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Risk Factors

   
Key Risk Categories
  1. Credit Risk

    Credit risk arises from a situation in which the debtors or counterparties fail to repay or fulfill their agreed obligations. This might be contributed by the fact that the debtor’s financial position is under distress due to volatilities of economic conditions that pose adverse impact on businesses or the debtors’ mismanagemnet, which as a result, may adversely affect the Company and its subsidiaries’ earnings and capital. The credit risk may arise from ordinary financial transactions such as credit lending, financial obligations in the form of avals or guarantees, other transactions related to credit lending, as well as investment in debt instruments issued by state agencies or state enterprises with neither guarantee from government nor the BOT and private debt instruments such as debentures.

    Under its credit risk management policies and guidelines, the Company and its subsidiaries have successfully established a credit culture. To start with, the credit risk of the borrowers or counterparties or issuers of debt instruments will be independently assessed by the model developed specifically to each type of borrowers or counterparties by the Credit Analysis Unit. At this juncture, authorized Credit Committee would then consider and determine the level of credit risk of borrowers or couterparties, appropriate credit lines and investment budget, as well as terms and conditions on loans or other obligations. The Committee also controls the overall risk status by appropriately diversifying credit risk into various business sectors and groups of customers within the established risk ceilings. In addition, the Committee closely monitors the quality of loans to ensure proper and vigilant management by emphasizing on business capability and repayment ability under the supervision of an independent risk control unit - ensuring that credit transactions are in line with the policies and guidelines of credit risk management. Apart from the aforementioned units, there is also an Internal Audit Division to verify that the credit transactions are in compliance with the BOT’s guidelines.

    In order to receive return suited to risks, the Company and its subsidiaries employ the use of tools to measure the Risk Adjusted Return on Capital (RAROC). The Company and its subsidiaries also organize a stress test to estimate the damage that may occur in a crisis. Under this condition, the debtors’ ability to complete their financial obligations may lessen or the debtors may be unable to pay off the debt as stated in the terms and conditions of the hypothetical contract. The risk factors are determined in order to affect business in the industrial sector in which the debtor has a working operation.

    Key Credit Risk Factors
    1. Credit Concentration Risk

      The Company and its subsidiaries aim to appropriately diversify its loans to various groups of customers, focusing on high potential customers and attempt to prevent concentration of loans to a particular group of customers. Under such goal, the Company and its subsidiaries pursue proper risk management on overall credit portfolio with close monitoring and comprehensive assessment to report to the assigned committees on a regular basis


      Credit Status as of 31 December 2014 and 31 December 2013 Classified by Business Types
      Business Type 2014 2013
      Debt Balance(Million Baht) Percent Debt Balance(Million Baht) Percent
      Agricultural and Mining 12,080 1.60 12,003 1.52
      Manufacturing and Commerce 82,655 10.94 81,251 10.27
      Real Estate and Construction 52,101 6.89 50,867 6.43
      Public Utilities and Services 67,616 8.95 68,452 8.65
      Personal Consuming
      Housing Loans 85,754 11.35 83,665 10.57
      Securities Business 3,835 0.51 3,317 0.42
      Hire Purchase 399,341 52.84 440,177 55.63
      Others 28,156 3.73 28,445 3.59
      Others 24,170 3.19 23,065 2.92
      Total loans 755,708 100.00 791,242 100.00

      The overall credit data revealed that the Company and its subsidiaries’ lending concentration on hire purchase business declined from 55.63 percent in 2013 to 52.84 percent in 2014. Most of the hire purchase loans were provided to retail customers whose credit line was relatively small and with a large number of customers, such risk therefore was well diversified.

    2. Risk of Non-performing Loans

      Non-performing loans are loans classified as substandard, doubtful, and doubtful of loss. They have been the major concerns of each financial institution. They have adverse effect on earnings and capital of the Company and its subsidiaries. At this juncture, the Company and its subsidiaries have focused efforts on controlling credit quality through appropriate policies and procedures to regularly monitor the quality of the loans.


