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’ mismanagement, 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
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 2017 and 31 December 2016 Classified by Business Types
Business Type 2017 2016 Debt Balance (Million Baht) Percent Debt Balance (Million Baht) Percent Agricultural and Mining 7,498 1.05 14,081 2.03 Manufacturing and Commerce 81,105 11.38 78,238 11.31 Real Estate and Construction 47,484 6.66 47,881 6.92 Public Utilities and Services 58,878 8.26 60,117 8.69 Personal Consuming Housing Loans 97,676 13.70 97,756 14.13 Securities Business 4,116 0.58 3,536 0.51 Hire Purchase 371,031 52.06 345,343 49.90 Others 29,504 4.14 28,958 4.18 Others 15,469 2.17 16,136 2.33 Total loans 712,761 100.00 692,046 100.00
The overall credit data revealed that as of 31 December 2017, the Company and its subsidiaries’ lending concentration on hire purchase business increased from 49.90 percent in 2016 to 52.06 percent. 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.
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. 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 InstitutionsAs of 31 December 2017 and 31 December 2016
Loan Classification 2017 2016 Debt Balance (Million Baht) Percent Debt Balance (Million Baht) Percent Substandard 5,957 34.61 4,281 27.20 Doubtful 2,674 15.53 3,364 21.38 Doubtful of Loss 8,582 49.86 8,093 51.42 Total 17,213 100.00 15,738 100.00
As of 31 December 2017, non-performing loans of the Company and its subsidiaries that are financial institutions amounted to 17,213 million baht, an increase from 15,738 million baht at the end of the previous year. From credit overview, non-performing loans accounted for 2.41 percent of total loans, an increase from 2.27 percent as of 31 December 2016. This level of NPL ratio was relatively low compared to the industry level.
Non-performing Loans of the Company and Its Subsidiaries that are Financial Institutions Classified by Business Types (excluding accrued interest receivables)
As of 31 December 2017 and 31 December 2016 are as follows:
Business Type 2017 2016 Debt Balance (Million Baht) Percent Debt Balance (Million Baht) Percent Agricultural and Mining 68 0.40 363 2.31 Manufacturing and Commerce 4,985 28.96 3,348 21.27 Real Estate and Construction 2,065 12.00 2,364 15.02 Public Utilities and Services 1,444 8.39 1,390 8.83 Personal Consuming Housing Loans 3,577 20.78 2,263 14.38 Hire Purchase 3,577 20.78 4,637 29.46 Others 1,253 7.28 1,211 7.70 Others 244 1.41 162 1.03 Total NPLs 17,213 100.00 15,738 100.00
Trouble Debt Restructuring
(Unit: Million Baht)
2017 2016 Number of Debtors (Persons) 8,820 14,002 Outstanding Principal and Accrued Interest Receivables 11,169 14,829 Loan not Fully Covered by Collateral 3,678 5,917 Revalutaion Allowance for Debt Restructuring 1 2 Total Loans and Accrued Interest Receivables 713,362 692,677 Restructred Debt to Total Loans (Percent) 1.57 2.14
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 performance of the Company and its subsidiaries. As of 31 December 2017, the outstanding principal and the accrued interest receivables of the restructured debt amounted to 11,169 million baht or 1.57 percent of total loans and accrued interest receivables. The net restructured debt (less collateral) or loan not fully covered by collateral amounted to 3,678 million baht.
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 considered by a concerned 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 depend on risk factors, for instance, the conditions of 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 44 percent and TBANK provides reserve higher than the LGD to cover possible loan loss.
Risk from Impairment of Property Foreclosed
As of 31 December 2017, the Company and its subsidiaries had 4,747 million baht in property foreclosed according to the book value net allowance for impairment, equivalent to 0.46 percent of total assets. Impairment totaled 1,800 million baht, equivalent to 27.49 percent of the book value.
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 subsidiaries are held responsible for, if the customers are unable to fulfill their obligations. In managing such risk, the Company and its subsidiaries carefully scrutinize supporting information and apply 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 subsidiaries.
As of 31 December 2017, the Company and its subsidiaries’ obligations in the form of avals, guarantees for loans, and other obligations amounted to 25,710 million baht or 2.51 percent of total assets.
- Credit Concentration Risk
The market risk arises from movements in interest rates, exchange rates, and prices of instruments in money market and capital market, which may adversely 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 remain at an appropriate level and in line with the Company and its subsidiaries’ policies on risk management.
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 model (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 for International Settlement (BIS) standards. Moreover, the Company and its subsidiaries 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 2017 and 31 December 2016, the Company and Its Subsidiaries’ Trading and Available-for-sale Investments Classified by Types of Investments are as follows: Securities Classified by Types of Investments
(Unit: Million Baht)
Fair Value 2017 2016 Investment Trading Investments Government and State Enterprise Securities 11,500 9,321 Private Debt Securities 5,364 4,782 Domestic Marketable Equity Securities 1,713 1,597 Available-for-sale Investments Government and State Enterprise Securities 114,495 124,804 Private Debt Securities 25,373 23,611 Foreign Debt Securities 10,430 11,434 Domestic Marketable Equity Securities 4,531 5,729 Unit Trusts 625 158 Total Trading and Available-for-sale Investments 174,031 181,436
The value of trading and available-for-sale investments of the Company and its subsidiaries decreased from lowering investments in government and state-owned enterprise securities and foreign debt securities. Therefore, the overall price risk of the Company and its subsidiaries decreased from the previous year.
