the siam commercial bank pcl · pillar i provides guidelines on minimum capital requirements for...

THE SIAM COMMERCIAL BANK PCL

THE SIAM COMMERCIAL BANK PCL i

CONTENTS

1. Introduction ......................................................................................................................................................... 1

2. Scope of Application ........................................................................................................................................... 2

3. Regulatory Capital .............................................................................................................................................. 4

3.1 Capital Management ................................................................................................................................... 4

3.2 Capital Structure and Adequacy.................................................................................................................. 4

4. Risk Management ............................................................................................................................................14

4.1 Risk Management Structure .....................................................................................................................14

4.2 Risk Management Policy ...........................................................................................................................15

4.3 Risk Management System ........................................................................................................................16

4.4 Emerging Risks ..........................................................................................................................................18

5. Credit Risk ........................................................................................................................................................20

6. Market Risk .......................................................................................................................................................38

7. Operational Risk ...............................................................................................................................................40

8. Interest Rate Risk in the Banking Book (IRRBB) .............................................................................................42

9. Liquidity Risk ....................................................................................................................................................44

LCR report ........................................................................................................................................................45

10. Equity Investment in the Banking Book ............................................................................................................47

11. Strategic Risk ...................................................................................................................................................49

12. Reputational Risk .............................................................................................................................................50

13. Technology Risk ...............................................................................................................................................51

14. People Risk ......................................................................................................................................................52

15. Model Risk ........................................................................................................................................................53

Appendix .................................................................................................................................................................55

PILLAR 3 DISCLOSURE DECEMBER 2019 ii

INDEX OF TABLES

Table 1: Comprehensive Regulatory Capital and Capital Adequacy ..................................................................... 7

Table 2: Capital Requirements by Risk Type ......................................................................................................... 8

Table 3: Main Features of Regulatory Capital Instruments .................................................................................... 9

Table 4: Reconciliation of Capital from Consolidated Financial Statements .......................................................10

Table 5: Capital Position During Transitional Period ...........................................................................................13

Table 6: Significant On- and Off-Balance Sheet Exposure Items ........................................................................26

Table 7: Exposures Classified by Geographical Area ..........................................................................................27

Table 8: Exposures Classified by Residual Maturity ............................................................................................28

Table 9: Loans and Investment in Debt Securities Classified by Geographical Area and Asset Classification ..29

Table 10: Provisions and Bad Debts Written-Off on Loans and Investment in Debt Securities, Classified by

Geographical Area .................................................................................................................................30

Table 11: Loans Classified by Type of Business and Asset Classification ............................................................31

Table 12: Provisions and Bad Debts Written-Off for Loans Classified by Type of Business .................................32

Table 13: Reconciliation of Changes in Provisions for Loans ................................................................................33

Table 14: Exposures Classified by Asset Type under the Standardized Approach (SA) ......................................34

Table 15: Exposures After Adjusting for Credit Risk Mitigation Classified by Asset Type and Risk Weights under

the Standardized Approach (SA) ...........................................................................................................35

Table 16: Exposures Covered by Risk Mitigation Classified by Asset Type and Type of Collateral under the

Standardized Approach (SA) .................................................................................................................37

Table 17: Minimum Capital Requirements of Market Risk under the Standardized Approach (SA) .....................39

Table 18: Minimum Capital Requirements of Operational Risk under the Standardized Approach (SA) ..............41

Table 19: Impact on Net Interest Income in the Event that Interest Rates Rise by 1% .........................................43

Table 20: Impact on Economic Value of Equity in the Event that Interest Rates Rise by 1% ...............................43

Table 21: Liquidity Coverage Ratio (LCR) .............................................................................................................46

Table 22: LCR data for comparison .......................................................................................................................46

Table 23: Minimum Capital Requirements of Equity Exposures in the Banking Book ...........................................48

INDEX OF FIGURES

Figure 1: List of Companies and Business Types within the SCB Financial Group ................................................. 3

Figure 2: Basel III Capital Structure as of December 31, 2019 ................................................................................ 5

Figure 3: Capital Adequacy Ratios under the Standardized Approach (SA) of SCB and its Financial Group ......... 6

THE SIAM COMMERCIAL BANK PCL 1

1. INTRODUCTION

The current Basel Capital Accord comprises three

pillars, each of which is essential for promoting the

stability of financial institutions:

Pillar I provides guidelines on minimum capital

requirements for credit risk, market risk

and operational risk.

Pillar II addresses the key principles of

supervisory review processes and

relevant internal risk assessment beyond

Pillar I, with an emphasis on a bank's

internal capital adequacy assessment

process (ICAAP).

Pillar III leverages market mechanism for bank

supervision by requiring public disclosure

of key information on capital adequacy

and risk exposure as well as risk

assessment and management.

This Pillar III report presents detailed information on

capital adequacy and risk-weighted asset calculations

for credit risk, market risk in the trading book, and

operational risk for both SCB (referred to as ‘Bank-

only’) and its Financial Group (referred to as

‘Consolidated’). In accordance with the Basel III

framework, this report discloses information on risk

management guidelines and frameworks, risk

components, measurement methodologies for risk

monitoring and reporting, and capital adequacy

requirements with both quantitative and qualitative

information. Qualitative information is updated

annually, or whenever any material changes to the

underlying policy occur.

The BOT requires Pillar III disclosure to be reported

as of June 30 and December 31 and made available

to market participants within four months of the report

dates. The report is published on the Bank’s website

under the Investor Relations section at

https://www.scb.co.th/en/investor-relations/financial-

information.html

Although there is no external audit requirement for this

report, the Bank has an internal verification and

approval process to ensure that the contents are

consistent with the Bank’s Pillar III disclosure policy

and that there is no material difference from the

information used internally by management and from

the reports submitted to the BOT.

Note that quantitative disclosure in this report follows

the Pillar III principles under the Basel III framework

which was adopted by the BOT, rather than the

convention of Thai Financial Reporting Standards.

Therefore, Pillar III disclosure is not directly

comparable with SCB’s financial statements. For

example, this disclosure includes undrawn portions of

committed credit lines as part of credit risk assets

computation whereas Thai Financial Reporting

Standards do not require such consideration.

Since January 1, 2013, Siam Commercial Bank PCL (SCB)

and its Financial Group have adopted Basel III, the latest

global regulatory framework for assessing bank capital

adequacy and liquidity, to further strengthen their risk

measurement and risk management practices. The Bank’s

implementation of Basel III follows the guidelines of the

Basel Committee on Banking Supervision and strictly

complies with the Bank of Thailand (BOT)’s regulations.

In September 2017, the Bank was designated as one of the

Domestic Systemically Important Banks (D-SIBs) by the

BOT which resulted in a requirement to maintain an

additional Common Equity Tier 1 (CET1) of 0.5% in 2019

and increased to 1.0% in 2020. This D-SIBs buffer will be

added on top of the capital conservation buffer of 2.50% in

2019. Moreover, a countercyclical capital buffer (CCyB) of

no more than 2.5% is currently being deliberated by the BOT

although this additional capital buffer is anticipated to be 0%

given no evidence of excessive credit growth in Thailand.

The CCyB buffer is intended to strengthen the Thai financial

system as well as preventing a credit bubble which may lead

to a financial crisis. In addition, Thai commercial banks are

faced with regulatory changes on more stringent capital

requirements and risk-weighted asset calculation, changes

in financial reporting standards (TFRS 9) having a significant

impact on loan loss provisioning, as well as technological

changes that affect business operations. Nonetheless,

those factors are already considered and incorporated into

the Bank’s short-term and long-term capital planning

process.

https://www.scb.co.th/en/investor-relations/financial-information.html

https://www.scb.co.th/en/investor-relations/financial-information.html

PILLAR 3 DISCLOSURE DECEMBER 2019 2

2. SCOPE OF APPLICATION

Standardized Approach

SCB and its Financial Group have adopted the

Standardized Approach (SA), which complies with the

BOT’s guidelines for measuring credit risk, market

risk, and operational risk, as a computational

framework for regulatory capital requirements.

Accounting Consolidation

The consolidated financial statements present

information on the combined assets and liabilities of

SCB and all its subsidiaries. The methodology for

consolidating financial statements in accordance with

the Thai Financial Reporting Standards can be found

in the SCB Annual Report for 2019.

Regulatory Consolidation1/

Regulatory consolidation consists of solo

consolidation, which considers only financial entities

for which SCB holds more than 75% of their shares,

and full consolidation (referred to as ‘Consolidated’),

which includes all entities within the Financial Group.

In this context, entities involved in the insurance

business or other financial operations are excluded

from the regulatory consolidation provided, in the

latter case, that SCB has more than 10% but less than

50% of shareholding. Under Basel III, investment in

these two types of entities is considered ‘investment

outside the scope of consolidation’ and shall be

calculated according to the BOT’s guidelines.

The treatment of investment outside the scope of

consolidation, i.e. insurance companies, is

determined by the proportion of issued common share

capital held by the Bank with 10% being the threshold

level:

• The Bank’s investment does not exceed 10%

(insignificant investment).

