program of study of the Lao language our team, led by the General Manager Designate for Laos, Mr. Vann Saroeun, moved permanently to Vientiane at the end of the year to begin recruitment and training of approximately 80 Lao staff and to secure suitable office premises. The first group of recruits will be seconded to various branches in Cambodia to complete 'on the job' training commencing in March 2008. Vientiane is expected to have its soft opening in May with Savannaket and Pakse shortly after.

Prospects and Strategic Imperatives for 2008

'Our commitment is to deliver quality and convenience to our customers by providing service 24 hours a day 365 days a year'

The focus for Cambodia will be on domestic growth and improving service quality in the five main lines of business in which the bank already has significant franchises and competitive advantage:

• Retail banking.
• Microfinance — both direct and wholesale.
• Micro, small and medium enterprise commercial banking.
• Cash management services (transfers, collections, payrolls, etc.) — to all sectors including commercial, national and multi-national companies, financial institutions, government and development agencies.
• Trade finance.

To achieve this our action plans are:

• A thorough re-examination of our management structure to rationalise responsibilities and reporting lines, and more evenly distribute the workload.
• Further expansion and upgrading of the office network in both urban and rural areas to meet the needs of those for who have limited or no access to banking services — in particular microfinance customers.
• Develop and launch new products and services especially those based on cards and ATMs, and our 24/7 call centre.
• Improve the automated delivery systems for both new and existing products and services.
• Continually upgrading our MIS and communications networks.
• Expand and nurture our relationships with our international correspondents through the principle of 'reciprocity' to support trade finance and remittances.
• Work with the international rating agencies to benchmark ourselves against our peers both in the region and internationally. (In January 2008, Standard and Poor's joined Moody's in rating ACLEDA — see 'Credit Rating' page — as we wished to offer our counterparties and prospective clients a choice as well as providing a second opinion on the bank.)

Strategic Priorities

Our ongoing strategic priorities are:

• To 'fill the gap' between microfinance and commercial banking to provide a seamless transition for our clients to move up the wealth ladder — to be a bank where all comers, irrespective of their financial status, our proud to be 'ACLEDA' customers.
• To build upon our model as an integrated microfinance, retail and commercial bank as a solid foundation for regional expansion.
• To develop our successful 'International Visitor Program' into a recognised training centre to share our experiences and encourage interchange of knowledge and 'best practice' with others in our field.
• To take a proactive role in the development of a capital market in Cambodia, with a stock exchange expected to be launched in 2009/2010, both with a view to the opportunities it can offer for our future capital raising as well as new financial services which it may create.

Once again it is my warmest pleasure to express my thanks to our shareholders, the Board of Directors, my colleagues in ACLEDA Bank, the National Bank of Cambodia and, above all, our customers for their continued support in our efforts to build ACLEDA Bank to be the market leader.