      NPL Ratio of the Company and Its Subsidiaries that are Financial Institutions
      As of 31 December 2014 and 31 December 2013
      Loan Classification 2014 2013
      Debt Balance(Million Baht) Percent Debt Balance(Million Baht) Percent
      Substandard 5,808 18.08 6,191 17.05
      Doubtful 4,134 12.87 9,328 25.69
      Doubtful of Loss 22,179 69.05 20,796 57.26
      Total 32,121 100.00 36,315 100.00

      Non-performing loans of the Company and its subsidiaries that are financial institutions decreased from 36,315 million baht in December 2013 to 32,121 million baht in December 2014. From credit overview, non-performing loans accounted for 4.25 percent of total loans and accrued interest receivables, a decrease from 4.59 percent as of 31 December 2013.


      Non-performing Loans Classifed by Types of Business (Excluding Accrued Interest Receivables)
      Business Type 2014 2013
      Debt Balance(Million Baht) Percent Debt Balance(Million Baht) Percent
      Agricultural and Mining 529 1.65 788 2.17
      Manufacturing and Commerce 8,845 27.54 10,640 29.30
      Real Estate and Construction 2,431 7.57 2,937 8.09
      Public Utilities and Services 4,802 14.95 6,638 18.28
      Personal Consuming
      Housing Loans 3,495 10.88 4,508 12.41
      Securities Business - - - -
      Hire Purchase 9,724 30.27 8,312 22.89
      Others 1,748 5.44 1,884 5.19
      Others 547 1.70 608 1.67
      Total NPLs 32,121 100.00 36,315 100.00

      Trouble Debt Restructuring

      (Unit: Million Baht)

        2014 2013
      Number of Debtors (Persons) 33,066 44,700
      Outstanding Principal and Accrued Interest Receivables 23,780 31,023
      Loan not Fully Covered by Collateral 11,643 16,055
      Revalutaion Allowance for Debt Restructuring 103 305
      Total Loans and Accrued Interest Receivables 756,444 792,189
      Restructred Debt to Total Loans (Percent) 3.14 3.92

      The risk on debt restructuring arises from re-entry of the substandard debtors, i.e. after the debt restructuring, the debtors again default on their repayments and hence re-enter the non-performing status. The problem poses adverse effects on debt-restructuring performance of the Company and its subsidaries. As of 31 December 2014, the outstanding principal and the accrued interest receivables of the restructured debt amounted to 23,780 million baht or 3.14 percent of total loans and accrued interest receivables. The net restructured debt (less collateral) amounted to approximately 11,643 million baht.

    3. Risk from Collaterals

      For collateralized loans, the Company and its subsidiaries carefully assess and classify quality of each type of collateral by taking into account the liquidity and overall risk from that collateral. The assessment result is one of the important factors applied in the classification of each credit exposure. In this regard, the collateral, both in the form of immovable and movable whose value could be appraised, is subject to appraisal or valuation complying with the BOT’s regulation. The Company and its subsidiaries significant types of collaterals are deposits and bills of exchange, marketable equity securities, non-listed equity securities, commercial immovable property, immovable property from housing, vehicles, machinery, etc. The Company and its subsidiaries have determined guidelines, standards, and frequency of appraisal and valuation of each type of collateral. Furthermore, a report of the appraisal and valuation is made which includes clear and sufficient data and analysis to determine the price. In case that it cannot be specified whether the collateral price has decreased or declined over time, the impairment of the asset must be consisdered by an official.

      Hire purchase loans are the Company and its subsidiaries’ main business. The ownership of collateralized car belongs to the Company, and in case of default, the Company is eligible to immediately repossess the collateral for the purpose of reselling in the used car market. As a result, the Company might be exposed to risk from the inability to repossess the car or from recovering the incurred loss by reselling the assets. Such conditions risk factors, for instance, the conditions or the used car market and the repossessed car itself. TBANK used statistic information to calculate the possible incurred loss that may happen when default called Loss Given Default (“LGD”). The LGD rate used is 38 percent and TBANK provides higher than the LGD to cover possible loan loss.

    4. Risk from Impairment of Property Foreclosed

      As of 31 December 2014, the Company and its subsidiaries had 8,931 million baht in NPA book value net impairment, equivalent to 0.87 percent of total assets. Impairment totaled 1,112 million baht, equivalent to 11.07 percent of book value.