If the aggregate holding exceeds 10% of the

Bank’s net common equity Tier 1 capital (CET1),

then the amount above 10% is required to be

deducted from the corresponding tier of capital.

The portion under 10% is assigned a risk weight

according to the BOT’s guidelines.

• The Bank owns significant investments (more than

10% of the issued common share capital of the

entity or a threshold approach).

If the aggregate holding exceeds 10% of the

Bank’s net common equity, then the amount above

10% is required to be deducted from the

corresponding tier of capital. If there is a shortfall,

the remaining amount will be deducted from the

next higher tier of capital, whereas the amount

under the 10% of net CET1 will be assigned a risk

weight of 250%.

Quantitative information in this document is presented

in both Bank-only and Consolidated basis.

1/ See more details on regulatory consolidation in the Appendix.


Figure 1: List of Companies and Business Types within the SCB Financial Group as of December 31, 2019

Full Consolidation Group

Siam Commercial Bank PCL

Finance companies with shareholding from 50%

Credit institutions with shareholding from 75%

100%Rutchayothin Assets

Management

100%Cambodian

Commercial Bank 100%SCB Asset

Management

100%

100%

100%SCB Training Centre

100%

100%

Support companies with shareholding from 50%

100%SCB Abacus

100%SCB Protect

Mahisorn

SCB Plus

Digital Ventures

SCB Securities

SCB-Julius Baer (Singapore)

SCB-Julius Baer Securities

60%

100%

Solo Consolidation Group


3. REGULATORY CAPITAL

3.1 Capital Management

Since capital is the most critical resource for the

banking business, SCB and its Financial Group have

adopted the Internal Capital Adequacy Assessment

Process (ICAAP) to assess material risks and capital

adequacy under both normal and stress conditions.

Moreover, policies and procedures have been

developed and put in place to ensure that SCB and

its Financial Group’s capital:

• Provides adequate cushion to absorb unexpected

losses and builds market confidence in the Bank’s

financial strength by maintaining capital in excess

of the minimum regulatory requirements at all

times.

• Matches the risk profile of SCB and its Financial

Group, facilitates growth based on their business

strategies, and provides the ability to withstand

potential risks from economic downturns or other

adverse scenarios.

• Strikes the right balance between shareholders’

returns and the Bank’s capital position.

Senior management is responsible for reviewing

capital adequacy periodically by considering

business needs and any imminent regulatory

changes.

3.2 Capital Structure and Adequacy

Capital Structure

Regulatory capital under Basel III is based on strict

definition of capital and higher levels of minimum

capital ratios. The components of Basel III regulatory

capital are as follows:

(1) Common Equity Tier 1 Capital (CET1)

represents the highest-quality component of

capital that allows banks to enter into financial

commitments without any restriction, which

includes:

• Fully paid-up common shares

• Premium on common shares

• Appropriated retained earnings

• Legal reserves

• Other comprehensive income, i.e.

revaluation surplus on land and premises,

and revaluation surplus on AFS investment

(2) Additional Tier 1 Capital consists of high-

quality capital, which includes:

• Fully paid-up non-cumulative preferred

shares

• Premium on the above-mentioned preferred

shares

• Perpetual subordinated debt

(3) Tier 2 Capital consists of:

• Long-term subordinated liabilities

• General provisions (eligibility limited to

1.25% of credit risk-weighted assets)

Capital Adequacy

Maintaining adequate capital is a business

imperative for financial institutions. Therefore, SCB

and its Financial Group identify and manage risk by

setting internal control procedures and performing

stress tests as well as assessing and managing risk

impacts through the capital planning process.

Scenario analysis and stress tests are employed to

assess the sensitivities of regulatory capital to

business plans as well as to adverse shocks from

extreme yet plausible events. SCB and its Financial

Group use these analytical tools to anticipate

potential financial impacts from the business plans

and capital requirements as well as formulating

management action plans for impact mitigation

should such adverse events or similar circumstances

occur.

To comply with the regulatory requirements, SCB

and its Financial Group must maintain capital at the


level deemed sufficient to cover credit risk, market

risk, and operational risk. In addition, the Bank is

required to maintain a capital conservation buffer of

2.5% of CET1. Furthermore, banks that have been

designated as Domestic Systemically Important

Banks (D-SIBs) must maintain additional CET1 of

0.5% in 2019 and 1% in 2020 to enhance their ability

to absorb losses and minimize any potential spillover

to the overall financial sector and the economy.

As a result, throughout 2019, the Bank must maintain

the minimum ratios of Common Equity Tier 1 (CET1)

at 7.5%, Tier 1 capital at 9.0%, and total CAR at

11.5%.

As of December 31, 2019, the Bank’s total CAR was

18.08% on a Consolidated basis and 16.49% on a

Bank-only basis, while CET1 capital stood at 16.99%

on a Consolidated basis and 15.40% on a Bank-only

basis.

Note: In compliance with the BOT guidelines, the

ratios as of December 31, 2019 excluded net profit

after dividend payment for 2H19; otherwise, the

capital would have been 17.42% and 18.50% for

CET1/Tier 1 and CAR respectively on a Bank-only

basis and 17.31% and 18.40% on a Consolidated

basis.

Figure 2: Basel III Capital Structure as of December 31, 2019

(In Baht billion)

Tier 2 Capital

CET1 / Tier 1Capital

Total Capital339.7

Bank-Only

CET1 / Tier 1Capital

Tier 2 Capital

Total Capital375.2

Consolidated


Figure 3: Capital Adequacy Ratios under the Standardized Approach (SA) of SCB and its Financial Group

(In % of RWAs)

14.6 14.5 15.4

2.1 2.0

Dec’18 Jun’19

16.5

Dec’19

Tier CAR

CET / Tier CAR

16.41.1

Total CAR

Bank-Only Consolidated

15.1 15.217.0

2.0 1.9

CET / Tier CAR

Dec’18 Jun’19

Tier CAR

Dec’19

18.11.1

Total CAR


Table 1: Comprehensive Regulatory Capital and Capital Adequacy

Unit: Baht million, %

1/ Capital conservation buffer requires additional CET1 of 0.625% per annum from January 1, 2016 onwards until reaching 2.5% in 2019.

2/ D-SIB buffer requires additional CET1 of 0.5% in 2019 with a step-up to 1.0% in 2020.


31 Dec 19 30 Jun 19 31 Dec 18 31 Dec 19 30 Jun 19 31 Dec 18

Tier 1 capital 317,312 305,148 305,183 352,691 332,040 326,679

Common Equity Tier 1 (CET1) 317,312 305,148 305,183 352,691 332,040 326,679

Paid-up common shares capital 33,992 33,992 33,992 33,992 33,992 33,992

Surplus (deficit) net worth 11,124 11,124 11,124 11,124 11,124 11,124

Legal reserve 7,000 7,000 7,000 7,000 7,000 7,000

Net profit after appropriation 271,824 258,937 258,691 307,654 294,768 287,738

Disclosed reserves

Other comprehensive income 13,632 14,338 13,985 13,973 23,719 15,943

Others owner changes items - - - - (2,365) (2,365)

Regulatory deduction to CET1 capital (20,260) (20,243) (19,610) (21,052) (36,198) (26,754)

Additional Tier 1 - - - - - -

Tier 2 capital 22,432 41,146 42,953 22,514 42,017 43,793

Proceeds from issuing subordinated debt securities - 18,000 20,000 - 18,000 20,000

General provision 22,432 23,146 22,953 22,514 24,017 23,793

Total Regulatory Capital 339,744 346,294 348,136 375,206 374,057 370,472

Risk-weighted assets

Credit risk 1,794,549 1,851,685 1,836,207 1,801,155 1,921,383 1,903,409

Market risk 55,074 47,653 48,926 57,783 51,219 50,778

Operational risk 210,546 208,440 205,937 216,553 214,980 212,187

Total Risk-Weighted Assets 2,060,169 2,107,778 2,091,071 2,075,492 2,187,582 2,166,374

Total capital/ Total risk-weighted assets 16.49% 16.43% 16.65% 18.08% 17.10% 17.10%

Total Tier 1 capital/ Total risk-weighted assets 15.40% 14.48% 14.59% 16.99% 15.18% 15.08%

Total CET1 capital/ Total risk-weighted assets 15.40% 14.48% 14.59% 16.99% 15.18% 15.08%

Minimum regulatory capital adequacy ratios:

Minimum total capital/ Total risk-weighted assets 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%

Minimum Tier 1 capital/ Total risk-weighted assets 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

Minimum CET1 capital/ Total risk-weighted assets 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%

Capital conservation buffer requirements 2.50% 2.50% 1.875% 2.50% 2.50% 1.875%

Higher loss absorbency for D-SIBs 0.50% 0.50% 0.00% 0.50% 0.50% 0.00%

Total minimum CAR including capital conservation buffer 11.50% 11.50% 10.375% 11.50% 11.50% 10.375%

1/

2/


Table 2: Capital Requirements by Risk Type

Unit: Baht million

1/ Multilateral development banks

2/ Public sector entities

3/ Including claims on individuals and their related parties when aggregated limits exceed conditions of claims on retail

4/ Other assets under Basel III include investment outside the scope of consolidation which carries a 250% risk-weight

5/ Minimum capital requirements are calculated based on the minimum regulatory capital adequacy ratio at 8.5%. If capital conservation

buffer of 2.5% and D-SIB buffer of 0.5% for 2019 were included, total capital requirements at end of December 2019 would have been

Baht 236,919 million on a Bank-only basis and Baht 238,682 million on a Consolidated basis.


