(The following statement was released by the rating agency)

Dec 12 -

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Summary analysis -- ACLEDA Bank PLC ------------------------------- 12-Dec-2012

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CREDIT RATING: B/Stable/B Country: Cambodia

Primary SIC: Commercial banks,

nec

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Credit Rating History:

Local currency Foreign currency

31-Oct-2011 B/B B/B

09-Jan-2008 B+/B B+/B

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Ratings Score Snapshot

Issuer Credit Rating B/Stable/B

SACP b+

Anchor b+

Business Position Strong (+1)

Capital and Earnings Moderate (0)

Risk Position Moderate (-1)

Funding and Liquidity Above Average

and Adequate (0)

Support 0

GRE Support 0

Group Support 0

Sovereign Support 0

Additional Factors -1

Outlook

The stable outlook reflects our expectation that Cambodia-based ACLEDA Bank PLC will maintain its adequate financial profile amid high balance-sheet growth. It also reflects our outlook on the Cambodian sovereign rating.

We do not rate the bank higher than the unsolicited foreign currency sovereign rating on Cambodia (B/Stable/B; axBB-/axB) because the bank primarily operates in that country, and we do not expect it to be able to withstand the stress associated with sovereign default. An upgrade is possible if we were to raise the sovereign rating on Cambodia. Similarly, we could downgrade ACLEDA if we were to lower the sovereign rating on Cambodia.

Rationale

The ratings on ACLEDA reflect the bank's 'strong' business position, 'moderate' capital and earnings, 'moderate' risk position, 'above-average' funding, and 'adequate' liquidity, as defined by our criteria. The bank's stand-alone credit profile is 'b+'.

Our bank criteria use our BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in Cambodia is 'b+'. The BICRA score is based on our evaluation of economic risk, where we view Cambodia as a very small, narrow, and underdeveloped economy. We assess credit risk in the economy as extremely high because of moderately high levels of private debt, low income levels, relaxed lending practices and underwriting standards, and a very weak payment culture. In our industry risk assessment, we consider Cambodia's banking industry to have a weak regulatory track record in enforcement and in taking pre-emptive actions. The regulator's supervisory capacity is also stretched. Cambodian banks lack diversity in funding, due to an absence of debt capital markets. Deposits remain the major source of funding, but they have been unstable as a result of weak customer confidence due to past bank failures.

ACLEDA's 'strong' business position reflects the bank's strong market position in Cambodia and relatively strong management and strategy. ACLEDA has a strong business franchise in Cambodia, with the country's largest network (238 branches and offices) spread across every province. Leveraging its strong franchise, ACLEDA has gained significant market share. It ranks first in terms of deposit market share, at 21.4% in December 2011, up from 9% in 2006 (fifth highest). Given the bank's large branch network, ACLEDA's deposits are mostly retail, which provides it with access to a stable customer base. ACLEDA's management and corporate strategy is also strong, supported by strong execution in recent years. The bank has a well-balanced board composition with representation by all major shareholders.

We assess ACLEDA's capital and earnings as 'moderate,' based on our expectation that the bank's risk-adjusted capital (RAC) ratio before diversification adjustments will remain 5%-7% over the next two years. It stood at 6.2% on Dec. 31, 2011. ACLEDA's profitability is characterized by high margins, limited revenue diversity, and inefficiency. The bank has been focusing on controlling costs and diversifying its income stream. This has led to improvement in the bank's cost to income ratio in the past few years. However, the ratio remains poorer than the industry average. ACLEDA's profitability is generally better than the industry average thanks to the bank's better margins. The bank's return on average assets was about 3.8% (annualized) for the nine months ended Sept. 30, 2012. Given that the bank intends to retain its entire profits and pay no cash dividends, we believe its earnings will be sufficient to meet its aggressive growth needs.

We assess ACLEDA's risk position as 'moderate,' primarily reflecting the bank's aggressive growth expectations and geographic concentration in Cambodia, which has a challenging operating environment and poor legal infrastructure. Geographically, ACLEDA's business is mostly based in Cambodia, with a very small portion in Laos. The bank recently expanded its operations into Myanmar, creating and incorporating a fully owned subsidiary, ACLEDA MFI Myanmar Co. Ltd. Moreover, the bank has been growing aggressively, rendering a substantial portion of its portfolio unseasoned. In addition, ACLEDA focuses on the micro, small, and midsize enterprise sector, which could prove vulnerable during an economic downturn. Accordingly, we expect the bank's ratio of nonperforming loans to rise from a low 0.21% as of Dec. 31, 2011. Nevertheless, ACLEDA's asset quality is likely to remain better than the industry average due to the bank's good credit risk management and its expertise in lending to the microfinance industry.

We view ACLEDA's funding as 'above average' and its liquidity as 'adequate.' The bank has a large and established customer deposit base, and benefited from a flight of deposits to quality in Cambodia in 2008. Deposits are the only major source of funding for the industry as a whole, including ACLEDA. The bank's retail deposit base accounts for a higher proportion of its funding base compared with the industry average (about 70% of total deposits compared with an industry average of 48.5%). Its loan-to-deposit ratio has improved considerably since ACLEDA acquired commercial a banking license in 2003. That said, the bank's loan-to-deposit ratio of 91% in 2011 was still higher than the industry average of 83%. ACLEDA's liquidity is underpinned by a sizable amount of cash and bank balances and interbank deposits.

Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Bank Capital Methodology And Assumptions, Dec. 6, 2010

(Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net)

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