    5. Risks from Guarantees and Avals

      The Company and its subsidiaries are also obligated in forms of avals, letter of credits, loan guarantees, and other obligations which the Company and its subsidaries are held responsible for, if the customers are unable to fulfill their obligations. In managing such risk, the Company and its subsidiaries carefully scrutinizes supporting information and applies strict approval procedures to these obligations. A close monitoring on these transactions is undertaken based on the same guideline used for its regular lending procedure of the Company and its subsdiaries.

      As of 31 December 2013, the Company and its subsdiaries’ obligations in the form of avals, guarantees for loans, and other obligations amounted to 28,512 million baht or 2.78 percent of total assets.

  2. Market Risk

    The market risk arises from movements in interest rates, exchange rates, and prices of instruments in money market and capital market, which may adveresely affect earnings and capital of the Company and its subsidiaries. Market risk can be segmented into three categories including price risk, interest rate risk, and exchange rate risk. At this juncture, the Company and its subsidiaries’ policies are to control and manage these risks to remian at an appropriate level and in line with the Company and its subsdiaries’ policies on risk management.

    1. Price Risk

      Price risk arises when the Company and its subsidiaries’ earnings and capital are adversely affected by changes in the price of debt and equity instruments, causing the value of the Company and its subsidiaries’ trading and available-for-sale investment portfolio to decline.

      The Company and its subsidiaries have developed risk measurement tools based on the Value-at-Risk (VaR) model to estimate the maximum loss amount at a certain confidence level and over a given asset holding period. The Company and its subsidiaries also determine the various limits of transaction in order to control risk to remain in an acceptable level, for example, Position Limit and Loss Limit. The Risk Control Unit separated from the front office and back office, has the duty of risk control and reporting on the status of the limits to the Board of Directors and departments and executives associated to the risk management in order to respond to the risk in a timely manner. The Company and its subsidiaries assigns Investment Committee to control and monitor this type of risk. In order to ensure the efficiency and accuracy of its tools for risk measurement, the Company and its subsidiaries require that the tools are subject to back-testing in accordance with the Bank of International Settlement (BIS) standards. Moreover, the Company and its subsdiaries have conducted stress testing by formulating stress scenarios which can create extraordinary reduction in stock prices. The test result could therefore shed light on how much the impact to earnings and capital of the Company and its subsidiaries could be.


      As of 31 December 2014, the Company and Its Subsidiaries’ Trading Investments and Available-for-sale Securities Classified by Types of Investments

      (Unit: Million Baht)


        Fair Value
      2014 2013
      Investment
      Trading Investments
      Government and State Enterprise Securities 8,319 5,532
      Private Debt Securities 5,434 5,214
      Foreign Debt Securities 0 0
      Domestic Marketable Equity Securities 194 16
      Available-for-sale Investments
      Government and State Enterprise Securities 68,985 77,313
      Private Debt Securities 46,226 26,347
      Foreign Debt Securities 11,827 14,543
      Domestic Marketable Equity Securities 4,811 1,909
      Total Trading and Available-for-sale Investments 145,796 130,874
    2. Interest Rate Risk

      Interest rate risk is the risk that earnings or capital are adversely affected by changes in interest rates that pose impact on its rate-sensitive items including assets, liabilities, and off-balance sheet items. These changes may have a negative impact on net interest income and capital fund of the Company and its subsidiaries.

      It is a goal of the Company and its subsidiaries to run their business operatings under a long-term effective interest rate risk management system, in other words, to maintain an appropriate structure of assets and liabilities which are rate-sensitive at different time intervals. To ensure maximum benefits of the Company and its shareholders, the Company and its subsidiaries have developed the Repricing Gap Analysis Model as a tool for measuring interest rate risk by assessing the impact that may arise from the mismatch of the repricing periods of assets, liabilities, and obligations at different time intervals, which is used for risk measurement every month. In order to ensure that the risk of the Company and its subsidiaries business operation is within an acceptable limit, they have also established an acceptable risk ceiling and an early warning risk level, taking into consideration the structure of assets, liabilities, and obligations as well as interest rate repricing which are expected to take place in each period of the Company and its subsidiaries’ business plan. The Asset and Liabilitiy Management Committee (ALCO) is responsible for monitoring and controlling such risk very closely. To effectively design appropriate measures to accommodate the risks, the committee has to monitor economic conditions, development in the money market and capital market, and the interest rate trend which could become important interest rate risk factors.