31 Dec 19 30 Jun 19 31 Dec 18 31 Dec 19 30 Jun 19 31 Dec 18

Credit risk - Standardized Approach

Performing

Governments, Central Banks, MDBs and PSEs treated as

Sovereign 129 173 118 483 370 455

Banks and PSEs treated as banks 2,728 2,829 2,817 2,855 2,933 2,866

Corporates and PSEs treated as corporates 85,618 89,805 90,533 85,954 90,100 90,858

Retail 36,733 35,253 33,105 36,775 35,298 33,149

Retail mortgage loans 17,404 17,672 17,372 17,404 17,672 17,372

Other assets 6,334 8,707 8,929 6,011 13,964 13,858

Non-performing 3,590 2,954 3,204 3,615 2,980 3,231

First-to-default credit derivatives and securitization - - - - - -

Minimum capital requirements for credit risk 152,537 157,393 156,078 153,098 163,318 161,790

Market risk - Standardized Approach

Interest rate risk 4,028 3,753 3,538 4,031 3,755 3,539

Equity position risk 271 - - 276 8 8

Foreign exchange risk 383 297 621 605 590 769

Commodity risk - - - - - -

Minimum capital requirements for market risk 4,681 4,050 4,159 4,912 4,354 4,316

Operational risk - Standardized Approach

Minimum capital requirements for operational risk 17,896 17,717 17,505 18,407 18,273 18,036

Total minimum capital requirements 175,114 179,161 177,741 176,417 185,944 184,142

1/ 2/

2/

2/3/

4/

5/


Table 3: Main Features of Regulatory Capital Instruments

1/ Preferential rights of the Bank’s preferred shares (Baht 36 million) expired on May 10, 2009. Since then, preferred shareholders have had

the same rights as ordinary shareholders.

Ordinary share

Issuer The Siam Commercial Bank PCL

Unique identifier ISIN Code: TH0015010000

Regulatory treatment

Instrument type Common Equity Tier 1 capital

Qualified or non-qualified Basel III Qualified

Non-qualified Basel III features -

Phased-out or full amount Full amount

Eligible at Solo / Group / Group and Solo Group and Solo

Amount recognized in regulatory capital 33,992 million Baht

Par value of instrument 10 Baht

Accounting classification Shareholder's equity

Original date of issuance Multiple

Perpetual or dated Perpetual

Original maturity date No maturity

Issuer's authority to call prior to supervisory approval No

Optional call date, contingent call date and redemption amount -

Subsequent call dates, if applicable -

Coupons / dividends

Fixed or floating dividend / coupon Discretionary dividend amount

Coupon rate and any related index The ordinary shares receive distributable profit that has been

declared as dividend.

Existence of a dividend stopper No

Fully discretionary, partially discretionary or mandatory Fully discretionary

Existence of step up or other incentive to redeem No

Non-cumulative or cumulative Non-cumulative

Convertible or non-convertible Non-convertible

Write-down feature No

Position in subordination hierarchy in liquidation (specify instrument

type immediately senior to instrument)

The ordinary shares shall receive the return of capital in a winding-

up, allowing the holders the rights to participate in any surplus profit

or assets of the company after all senior obligations have been paid

off.

1/


Table 4: Reconciliation of Capital from Consolidated Financial Statements

Unit: Baht million

Capital related items as of December 2019 References

Assets

Cash 47,615 47,615

Interbank and money market items, net 433,510 433,510

Derivative assets 63,132 63,132

Investments, net 312,065 312,065

Investments in subsidiaries and associates, net 78 107

Loans to customers and accrued interest receivables, netLoans to customers 2,146,867 2,146,867 Accrued interest receivables 2,946 2,946

Total loans to customers and accrued interest receivables 2,149,813 2,149,813 Less Deferred revenue (33,080) (33,080) Less Allowance for doubtful accounts (111,150) (111,150)

General provision (22,514) O

Specific provision (88,636) Less Revaluation allowance for debt restructuring (3,122) (3,122)

Total loans to customers and accrued interest receivables, net 2,002,461 2,002,461

Properties for sale, net 16,642 16,642

Premises and equipment, net 40,777 40,777

Goodwill and other intangible assets, net 19,187 19,187 Goodwill 1,270 1,270 KOther intangible assets 17,917 17,917 L

Deferred tax assets 2,005 2,005 M

Other assets, net 26,275 26,275

Total assets 2,963,746 2,963,775

Liabilities

Deposits 2,159,425 2,159,454

Interbank and money market items 145,844 145,844

Liabilities payable on demand 11,796 11,796

Liabilities to deliver securities 18 18

Derivative liabilities 61,937 61,937

Debt issued and borrowings 77,952 77,952

Provisions 11,410 11,410

Deferred tax liabilities 139 139 N

Other liabilities 94,378 94,378 Total liabilities 2,562,900 2,562,929

Balance sheet as per the published financial

statements

Balance sheet under the regulatory scope of

consolidation


Table 4 (Cont.)

Unit: Baht million

1/ Balance sheet per the published financial statements refers to audited financial statements on a consolidated basis as reported to the

Stock Exchange of Thailand.

2/ Balance sheet under the regulatory scope of consolidation refers to financial statements on a consolidated basis under the BOT’s

regulation.

3/ Surplus on revaluation of land and premises can be counted toward capital only for items that the BOT has approved.

4/ Net profit for the second half of the year after being appropriated in accordance with the approved resolutions from the shareholders’

meeting or profit for the first half of the year in accordance with the rules as specified by the Bank.

Capital related items as of December 2019 References

Owner's Equity

Share capitalIssued and paid-up share capital

Preferred shares 36 36 ACommon shares 33,956 33,956 B

Premium on share capitalPremium on preferred shares 14 14 CPremium on common shares 11,110 11,110 D

Disclosed reservesSurplus on revaluation of land and premises 15,641 15,641

Qualified as capital 13,444 G3/

Non-qualified as capital 2,197 Surplus (deficit) on remeasuring available-for-sale investments 1,059 1,059 HForeign currency translation differences (530) (530) I

Surplus (deficit) from value of cash flow hedge reserve (0) (0) J

Retained earningAppropriated retained earning

Legal reserve 7,000 7,000 EUnappropriated retained earning 332,072 332,072

Net profit after appropriation to capital 307,654 F4/

Net profit unappropriated to capital 24,417 Total shareholders' equity 400,358 400,358 Non-controlling interest 489 489 Total owner's equity 400,846 400,846 Total liabilities and owner's equity 2,963,746 2,963,775

Balance sheet as per the published financial

statements

Balance sheet under the regulatory scope of

consolidation


Table 4 (Cont.)

Unit: Baht million

Component of regulatory capital as of December 2019

Tier 1 capital

Common Equity Tier 1 (CET1) capital

Paid-up common shares after deducting treasury shares 33,992 A + B

Surplus (deficit) net worth 11,124 C + D

Legal reserve 7,000 E

Net profit after appropriation 307,654 F

Disclosed reserves

Revaluation surplus on land and building appraisal 13,444 G

Revaluation surplus (deficit) of equity and debt securities for sales 1,059 H

Gain (loss) from converting foreign currency operation to the Bank (530) I

Gain (loss) from fair valued cash flow hedge reserve (0) J

Total CET1 capital before regulatory adjustments and deduction 373,744

Regulatory adjustments on CET1 -

Regulatory deductions on CET1

Goodwill 1,270 K

Other intangible assets 17,917 L

Deferred tax assets 1,866 M - N

Total regulatory deduction on CET1 21,052

Total CET1 capital 352,691

Additional Tier 1 capital

Total Additional Tier 1 -

Total Tier 1 capital 352,691

Tier 2 capital

General provision 22,514 O

Total Tier 2 capital before regulatory adjustments and deduction 22,514

Regulatory adjustment and deduction on Tier 2 capital -

Total Tier 2 capital 22,514

Total regulatory capital 375,206

References based on balance sheet under the

consolidated supervision

Regulatory capital reported by financial

group


Table 5: Capital Position During Transitional Period

Unit: Baht million

Bank-only Consolidated

Tier 1 capital

Common Equity Tier 1 (CET1) capital

Paid-up common shares capital 33,992 33,992

Surplus (deficit) net worth 11,124 11,124

Legal reserve 7,000 7,000

Net profit after appropriation 271,824 307,654

Disclosed reserves

Revaluation surplus on land and buidling appraisal 12,575 13,444

Revaluation surplus (deficit) of equity and debt securities for sales 1,057 1,059

Gain (loss) from converting foreign currency operation to the Bank - (530)

Gain (loss) from fair valued cash flow hedge reserve (0) (0)

CET1 capital before regulatory adjustments and deduction 337,572 - 373,744 -

Regulatory adjustments on CET1 - -

Regulatory deduction on CET1

Goodwill (1,270) (1,270)

Other intangible assets (17,181) (17,917)

Deferred tax assets (1,809) (1,866)

Total regulatory deduction on CET1 (20,260) - (21,052) -

Total CET1 capital 317,312 - 352,691 -

Additional Tier 1 capital - -

Total Tier 1 capital 317,312 - 352,691 -

Tier 2 capital

Proceeds from issuing subordinated debt - - - -

General provision 22,432 22,514

Tier 2 capital before regulatory adjustments and deduction 22,432 - 22,514 -

Regulatory adjustments and deduction on Tier 2 capital - -

Total Tier 2 capital 22,432 - 22,514 -

Total regulatory capital 339,744 - 375,206 -

Capital amount as of

December 2019

Capital amount as of

December 2019

Net value of items with transitional phase subject to

Basel III

Net value of items with transitional phase subject to

Basel III


4. RISK MANAGEMENT

SCB’s outstanding performance over the past years

has led to rapid growth in assets, customers, and

employees and, unavoidably, increased complexity

and size. Hence, sustainable growth has become an

important part of the Bank’s agenda. Furthermore,

past success has also raised expectations of

customers, shareholders, and other stakeholders.