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 Liability 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 2017 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 Subsidiaries are as follows:
(Unit: Million Baht)
Items Period of Interest Rate Repricing or Due Date Floating Interest Rate At Call 0-3 Months 3-12 Months 1-5 Years Over 5 Years No Interest Total Financial Assets Cash - - - - - - 11,453 11,453 Interbank and Money Market Items 1,063 750 79,073 6,963 500 1,200 6,556 96,105 Derivative Assets - - - - - - 2,889 2,889 Investments 956 - 25,295 15,053 119,277 7,039 9,421 177,041 Loans 221,106 4,651 44,916 25,871 240,130 175,940 147 712,761 Receivables from Purchase and Sale - - - - - - 3,127 3,127 Securities and Derivatives Receivables from Clearing House - - - - - - 343 343 Total Financial Assets 223,125 5,401 149,284 47,887 359,907 184,179 33,936 1,003,719 Financial Liabilities Deposits 304,946 51 129,188 233,576 41,264 - 7,066 716,091 Interbank and Money Market Items 16,875 1,699 39,070 20,759 1,118 1,115 1,707 82,343 Liabilities Payable on Demand - - - - - - 1,989 1,989 Derivative Liabilities - - - - - - 2,868 2,868 Debts Issued and Borrowings 62 388 893 6,200 21,823 22,230 - 51,596 Payables from Purchase and Sale - - - - - - 2,259 2,259 Securities Payables to Clearing House - - - - - - 1,269 1,269 Total Financial Liabilities 321,883 2,138 169,151 260,535 64,205 23,345 17,158 858,415
In view of the above assets and liabilities structure, if the market interest rate is higher than the current level, net interest income will be adversely impacted during the forthcoming year. This is mainly due to the Company’s hire purchase loan portfolios of the Company and its subsidiaries, whose interest rates are fixed ones. However, the Company and its subsidiaries have implemented risk management measures including interest rate swaps and mobilization of more long-term deposits.
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 or having exposures in their possession of assets or liabilities in foreign currencies. There are two types of exchange rate risk - risk from transactions in foreign currencies (Transaction Risk) and risk from changing value from exchanging foreign currency to local currency (Translation Risk).
Most transactions in relation to exchange controls are due to the service of TBANK which is one of the Company’s subsidiaries. TBANK assigns ALCO to be 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 exchange rate risk, TBANK has also relied on hedging instruments such as forward contracts.
As of 31 December 2017, 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.
- Price 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 earnings 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 occurrences that affect working operations. In this regard, the Company and its subsidiaries have assigned ALCO in controlling and managing the liquidity risk every two weeks to monitor and manage risk.
The Structure of the Company and Its Subsidiaries’ Funds Classified by Source of Fund and Maturity Date are as follows: Capital Funds Classified by Source of Fund
2017 2016 Million Baht Percent Million Baht Percent Deposits 716,091 84.24 676,456 84.15 Interbank and Money Market Items 82,343 9.69 65,701 8.17 Debts Issued and Borrowings 51,596 6.07 61,704 7.68 Total 850,030 100.00 803,861 100.00
Capital Fund Classified by Maturity
2017 2016 Million Baht Percent Million Baht Percent Less than 1 Year 761,007 89.53 716,573 89.14 More than 1 Year 89,023 10.47 87,288 10.86 Total 850,030 100.00 803,861 100.00
As of 31 December 2017, deposits and debts issued and borrowings of the Company and its subsidiaries were 850,030 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 Negotiable Certificates of Deposit (NCD) and debentures in order to increase the saving alternatives for the customers.
Financial Assets and Liabilities as of 31 December 2017 Classified by Maturity Date are as follows:
(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 11,453 - - - 11,453 Interbank and Money Market Items 8,369 86,036 1,700 - 96,105 Derivatives - 1,069 1,820 - 2,889 Investments 961 45,416 121,273 9,391 177,041 Loans to Customers 40,579 195,236 476,946 - 712,761 Receivables from Purchase and Sale Securities - 3,127 - - 3,127 Receivables from Clearing House - 343 - - 343 Total Financial Assets 61,362 331,227 601,739 9,391 1,003,719 Financial Liabilities Deposits 307,410 365,945 42,736 - 716,091 Interbank and Money Market Items 20,281 59,828 2,234 - 82,343 Liabilities Payable on Demand 1,989 - - - 1,989 Derivative Liabilities - 1,319 1,549 - 2,868 Debts Issued and Borrowings 399 7,144 44,053 - 51,596 Payables from Purchase Sale Securities - 2,259 - - 2,259 Payables to Clearing House - 1,269 - - 1,269 Total Financial Liabilities 330,079 437,764 90,572 - 858,415 Commitments Aval to Bills 2 100 13 - 115 Guarantees of Loans 87 2,204 - - 2,291 Liability under Unmatured Import Bills 48 222 - - 270 Letter of Credits 250 795 - - 1,045 Other Commitments 38,222 39,177 2,077 - 79,476 Total Commitments 38,609 42,498 2,090 - 83,197
The operational risk is the risk that arises from the damage that occurs from lack of good corporate governance within the organization. Risk may arises from the inadequate efficiency of the internal audit and internal control systems 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 an 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:
- 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.
- 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.
- 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.
- Establish the Audit Committee and the Risk Management Committee to control, monitor, and assess the risks of the Company and its subsidiaries. The committees are responsible for examining and correcting the pitfalls in order to create soundness and efficiency in the work operation.
- 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.
- 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 the 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 business, 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 the BOT’s 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 the 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.
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, resulting 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.
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 SET, the OIC, the AMLO, etc. Such changes may affect the strategies and business operations of the Company and its subsidiaries.
Thanachart Group has a Compliance Department, which is under TBANK, 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 disseminates knowledge 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, etc. It parallelly reports to the highest executives of the Company and TBANK together with the Audit Committees of the Company and TBANK.
In evaluating regulatory risk, the Compliance Department assesses incompliance risks in various transactions by considering all related 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.