      Details of Financial Assets and Liabilities as of 31 December 2014 Classified by the Period when the Interest Rate would be Repriced in Accordance with Contract Related to Financial Assets and Liabilities of the Company and Its Subsidiries

      (Unit: Million Baht)

      Items Period of Interest Rate Repricing or Due Date
      FloatingInterest Rate 0-3Months 3-12Months 1-5Years Over 5 Years No Interest Total
      Financial Assets
      Cash - - - - - 16,605 16,605
      Interbank and Money Market Items 816 54,369 2,706 500 - 7,836 66,227
      Derivative Assets - - - - - 4,389 4,389
      Investments 1,293 13,924 21,939 103,605 10,792 10,128 161,681
      Loans 336,271 19,529 13,026 304,201 81,693 988 755,708
      Receivables from Purchase and Sale - - - - - 1,805 1,805
      Securities and Derivatives
      Receivables from Clearing House - - - - - 18 18
      Total Financial Assets 338,380 87,822 37,671 408,306 92,485 41,769 1,006,433
      Financial Liabilities
      Deposits 246,949 152,695 257,989 32,660 - 6,656 696,949
      Interbank and Money Market Items 13,050 46,094 13,473 4,919 - 2,603 80,139
      Liabilities Payable on Demand - - - - - 1,655 1,655
      Derivative Liabilities - - - - - 5,200 5,200
      Debts Issued and Borrowings 1,052 25,653 21,117 16,880 33,716 - 98,418
      Payables from Purchase and Sale - - - - - 1,520 1,520
      Securities
      Payables to Clearing House - - - - - 480 480
      Total Financial Liabilities 261,051 224,442 292,579 54,459 33,716 18,114 884,361

    3. Exchange Rate Risk

      The exchange rate risk is a risk that the earnings and capital of the Company and its subsidiaries can be adversely affected by exchange rate fluctuations from transactions in foreign currencies, exchange rate exposures in their possession of assets or liabilities in foreign currencies. There are two types of exhcange rate risk - risk from transactions in foreign currencies (Transaction Risk) and risk from exchanging foreign currency to local currency (Translation Risk).

      Most transactions relation to exchange controls are due to the service of TBANK which is one of the Company’s subsidiaries. The ALCO is responsible for monitoring and controlling this type of risk through the consideration in the proper matching between the structure and the maturity of assets and liabilities in foreign currencies. TBANK’s policy is to determine the risk ceiling in order to control the impact of exchange rate movements on earnings and capital. Nevertheless, in order to avoid the exhcange rate risk, TBANK has also relied on hedging instruments such as forward contracts.

      As of 31 December 2014, the Company and its subsidiaries faced with relatively low exchange rate risk as most of the assets in foreign currencies have been hedged by forward contracts.

  3. Liquidity Risk

    Liquidity risk arises from the inability of the Company and its subsidiaries to repay their debts or obligations upon the delivery date due to the lack of ability to convert assets into cash or to mobilize adequate funds or to mobilize funds at an acceptable cost. This could adversely affect the current and future earnigs and capital of the Company and its subsidiaries. The liquidity risk management mechanism starts with the assessment of the cash flows and liquidity position over particular time horizons of the Company and its subsidiaries when the different levels of funds may be required to accommodate borrowings upon maturities, to reduce other types of liabilities, or to acquire of assets by using Liquidity Gap Analysis, various liquidity ratios, and “What If” scenarios to evaluate the sufficiency of the cash flow liquidity depending on customer behavior in extending contracts upon maturity and estimate the need of liquidity in various “What If” scenarios depending on the economic climate and extraordinary situations that may happen to the Company and its subsidiaries, and the financial institution system.

    Meanwhile, the Company and its subsidiaries developed an emergency plan in the case of a liquidity problem and there will be a revision of the significant occurences that affect working operations. In this regard, the Company and its subsidiaries have assign ALCO in controlling and managing the liquidity risk every two weeks to monitor and manage risk.