The Bank believes that effective risk management is

crucial to achieve sustainable growth and maintain

profitability.

Therefore, a robust risk management framework has

been put in place under a transparent governance

structure to enhance the effectiveness in risk

management. Further details on the risk management

framework and risk categories will be discussed in the

rest of this section.

By continually strengthening the Bank's risk

management framework and governance, SCB will be

well-prepared to respond appropriately to any current

and future economic conditions, whether favorable or

otherwise.

An overview of the Bank's risk management structure,

risk management policy, and risk management

system is presented below.

4.1 Risk Management Structure

Risk management structure of SCB and its Financial

Group has been categorized into 2 levels as below:

4.1.1 Sub-Board Committees

The Board of Directors has the authority and

responsibility to delegate its risk management

authority, including credit approval and underwriting

decisions based on the underlying risk level (risk-

based authority), to the management and other

committees. The following committees have been

appointed to oversee the Bank’s risk management

implementation:

1. The Executive Committee is responsible for

considering and approving matters related to the

Bank’s businesses such as credits, debt

restructuring and investments, and to perform

other management functions as assigned by the

Board of Directors.

2. The Risk Oversight Committee is responsible for

reviewing the Bank and its Financial Group’s risk

management policies, strategies, and risk

appetite, to ensure the effectiveness of the

Group’s risk management. Other responsibilities

include making recommendations to the Board of

Directors for approval, as well as directly

approving certain policies when

delegated/authorized by the Board of Directors.

3. The Audit Committee comprises independent

members of the Board who are responsible for

reviewing the adequacy of the Bank and its

Financial Group’s risk management measures and

systems, as well as internal control. Audit Function

is responsible for evaluating the overall

effectiveness of risk management and internal

control within the Bank and its Financial Group and

communicating their review to the Audit

Committee.

4. The Technology Committee is responsible for

providing support to the Board of Directors to

forecast long-term technology trends and develop

corresponding strategies, address the integrity of

technology services and manage technology risk.

4.1.2 Management Committees relating

to Risk Management of the Bank

In addition to the abovementioned sub-board

committees, the following management committees

have also been set up to oversee the Bank’s risk

management matters:

• The Risk Management Committee reviews risk

management policies and makes

recommendations to the Risk Oversight

Committee and the Board of Directors for

approval. The Risk Management Committee is

also responsible for managing the overall risk of

the Bank and its Financial Group.


• The Assets and Liabilities Management

Committee is responsible for managing liquidity

risk and interest rate risk in banking book.

• The Equity Investment Management

Committee is responsible for managing risk from

the Bank’s equity investment portfolio.

• The Credit Committee, the Retail Credit

Committee, and the Special Assets Committee

are authorized to approve credits within a pre-

specified limit which varies by each committee’s

approval authority level. Any loan amount

exceeding the authorized level must be approved

by the Executive Committee or by the Board of

Directors. In addition, loans for bank-related

businesses, major shareholders, any parties with

Board member connection must be approved by

the Board of Directors only. For any loans

considered sensitive or highly complicated which

may materially impact the Bank’s reputation, the

Chairman of the Executive Committee may

escalate the matter to the Board of Directors as

deemed appropriate.

• The Underwriting Risk Committee considers,

reviews, and approves securities underwriting

limits based on market risk perspective, as well as

making recommendations to the Executive

Committee or the Board of Directors for

consideration in cases that underwriting risk limits

exceed its approval authority or for any high-risk

transactions.

• The Model Risk Management Committee is

responsible for validating and overseeing all

internal risk models employed by the Bank to

ensure that model risk management frameworks

perform as expected. The committee is also

responsible for approving models as well as model

validation results.

• Other committees, such as the Investment

Committee.

Chief Risk Office

The Chief Risk Office, which reports to the Chief Risk

Officer and the Chief Executive Officer and the

Chairman of the Executive Committee, is responsible

for setting risk management framework, making risk

policy recommendations, as well as monitoring and

reporting major types of risk. The Chief Risk Office

has the responsibility to bring the Bank’s risk

management policies and practices up to global

standards while meeting all relevant regulatory

requirements, and to ensure that the Bank and its

subsidiaries have a comprehensive and integrated

risk management framework. In addition to the Chief

Risk Office performing the above risk management

roles, there are other functions overseeing specific

risks, i.e. Chief Financial Office for liquidity risk and

interest rate risk in the banking book (IRRBB), Chief

People Office for people risk, Chief Strategy Office for

strategic risk, and Chief Marketing Office for

reputational risk.

4.2 Risk Management Policy

The Bank as the parent company has a duty to

oversee risk management of subsidiary companies in

the Financial Group. The Bank requires that every

subsidiary has a risk management system that meets

the Bank’s standard and complies with the BOT’s

Consolidated Supervision Policy.

SCB and its Financial Group have established and

applied the Risk Management Policy Framework at

two levels:

• SCB as the parent company, with its Board of

Directors, sets the Financial Group’s strategy and

approves the Group’s risk management policy

which requires every subsidiary to tailor its risk

management policy, organizational structure, risk

tolerance limit, and risk management approach, to

specific risks relevant to the nature of its business.

Such policy shall be reviewed and approved by the

Group Risk Management Committee, the Bank’s

Risk Oversight Committee, and Audit Committee

accordingly, for the overall risk oversight.

The Risk Management Policy Framework covers

major risks facing the Financial Group which are

strategic risk, credit risk, market risk which

includes interest rate risk in banking book, liquidity

risk, operational risk which includes model risk,

reputational risk, people risk, and technology risk

along with identifying major risks for every


business that the Group operates. The policy also

establishes risk management and control

guidelines for each business as well as specifying

reporting standards to control and monitor risk

effectively and consistently across all businesses.

• Subsidiary companies in the Financial Group

are responsible for establishing risk management

policies that materially reflect business-specific

risks and also align with the Group Risk

Management Policy. Each subsidiary’s risk

management policy must be approved by the

company’s board with the Bank’s concurrence

through the Group Risk Management Committee.

The Board of Directors reviews and approves the

Bank’s major risk management policies, including:

• Risk Management Policy of SCB Financial Group

• Intra-SCB Financial Group Transaction Policy

• Credit Policy Guide

• Internal Capital Adequacy Assessment Process

Policy (ICAAP Policy)

• Stress Testing Policy

• Recovery Plan Policy

• Market Risk Policy Guide

• Trading Book Policy

• Interest Rate Risk in the Banking Book

Management Policy

• Equity Investment Policy

• Liquidity Risk Management Policy

• Operational Risk Policy

• Business Continuity Management Policy

• Strategic Risk Management Policy

• Reputational Risk Management Guidelines

• People Risk Management Guidelines

• Technology Risk Management Policy

• Model Risk Management Policy

4.3 Risk Management System

SCB and its Financial Group are working to align risk

management systems across all Group companies at

both the Bank level and the Group level. As the focal

point for risk management within its Financial Group,

SCB has a responsibility to establish a risk

management framework together with setting

guidelines and overseeing risk management of all

subsidiaries to facilitate sustainable growth and

increase its short-term and long-term competitiveness

under transparent management and good

governance.

SCB’s risk management system consists of four key

processes:

4.3.1 Risk Identification

The Bank’s major risks arise from transactions and

business activities with customers and counterparties.

The followings are major risks faced by the Bank:

• Strategic risk refers to risks on financial

performance (e. g. revenues, profits, capital) and

stability of the Bank and its Financial Group both

at present and in the future that arise from changes

in business environment, inappropriate strategic

decisions, ineffective strategic implementation, or

untimely responses to industry, economic, and

technological changes.

• Credit risk refers to risks that borrowers fail to

make the required principal and interest payments,

or counterparties fail to meet their contractual

obligations, either because of inability or

unwillingness, which may result in loss of revenues

and lower capital for SCB and its Financial Group.