    The Structure of the Company and Its Subsidiaries’ Capital Fund Classified by Source of Fund and Maturity Capital Funds Classified by Source of Fund
      2014 2013
    Million Baht Percent Million Baht Percent
    Deposits 696,949 79.61 715,931 78.99
    Interbank and Money Market Items 80,139 9.15 81,082 8.95
    Debts Issued and Borrowings 98,418 11.24 109,290 12.06
    Total 875,506 100.00 906,303 100.00

    Capital Fund Classified by Maturity
      2014 2013
    Million Baht Percent Million Baht Percent
    Less than 1 Year 776,623 88.71 804,163 88.73
    More than 1 Year 98,883 11.29 102,140 11.27
    Total 875,506 100.00 906,303 100.00

    As of 31 December 2014, deposits and debts issued and borrowings of the Company and its subsidiaries were 875,506 million baht, where sources of funds were mostly from public deposits with maturity less than 1 year. This is considered a common structure of the financial institutions. Nevertheless, the Company and its subsidiaries also offered various products such as certificates of deposit (NCD) and debentures in order to increase the saving alternatives for their customers.


    Financial Assets and Liabilities as of 31 December 2014 Classified by Maturity Date

    (Unit: Million Baht)

    Items Maturity Date of Financial Instruments
    At Call Less than 1 Year More than 1 Year Not Specified Total
    Financial Assets
    Cash 16,605 - - - 16,605
    Interbank and Money Market Items 8,652 57,075 500 - 66,227
    Derivatives - 4,389 - - 4,389
    Investments 1,293 46,335 103,982 10,071 161,681
    Loans 59,165 228,492 468,051 - 755,708
    Receivables from Purchase and Sale Securities - 1,805 - - 1,805
    Receivables from Clearing House - 18 - - 18
    Total Financial Assets 85,715 338,114 572,533 10,071 1,006,433
    Financial Liabilities
    Deposits 249,397 413,679 33,873 - 696,949
    Interbank and Money Market Items 15,541 59,679 4,919 - 80,139
    Liabilities Payable on Demand 1,655 - - - 1,655
    Derivative Liabilities - 5,200 - - 5,200
    Debts Issued and Borrowings 1,052 37,275 56,597 3,494 98,418
    Payables from Purchase Sale Securities - 1,520 - - 1,520
    Payables to Clearing House - 480 - - 480
    Total Financial Liabilities 267,645 517,833 95,389 3,494 884,361
    Off-balance Sheet Items
    Aval to Bills and Guarantee of Loans 35 201 20 - 256
    Obligation under Unmatured Import Bills 39 470 - - 509
    Letter of Credits 63 4,733 - - 4,796
    Other Commitments 44,277 6,213 631 - 51,121
    Total Off-balance Sheet Items 44,414 11,617 651 - 56,582
  4. Operational Risk

    The operational risk is the risk that arises from the damage that occurs from lack of good corporate governance within the organization. Risk may arise from the inadequate efficiency of the internal audit and internal control sytems which could be relating to internal operation process, personnel systems or external events and adversely affect the Company and its subsidiaries’ operating income and capital. This also includes legal risks such as litigations, exploitation by the government, and also damage from settlements outside the courtroom. Such risk can pose adverse impact on other risks, especially strategic risk and reputation risk.

    The Company and its subsidiaries have established policies and guidelines to ensure the prevention and monitoring of this type of risk. As the internal control system is an important tool in controlling and preventing potential risk that may occur, the Company and its subsidiaries have implemented an efficient internal control system as follows:

    1. Regarding the organization structure, the Company and its subsidiaries have specified the roles, the scope of duties and responsibilities for each position, based on a system of check and balance. The front office where all the transaction takes place is separated from the middle office, comprised of the Risk Control Unit and the back office who record all items in the transactions.
    2. Establish the transaction-support units which are independent and have expertise in their respective fields of work such as information technology unit, legal unit, and price appraisal unit in order to prevent any possible errors that may arise.
    3. Put operational procedures and regulations related to all types of transaction, staff manuals as well as the authority ranks for approval in writings as a guideline to set the same standard for all internal operations within the organization.
    4. Put operational procedures and regulations related to all types of transaction, staff manuals as well as the authority ranks for approval in writings as a guideline to set the same standard for all internal operations within the organization.
    5. Improve the management of the information technology system and information security system in order to enhance its potential to accommodate business expansion and gain credibility from the customers in the aspect of data and technology. A particular focus is given to the prevention of damages from unauthorized access to the Company’s information.
    6. Formulate the Business Continuity Plan which consists of an emergency plan, a plan for backup systems, and a business recovery plan to prevent disruption in business operation. In addition, the drills are essential to test for the readiness and to consistently improve the plans for its effective implementation.