Credit risk covers both on- and off-balance sheet

items, including loans, investments, commitments,

obligations, and similar transactions.

• Market risk refers to risks from changes in values

of on- or off-balance sheet positions due to

movements of market risk factors, such as

exchange rates, interest rates, stock prices, credit

spreads, and commodity prices, which may have

an impact on revenues and capital of SCB and its

Financial Group.

• Interest rate risk in the banking book (IRRBB)

refers to risks of losses in net interest income

and/or economic value of equity for the on- and off-

balance sheet positions in the banking book as a

result of interest rate movements.


• Liquidity risk arises from the Bank’s inability to

repay any debts and contingent liabilities due to a

lack of sufficient funds or because the Bank will

experience high costs or losses from the sale of

assets.

• Operational risk refers to risks from inadequacy

or failure of internal processes, personnel,

systems, or external events which include legal or

reputational damages that arise from operational

risk, but exclude strategic risk. Operational risk can

be influenced by both internal and external factors,

such as changes in personnel, organizational

structure, procedures, systems, products,

customers, business environment or operational

standards, as well as business activities.

• Model risk means risks arising from decisions

made based on outcomes or reports derived from

inappropriate risk models or from misuse of risk

models which may trigger adverse impacts to the

Bank.

• Reputational risk can arise from negative public

perception of the Bank. This type of risk is difficult

to identify or assess because it is driven by

changing political, economic, and social

conditions, including specific public expectations

of the Bank which might affect the revenue and

capital of SCB and its Financial Group.

• People risk refers to risks born to an organization

from people’s actions or negligence and, vice

versa, risks born to people from an organization’s

actions or negligence. People risk can influence

other risk types, i.e. credit risk, market risk, liquidity

risk, reputational risk, operational risk, and

strategic risk.

• Technology risk refers to risks from technological

changes that may have a negative impact on the

Bank’s transaction and service delivery, as well as

risks from technology people, technology

processes, technology systems and data, e.g.

technology obsolescence, insufficient security,

instability and unavailability of technology systems

to meet customer demands or handle crises. The

negative impacts on the Bank and customers will

likely hurt the Bank’s competitiveness and

profitability.

4.3.2 Risk Assessment and Measurement

To assess and measure each type of risk, the Bank

and its Financial Group applies a variety of

quantitative and qualitative methods based on internal

ratings- based approaches and/ or other appropriate

internal models:

• For strategic risk, the Bank relies and develops

an assessment using primarily qualitative risk

factors and quantitative economic indicators.

• For credit risk, the measures include Borrower

Risk Rating to gauge the probability of default

(PD) , credit scoring such as application scores,

and behavior scores to construct risk profiles of

retail and small SME clients. Moreover, risk

models are used to estimate loss given default

(LGD) and exposure at default (EAD). For

derivative products, the Bank relies upon the

potential future exposure (PFE) methodology to

measure credit risk exposure.

• For market risk, the measurements include both

statistical tools, such as value at risk (VaR) , and

non-statistical methods, including risk-factor

sensitivity analysis, position measures, and stress

testing.

• For interest rate risk in the banking book

(IRRBB), the Bank assesses this risk by

measuring the impact of interest rate fluctuation on

net interest income and economic value of equity

(EVE) using interest rate volatility assumption

under stress scenarios.

• For liquidity risk, the measures cover balance-

sheet structure, cash flows of assets and liabilities,

and off-balance sheet items. The liquidity risk

measurement framework includes liquidity

coverage ratio (LCR), net stable funding ratio

(NSFR), liquidity ratio, and maximum cumulative

outflow (MCO).

• For operational risk measurement, the Bank uses

risk and control self-assessments as well as loss

incident data to quantify risk and to assess the

effectiveness of the control environment by

applying both measures for every business unit.

Moreover, as part of its risk mitigation process, the

Bank has established business continuity

management plan (BCM) to ensure continuity of


key activities during crisis or disasters that may

cause business disruptions. The Bank requires

extensive risk reviews for new products and

existing products with material changes prior to

launch to minimize potential operational risk.

• For model risk, the Bank measures model

performance using key performance indicators

and other qualitative indicators to ensure that the

adopted models are suitable. The Bank also

conducts qualitative analysis and measurement to

review risks arising from implemented models.

• For reputational risk and technology risk, the

Bank mainly applies qualitative methods for

assessment.

• For people risk, the Bank employs quantitative

indicators such as employee turnover rate and

staff regrettable loss to measure and evaluate the

risk.

Moreover, to achieve forward-looking risk

management, the Bank adds stress testing to the

existing risk assessment toolkit, particularly for market

risk, credit risk and liquidity risk.

4.3.3 Risk Control and Mitigation

The Bank’s Board of Directors and senior

management establish the Bank’s acceptable risk

level or risk appetite statement (RAS) in order to meet

SCB’s long-term financial targets and to facilitate risk

monitoring and management, as well as capital

adequacy review.

The Bank monitors and controls risk by setting key

risk indicators and risk limits for different levels of

exposure: organization, customer, product,

transaction, and others. The Bank has a variety of

internal control mechanisms to manage, contain or

eliminate risks in accordance with the Bank’s policies

and procedures.

4.3.4 Risk Monitoring

SCB and its Financial Group have established

schedules and formats for risk monitoring and

reporting, which must be submitted by relevant

functions to senior management on a timely basis to

ensure effective risk control and management. Risk

monitoring reports are aggregated to highlight risk

levels and changes by the Chief Risk Office for

reporting regularly to the Group Risk Management

Committee, the Audit Committee, the Risk Oversight

Committee, and the Board of Directors.

4.4 Emerging Risks

The Bank analyzes the emerging risks which may

affect business operation in both short-term (within 1

year) and long-term (between 3-5 years). Measures

are developed to respond, manage and control

impacts of these risks accordingly. In 2019, the Bank

identified 3 key emerging risks.

Climate Change Risk

The climate change, including rising temperatures

caused by greenhouse gas emission directly or

indirectly from human activities, altered precipitation

patterns and rainfall, and more frequent or extreme

events such as heatwaves, drought, and storms,

could adversely impact the economic activities and

the stability of financial system. Climate change and

extreme events result in increasing risks of business

operation disruptions, natural resource and

commodity scarcity and physical and financial

damages. The Bank has committed to take part in

reducing such negative impacts. As a financial

institution, the Bank has pledged to take part in driving

Thailand toward a low-carbon economy by lending to

businesses and projects that help reducing

greenhouse gas emissions, such as solar power

project, wind power project, and mass rapid transit

project. In addition, the Bank also focuses on building

a culture of eco-efficiency and fostering

environmental awareness among employees to

ensure that business is conducted on the basis of

environmental protection and conservation.

Cybersecurity Risk

Reliance on advance technology in banking industry

causes the cybersecurity risks to evolve over time and

become increasingly sophisticated. The cybersecurity

risk could result in shutdown of essential services and

critical infrastructure, security breaches, as well as

identity theft. The cyberattack leads to loss of

customer confidence and potentially subsequent


contagion effect to the economy. To achieve a

secured digital platform, the Bank has invested in IT

infrastructure and continuously strengthen its risk

management and the three lines of defense

framework. In addition, the Bank uplifts employee

capabilities and rooted in a risk culture at corporate

level.

Artificial Intelligence and Big Data Risk

The use of Artificial Intelligence (AI) has transformed

the financial industry. AI technologies enable the

Bank to bring more efficient operations, improved

products and services, and better customer

experience. The complex nature of AI solution may

increase certain types of risks to the Bank, such as

data privacy, misuse of data, model risk, and

reputational risk. The Bank has acknowledged and

prepared for the challenges regarding innovation and

development into digital transformation age. The

Bank is strengthening its data architecture and

infrastructure to ensure security of personally

identifiable information (PII) and improving

governance and control on the access right to and the

use and transfer of personal data to comply with the

new Thai Personal Data Protection Act which will

become effective in mid-2020. In addition, the Bank

continues to enhance risk management frameworks

such as model risk management framework,

information security, data privacy and data protection,

and bring more talents to ensure that the AI and Big

Data are used in meaningful and transparent manner.


5. CREDIT RISK

5.1 Credit Risk Management Structure

For effective and efficient credit risk management,


specific units with clearly defined credit risk

management roles and responsibilities which are

separated from business functions. Specifically, the

Bank has established the following units to manage

credit risk under the Chief Risk Office:

• Credit Risk Management Function takes a major

role in approving loans that fall within its

designated authority and making independent

recommendations to higher levels of approval

authority for loan underwriting based on the Credit

Policy Guide and related underwriting standards.

• Credit Policies and Procedures Division makes

recommendations on credit risk management of

SCB Group companies as well as formulating and

revising SCB credit policy guides, policies and

procedures related to credit risk management,

including the credit manual, credit approval

authorities, collateral and non-performing asset

appraisal policy, loan classification, provision, and

bad debt written-off policy and practice.

• Retail and Small SME Portfolio Management

Function controls and oversees risk management

for retail and small SME by issuing the Credit

Policy Guide and by setting the approval authority

for retail lending as well as for product programs

and risk programs of all retail lending products.

This Function also sets policy and direction for

each target customer segment by adopting risk-

based pricing, increasing/reducing credit lines,

and measuring risk by product and customer

segment. In addition, the Retail Credit Portfolio

Management Unit within this Function jointly sets

collection strategy with the Retail and Small SME

Collection Unit of SCB (SCB Plus).

• Special Business Function has been set up to

prevent and resolve problem loans as well as

overseeing NPL management.

Debt restructuring, legal action, debt collection

after a charge-off, as well as property foreclosure

are under the responsibility of the Special

Business Function. These NPL resolution

alternatives are to follow the Workout Policy Guide

which outlines the Bank’s management framework

for non-performing assets with the objective of

maximum debt recovery within an appropriate

timeframe.

• Portfolio Analytics and Measurement Division

is in charge of performing credit portfolio analysis,

monitor and control credit risk to be within Risk

Appetite, measure and monitor Risk-Adjusted

Return on Capital (RAROC), which is used as a

tool for risk-based pricing, as well as assess and

monitor provision and capital adequacy.

• Risk Modelling and Risk Information System

Division develops credit risk models, maintaining

the credit scoring system for retail lending, and

manage information system which stores data

related to credit risk management.

• Model Risk Management Division is responsible

for validating credit risk models to ensure the

appropriateness before usage.

5.2 Credit Risk Management Policy

and Guidelines

The Group’s Risk Management Policy applies to SCB

and all companies in its Financial Group whose

businesses are related to banking, finance, leasing,

securities, asset management, fund management,

and life insurance that are exposed to material levels

of credit risk. SCB and these subsidiaries must carry

out the following credit risk policy implementation:

• Formulate a credit risk management policy

• Determine and document risk-based limits and

approval authorities


• Implement credit underwriting processes with

checks and balances to ensure both transparency

and thorough validation under the 'four-eye'

principle

• Conduct credit risk stress testing for loan portfolio

at least once annually

• Set a concentration limit for SCB based on

borrower and industry characteristics.

5.2.1 Collateral and Credit Risk

Mitigation Policy

Credit risk mitigation reduces losses from default on

repayment obligations by liquidating collateral and/or

claiming payment from guarantors.


Standardized Approach for credit risk calculation.

Accordingly, collateral that qualifies for credit risk

mitigation falls within one of these two following

categories:

1. Financial collateral comprises items that can be

easily liquidated for cash with clear mark-to-market

values, such as cash, deposits, bonds, securities,

and unit trusts.

2. Guarantees and credit derivatives

SCB issues the Collateral and Non-Performing Asset

Appraisal Policy to serve as a guideline for collateral

management to ensure that appraised collateral value

is in line with fair market value both before and after

acceptance of the collateral.

For near-cash collateral, SCB and its Financial Group

have established the following broad principles to

optimize the value of collateral:

• Minimize concentration of collateral in any

particular assets or issuers.

• Exclude, any material positive correlation between

collateral value and default risk of borrowers.

• Avoid, as much as possible, any currency

mismatch between the obligation and the

collateral. To the extent that such mismatch is

unavoidable, the value of collateral shall be

discounted to reflect the underlying currency risk.

• Avoid, as much as possible, any maturity

mismatch between the obligation and the

collateral. If such mismatch exists, loan renewal

must be monitored, and actions shall be taken

prior to the maturity date to ensure that the

collateral remains valid throughout the term of the

loan.

• Ensure that all contracts meet the standards, as far

as possible, and are reviewed for enforceability

and continued validity.

Appraisal of financial collateral is typically reviewed at

least once a month using the latest bid price for the

appraised value. Guarantees can be used to mitigate

credit risk which results in a lower risk weight

assignment than stand-alone risk weights assigned to

borrowers. Specifically, a private entity acting as a

guarantor must have a better credit rating than the

borrower based on ratings from external credit

bureaus.

For other types of collateral, the Bank’s Collateral and

Non-Performing Asset Appraisal Policy serves as a

guideline to ensure that collateral and NPA values,

prior to loan approval and in subsequent updates,

reflect fair market value.

5.2.2 On- and Off-Balance Sheet Netting

Policy and Process

SCB and its Financial Group can use netting to reduce

credit risk when contracts are binding and enforceable

for all relevant parties. Contracts must meet the

minimum standards set forth by the Bank of Thailand

and must be approved by relevant legal functions of

SCB and, if applicable, of SCB Group companies.

Contracts must be regularly reviewed to identify any

impact on enforceability from legal and regulatory

changes. In addition, SCB and its Financial Group

must have a system to monitor and control risk from

maturity mismatch which must be on a netting basis.

Non-compliance with the above principles will result in

the obligation losing its eligibility for netting.

5.2.3 Definition of Default

SCB and its Financial Group define default and loss

based on the occurrence of either or both of the

following events:


• Borrower is deemed unable to make full payments

according to his/her contractual obligation prior to

any recoverable payment from liquidation.

Examples of this case are consent for debt

restructuring with a significant haircut or

postponement of principal, interest, or fee

payments due to the borrower’s deteriorated

financial status.

• Delinquency on repayment (principal and interest)

for more than 90 days or 3 months past the due

date, or the borrower’s rating being reclassified as

substandard or lower based on the Bank of

Thailand’s notification on Loan Classification and

Provision Criteria for Financial Institutions.

In the event of asset impairment, SCB and its solo

consolidation companies are required to adopt the

BOT’s asset classification criteria which classify loans

into pass, special mention, substandard, doubtful,

doubtful loss, and loss. Loan classifications shall be

done at the borrower level except for retail borrowers

for whom classifications are done at the account level

for both secured loans and unsecured loans. In

addition to classification by number of days of

delinquency, SCB also adopts a qualitative credit

review process to enhance the accuracy of loan

classifications and to ensure adequate loan loss

provisions.

5.2.4 Classification and Provisioning

Policy

The Bank’s approach on loan classifications, loss

provisions, and write-offs for bad debt or bad debt

recovery complies with the regulations of the Bank of

Thailand or other related regulators. The Bank sets

aside an adequate amount of provisions to provide

cushion against expected losses from asset

impairment, particularly from loans.

Loans are typically classified based on the borrower’s

ability to meet his/her debt service obligations and to

ensure adequate provisions based on both

quantitative and qualitative criteria. Borrowers or

related parties whose cashflows are from the same

source will be assigned the same classification. In all

cases, the underlying goal is to ensure adequacy of

provisions.

General Provision

General provisions for a financial group under the solo

consolidation basis refer to surplus reserves set aside

for possible impairment of loans in the future.

Although general provisions are not earmarked for

specific borrowers, SCB and its Financial Group

maintain such reserves at an appropriate level to

cover possible future loan losses. The amount of

reserves to be set aside will depend on a variety of

factors, such as economic conditions that may impact

borrowers’ ability to make payment, quality and

characteristics of the loan portfolio, regulatory

requirements, and accounting standards.

Specific Provision

SCB and its Financial Group determine specific

provisions based on the BOT’s guidance on asset

classifications. Furthermore, the Bank has processes

for internal audit and credit review to assess the

adequacy of provisioning by taking the borrower’s

rating into account and, if warranted, the Bank may

set aside a special provision against future losses.

5.3 Credit Approval Process

SCB and its Financial Group place an emphasis on a

separation of duties between business functions and

credit risk management functions/credit underwriting

functions. Retail credit underwriting is based on the

Product Program/Risk Program as well as credit

scoring model approved by the Executive Committee

or the Retail Credit Committee with clear specification

of approval authorities and criteria, including

exceptions.

Approval Authority

As approved by their respective boards, all SCB

Financial Group companies have established credit

approval authority which may be delegated to

committees and further to individuals at different

corporate levels. Any credit request that deviates from

the policy or the underwriting standard must be

escalated to the top of the authorization chain for

approval.

SCB has two levels of credit approval authority:

committee level and individual level. Three

committees with credit approval authority are the


Credit Committee, the Executive Committee, and the

Board of Directors. Individual approval authority starts

from credit officers and goes up to the Chief Risk

Officer. In addition, the Bank also grants individual

approval authority with prespecified conditions to

business functions up to the President, starting at the

sector/regional manager level for Corporate and SME

Segment Function and the branch manager level for

the Retail Segment Function, for specific industries or

circumstances up to a pre-determined limit.

Approval authority is determined by risk level which

will depend on credit line, borrower risk rating, severity

class, and also conditions on fees and/or interest

rates. Approval authority for group exposure is

determined after considering shareholding and

controlling authority in accordance with Section 4 of

the Financial Institution Act.

5.4 Credit Risk Measurement

Since credit risks vary by loan type, borrower, and

collateral, it is necessary to use different risk

measurement approaches from simple to

sophisticated statistical tools to appropriately reflect

credit risk exposure.

For commercial loans, credit risk is assessed at the

borrower level by considering the following factors:

• Probability of default (PD) : For corporate and

business customers, risk rating will be assessed at

the individual borrower level to evaluate the

borrower’s ability to pay. The assigned risk ratings

must be reviewed annually or whenever there is

any material change that affects the borrower’s

risk behavior.