    The Company and its subsidiaries also employ the services of the third party to operate some group activities as per the direction of the work operations of financial institutions as present and in the future. The Company and its subsidiaries determine policies in order to manage the risk that may occur from outsourcing. These policies have to also be subject to regulations of BOT and must be beneficial to the internal control of the Company and its subsidiaries as well.

    In the measurement and assessment of operational risk, the Company and its subsidiaries determine a principle, form or condition of the process used in the measurement and assessment of risk in the Company and its subsidiaries. In the determination of this process, the Company and its subsidiaries consider the circumstantial factors such as supervising guidelines of the government units associated with the Company, state and complexity of the busienss, the capability of the Company in accepting risk, probability, likelihood or frequency as well as the impact or severity of risk that has happened or may happen. As per BOT specification for Thanachart Group to maintain the capital funds to risk-weighted assets in credit, market, and operation according to Basel III guidelines, the Company and its subsidiaries adopted the Basic Indicator Approach to calculate operational risks.

    In addition, to monitor operational risk, the Company and its subsidiaries determined a policy for executives of each department to have the responsibility of monitoring the risk and consider a part of their regular duties. This will help promptly inform all of the risk and problems that occur and to respond to the changes in each time period in an appropriate and timely manner, not damaging to the Company and its subsidiaries. Nevertheless, to inform of the result of business operations and problems that occur, as well as trends and changes in information of risk factors, the Company and its subsidiaries organized a filing and reporting of the information associated with operational risk management such as information on data loss, key risk indicators, and important risk points to be continually and regularly reported to Company’s Board of Directors, the Risk Management Committee, and high level executives to use in the determination of policies, to develop a sufficient risk management system, and to be a tool in aiding the Company and its subsidiaries to evaluate the capability and efficiency of the internal control system.

  5. Strategic Risk

    This type of risk arises from the inappropriate formulation of strategies, business planning, and implementation which are not compatible with internal setups and external environment, resultling in an adverse impact on earnings, capital or the existence of the Company and its subsidiaries. In managing the strategic risk, the formulation of strategies of the Company and its subsidiaries will be considered over the three years ahead, with the review required annually or in the case of an external event that may impact the achievement of the Company’s business goals. The Executive Committee is responsible for regular monitoring and evaluating the performance of the work units upon the established targets stated in the annual operation plan.

  6. Regulatory Risk

    The regulatory risk arises from incompliance to laws, regulation, requirements, standards, and guidelines in the Company transactions which can lead to financial loss, reputation damage, and interference by state entities. Also, there are risks from the amendments or changes in regulations, laws or requirements of the authorities especially the BOT, the SEC, the Stock Exchange of Thailand (“SET”), the Office of Insurance Commission (OIC), Anti-Money Laundering Office (AMLO), and etc. Such changes may affect the strategies and business operations of the Company and its subsidiaries.

    Thanachart Group has a Compliance Department under TBANK. It reports directly to the Audit Committee of TBANK. The department ensures that the Company and companies in Thanachart financial conglomerate are incompliance with regulations and requirements from related various state agencies and the Code of Business Conduct. The department also provides advices and information to executives and employees. Furthermore, it helps high-level executives to effectively manage risk of regulatory violation. The role and responsibilities do not overlap with the Internal Audit Department. As well, its specific responsibilities include operations in anti-money laundering measure, coordination with official supervisory or agencies, and etc. It parallelly reports to the highest executives of the Company and TBANK together with the Audit Committee of the Company and TBANK.

    The Compliance Department assesses incompliance risks in various transactions by evaluating internal and external factors for both the Company and its subsidiaries. These include regulatory climate and outlook of the authorities, auditing assessment by the officials, business policies, debates and complaints, internal audit, and internal work procedures. The consideration is placed on the magnitudes of possible impact and likelihood of occurrence in each aspect of incompliance risks using the guideline of Risk Based Approach (“RBA”). Random review is executed to comply with Control and Monitor standard, and a recommendation is proposed to correct errors and improve performance.