• Loss given default (LGD): This parameter is used

to estimate losses when default occurs. LGD is

calculated from losses given three recovery paths:

cure, restructuring, and liquidation. Losses will

depend on loan-to-value ratio (LTV) or the ratio of

loan outstanding to discounted collateral value by

severity class.

• Exposure at default (EAD): EAD is calculated

from the current outstanding balance and the

undrawn portion of credit lines which vary by

product type. All off-balance sheet items must be

converted to on-balance items using a credit

conversion factor (CCF).

For small business and retail loans, credit risk

measurement is calculated for the overall portfolio

using a similar methodology on a pooled basis. In

addition to PD, LDG and EAD, the measurement also

incorporates the following factors:

• Percentage of non-performing loans is based

on the percentage of borrowers in a portfolio who

are delinquent for more than 90 days or 3 months.

This ratio is calculated by product and customer

segment to facilitate portfolio management with

information on the underlying credit quality in a

portfolio.

• Percentage of write-off is the ratio of bad debts

that were non-collectable and written-off in a given

portfolio. This ratio is calculated by product and

customer segment to facilitate portfolio

management with information on the underlying

credit quality in a portfolio.

The above measures serve as inputs into the credit

underwriting process which determines approval

authority and pricing as well as other terms and

conditions, such as collateral terms, to ensure risk-

based credit decisions.

5.4.1 Credit Risk Measurement under the

Standardized Approach

SCB and its Financial Group adopted the

Standardized Approach to calculate credit risk assets.

This approach requires using external credit ratings to

measure credit risk with Standard & Poor’s ratings

being applied for sovereign and financial institutions

and TRIS Ratings and/or Fitch Ratings (Thailand) for

corporate borrowers.

In the event that a borrower is rated by multiple rating

agencies, SCB and its Financial Group will follow the

Bank of Thailand’s regulations on the rating selection.

Specifically, if two ratings are assigned, the rating with

a higher risk weight will be adopted. For non-rated

companies, SCB will use the Bank of Thailand’s

guidelines to determine the appropriate risk weights.


5.5 Credit Risk Monitoring and

Control

5.5.1 Risk Monitoring Guidelines

Credit risk monitoring is an important element of the

credit risk management process. SCB and its

Financial Group have adopted a monitoring process

to ensure that credit risk assessment is accurate,

appropriate, unbiased, complete, and monitored

regularly to stay current.

The credit risk monitoring process of SCB and its

Financial Group consists of three components:

• Part I is to monitor credit risk with risk

management tools, such as credit scoring,

borrower risk rating, and other similar tools. These

risk management tools have been validated to

ensure that they can accurately reflect the risk

level and customer behaviors at an acceptable

confidence level to SCB and its Financial Group.

The models are regularly reviewed to ensure their

continued validity.

• Part II is to monitor credit risk by imposing limits

on approval authority, transaction volume and

credit concentration. SCB and its Financial Group

have established limits for financial transactions

with customers and for intra-group transactions, as

well as concentration limit for each industry.

• Part III is risk monitoring for retail credit portfolio

which includes analysis of loan portfolio, credit

quality, and repayment behavior measured

against target benchmarks to reflect the Bank’s

retail credit risk management policy.

For risk monitoring, the Bank and its Financial Group

places high emphasis on credit review by focusing on

forward-looking analysis to gain insights on positive

and negative changes that affect customers’

businesses or industries as well as their future

financial stabilities to determine appropriate business

strategies and action plans. Credit reviews are

conducted annually and also triggered by events that

have material impacts on customers’ positions.

At the portfolio level, credit risk is monitored to ensure

that credit quality and loan growth stay within the

annual targets. Loan monitoring enables SCB to

analyze trends in loan growth and identify future

problem loans, as well as assess the effectiveness of

its credit-related strategies. For retail credit, SCB also

analyzes payment behavior and monitors credit

quality by focusing on key target indicators.

The Bank also monitors credit risk by utilizing

historical data of SCB and the banking industry to

analyze credit trends and obtain benchmarks for loan

volume and non-performing loans. In addition, the

Bank also performs credit risk stress testing with

predetermined scenarios for a wide range of risk

factors to forecast losses and capital adequacy.

Stress testing results are used in the process of risk

mitigation and capital planning.

5.5.2 Risk Control Guidelines

Lending, investment, contingent liabilities, and

lending-like transactions with major borrowers are

controlled at two levels in accordance with the BOT’s

regulations:

1. Bank level: Concentration shall not exceed 25%

of the Bank's total capital. Additionally, for all major

borrowers whose total loans exceed 10% of the

Bank's total capital, the aggregate loan balance

should not exceed three times of the Bank's total

capital.

2. Full consolidation level: Concentration must not

exceed 25% of the full consolidation capital.

Lending, investment, contingent liabilities, and

lending-like transactions involving major shareholders

or businesses with interests in the Bank are controlled

in accordance with the Bank of Thailand’s regulations

at both the Bank-only and at the solo consolidation

level.

SCB places a high priority on developing a process to

monitor and control limits for lending, investment, and

contingent liabilities to major borrower groups. Each

customer group has a centralized Primary Account

Manager (PAM) to control limits on lending,

investment, and contingent liabilities for each major

borrower to comply with the Bank of Thailand’s

regulations as well as allocating credit lines to

companies in the solo consolidation group. Full

consolidation companies are also required to submit

a report on credit lines and outstanding loans for such


customer groups on a monthly basis, while PAM

controls the aggregate limit on a consolidated level.

The Bank has a target to limit lending concentration in

any particular industry with the limit being determined

by industry trends, market share relative to the

banking industry, probability of loss, and probability of

default. Statistical tools, such as the Herfindahl-

Hirschman Index (HHI), are used to measure industry

concentration and determine industry lending limits.

Lending under a specific risk program or product

program for any customer or product segment is

subject to specific amount of credit lines. This type of

lending must specify objectives, types of credit line,

customer qualifications, criteria, standard terms and

conditions, as well as monitoring approach and loan

assessment on performance targets.

5.5.3 Counterparty Credit Risk and

Country Risk

SCB and its Financial Group control counterparty

credit risk by setting credit lines for each counterparty

to limit potential losses below an acceptable level if a

counterparty fails to meet its contractual obligations.

In addition, SCB also controls country risk by setting

limits on lending, investment, and contingent liabilities

for each country. SCB’s Country Risk Management

Policy requires both direct and indirect country-

specific exposure to be included when calculating the

country-risk limits.

5.6 Credit Risk Report

SCB and its Financial Group require all relevant

functions to regularly report credit risk by preparing

monthly reports for the functional heads to use for

managing risk. Credit risk reports of SCB and its

Financial Group are submitted to the Group Risk

Management Committee on a monthly basis with

contents covering loan growth, credit quality, credit

concentration, investment diversification, etc.

SCB and its Financial Group’s Credit Risk Report

incorporates information on outstanding assets on the

balance sheet and important off-balance sheet items.

The report also shows loss items that have been

written-off during the accounting period without credit

risk adjustment (Table 6-13), such as outstanding

debts by geographical area and business type.

Moreover, exposures by risk type and risk weights

under the Standardized Approach are also reflected

in Table 14-16.


Table 6: Significant On- and Off-Balance Sheet Exposure Items

Unit: Baht million

1/ Including accrued interest receivables and net of deferred income, allowance for doubtful accounts and allowance for revaluation from debt

restructuring and including net loans of interbank and money market

2/ Excluding accrued interest receivables and net of allowances for revaluation and impairment of securities

3/ Before using credit conversion factor

4/ Including equity-related derivatives


31 Dec 19 31 Dec 18 31 Dec 19 31 Dec 18

On-balance sheet items 2,792,997 2,692,971 2,803,322 2,703,686

Net loans 2,383,775 2,343,140 2,388,067 2,347,480

Net investment in debt securities 304,295 264,098 304,219 265,623

Deposits 41,644 44,199 47,904 49,666

Derivative assets 63,283 41,534 63,132 40,917

Off-balance sheet items 4,214,077 4,189,155 4,216,715 4,191,067

Contingent 61,633 89,439 62,667 90,635

OTC derivatives 4,105,750 4,054,279 4,107,354 4,054,995

Undrawn committed lines 46,694 45,437 46,694 45,437

1/

2/

3/

4/


Table 7: Exposures Classified by Geographical Area

Unit: Baht million




3/ Before using credit conversion factor


Bank-only 31 Dec 19 31 Dec 18 x-Chk w/ TH

Thailand

Foreign

Countries Total Thailand

Foreign

Countries Total

On-balance sheet items 2,770,709 22,288 2,792,997 2,668,660 24,311 2,692,971

Net loans 2,365,454 18,321 2,383,775 2,321,353 21,787 2,343,140

Net investment in debt securities 302,719 1,576 304,295 262,876 1,222 264,098

Deposits 39,253 2,391 41,644 42,900 1,299 44,199

Derivative assets 63,283 - 63,283 41,531 3 41,534

Off-balance sheet items 4,211,072 3,005 4,214,077 4,187,482 1,673 4,189,155

Contingent 61,633 - 61,633 89,439 - 89,439

OTC derivatives 4,102,745 3,005 4,105,750 4,052,606 1,673 4,054,279

Undrawn committed lines 46,694 - 46,694 45,437 - 45,437

Consolidated 31 Dec 19 31 Dec 18

Thailand

Foreign


Foreign

Countries Total

On-balance sheet items 2,772,161 31,161 2,803,322 2,670,884 32,802 2,703,686

Net loans 2,366,984 21,083 2,388,067 2,322,779 24,701 2,347,480


Deposits 39,403 8,501 47,904 42,790 6,876 49,666

Derivative assets 63,132 - 63,132 40,914 3 40,917

Off-balance sheet items 4,210,410 6,305 4,216,715 4,185,960 5,107 4,191,067

Contingent 59,371 3,296 62,667 87,201 3,434 90,635

OTC derivatives 4,104,345 3,009 4,107,354 4,053,322 1,673 4,054,995

Undrawn committed lines 46,694 - 46,694 45,437 - 45,437

1/

2/

3/

4/

1/

2/

3/

4/


Table 8: Exposures Classified by Residual Maturity

Unit: Baht million




3/ Before credit conversion factor


Bank-only 31 Dec 19 31 Dec 18

Less than

1 year

Within

1-5 years

More than

5 years

Less than

1 year

Within

1-5 years

More than

5 years

On-balance sheet items 1,330,878 709,848 752,271 1,314,884 620,865 757,222

Net loans 1,120,870 558,880 704,025 1,060,888 558,834 723,418


Deposits 41,644 - - 44,199 - -

Derivative assets 13,816 23,933 25,534 13,468 13,852 14,214

Off-balance sheet items 2,279,880 1,427,228 506,969 1,990,554 1,629,210 569,391

Contingent 44,464 17,169 - 63,718 25,721 -

OTC derivatives 2,227,478 1,409,542 468,730 1,920,723 1,598,621 534,935

Undrawn committed lines 7,938 517 38,239 6,113 4,868 34,456


Less than

1 year

Within

1-5 years

More than

5 years

Less than

1 year

Within

1-5 years

More than

5 years

On-balance sheet items 1,335,284 710,437 757,601 1,321,286 622,580 759,820

Net loans 1,120,524 559,313 708,230 1,062,579 560,477 724,424


Deposits 46,828 - 1,076 49,423 - 243

Derivative assets 13,665 23,933 25,534 12,797 13,906 14,214

Off-balance sheet items 2,282,518 1,427,228 506,969 1,993,295 1,628,381 569,391

Contingent 45,498 17,169 - 64,901 25,734 -

OTC derivatives 2,229,082 1,409,542 468,730 1,922,281 1,597,779 534,935

Undrawn committed lines 7,938 517 38,239 6,113 4,868 34,456

1/

2/

3/

4/

1/

2/

3/

4/


Table 9: Loans and Investment in Debt Securities Classified by Geographical Area and Asset Classification

Unit: Baht million

1/ Including outstanding amounts of loans and accrued interest receivables, interbank and money market (excluding allowance of doubtful

accounts)


Thailand

Foreign


Foreign

Countries Total

Total loans 2,478,787 18,772 2,497,559 2,423,849 22,053 2,445,902

Normal 2,330,622 17,745 2,348,367 2,301,624 20,930 2,322,554

Special mention 64,763 - 64,763 53,934 - 53,934

Substandard 36,234 - 36,234 23,034 - 23,034

Doubtful 17,821 - 17,821 13,246 - 13,246

Doubtful loss 29,347 1,027 30,374 32,011 1,123 33,134

Investment in debt securities 194 0 194 368 0 368

Doubtful loss 194 0 194 368 0 368


Thailand

Foreign


Foreign

Countries Total

Total loans 2,480,929 21,567 2,502,496 2,426,002 24,998 2,451,000

Normal 2,331,894 20,299 2,352,193 2,302,764 23,841 2,326,605

Special mention 64,763 241 65,004 53,934 34 53,968

Substandard 36,234 - 36,234 23,034 - 23,034

Doubtful 17,821 - 17,821 13,246 - 13,246

Doubtful loss 30,217 1,027 31,244 33,024 1,123 34,147

Investment in debt securities 194 0 194 368 0 368

Doubtful loss 194 0 194 368 0 368

1/

1/


Table 10: Provisions and Bad Debts Written-Off on Loans and Investment in Debt Securities, Classified by

Geographical Area

Unit: Baht million

1/ Including provision for outstanding amounts and accrued interest receivables of interbank and money market

Bank-only 31 Dec 19 31 Dec 18 x-Chk w/ TH

Thailand

Foreign


Foreign

Countries Total

Total loans

General provisions 42,442 33,340

Specific provisions 70,917 425 71,342 69,161 261 69,422

Bad debts written-off 27,693 1 27,694 13,187 415 13,602

Investment in debt securities

Specific provisions 194 - 194 368 - 368


Thailand

Foreign


Foreign

Countries Total

Total loans

General provisions 42,442 33,340

Specific provisions 71,529 458 71,987 69,889 291 70,180

Bad debts written-off 27,778 1 27,779 13,187 415 13,602

Investment in debt securities

Specific provisions 194 - 194 368 - 368

1/

1/


Table 11: Loans1/ Classified by Type of Business and Asset Classification

Unit: Baht million

1/ Including outstanding amounts of loans and accrued interest receivables, interbank and money market (excluding allowance for doubtful accounts)


Normal

Special

mention

Sub-

standard Doubtful

Doubtful

loss Total Normal

Special

mention

Sub-

standard Doubtful

Doubtful

loss Total

Agriculture and mining 12,687 388 125 165 3,417 16,782 17,104 195 2,074 126 332 19,831

Manufacture and commerce 883,207 22,074 12,210 5,921 15,325 938,737 875,998 19,304 8,828 3,583 19,871 927,584

Real estate and construction 152,912 4,219 9,735 484 1,789 169,139 159,151 3,282 983 410 2,025 165,851

Infrastructure and services 354,255 3,388 1,805 1,155 3,183 363,786 367,114 2,360 622 1,041 4,549 375,686

Housing loans 516,665 12,147 6,094 6,850 3,386 545,142 527,131 10,823 6,146 5,762 3,757 553,619

Others 428,641 22,547 6,265 3,246 3,274 463,973 376,056 17,970 4,381 2,324 2,600 403,331

Total 2,348,367 64,763 36,234 17,821 30,374 2,497,559 2,322,554 53,934 23,034 13,246 33,134 2,445,902


Normal

Special

mention

Sub-

standard Doubtful

Doubtful

loss Total Normal

Special

mention

Sub-

standard Doubtful

Doubtful

loss Total

Agriculture and mining 12,744 388 125 165 3,417 16,839 17,151 195 2,074 126 332 19,878

Manufacture and commerce 885,580 22,315 12,210 5,921 15,325 941,351 877,571 19,338 8,828 3,583 19,871 929,191

Real estate and construction 152,922 4,219 9,735 484 2,594 169,954 159,151 3,282 983 410 2,972 166,798

Infrastructure and services 354,255 3,388 1,805 1,155 3,183 363,786 368,345 2,360 622 1,041 4,549 376,917

Housing loans 516,715 12,147 6,094 6,850 3,386 545,192 527,190 10,823 6,146 5,762 3,757 553,678

Others 429,977 22,547 6,265 3,246 3,339 465,374 377,197 17,970 4,381 2,324 2,666 404,538

Total 2,352,193 65,004 36,234 17,821 31,244 2,502,496 2,326,605 53,968 23,034 13,246 34,147 2,451,000


Table 12: Provisions and Bad Debts Written-Off for Loans1/ Classified by Type of Business

Unit: Baht million

1/ Including outstanding amounts of loans, accrued interest receivables, and interbank and money market

2/ General provisions disclosed in total amount


General

provisions

Specific

provisions

Bad debts

written-off

General

provisions

Specific

provisions

Bad debts

written-off

Agriculture and mining 4,526 2,174 3,689 69

Manufacture and commerce 30,848 13,731 33,181 3,489

Real estate and construction 9,916 446 7,035 230

Infrastructure and services 7,316 2,724 4,546 480

Housing loans 7,219 2,464 8,065 2,853

Others 11,517 6,156 12,905 6,480

Total 42,442 71,342 27,694 33,340 69,422 13,602


General

provisions

Specific

provisions

Bad debts

written-off

General

provisions

Specific

provisions

Bad debts

written-off

Agriculture and mining 4,527 2,174 3,690 69

Manufacture and commerce 30,879 13,731 33,198 3,489

Real estate and construction 10,461 530 7,697 230

Infrastructure and services 7,316 2,724 4,558 480

Housing loans 7,219 2,464 8,066 2,853

Others 11,585 6,156 12,971 6,480

Total 42,442 71,987 27,779 33,340 70,180 13,602

2/

2/

2/

2/


Table 13: Reconciliation of Changes in Provisions for Loans1/

Unit: Baht million

1/ Including outstanding amounts of loans, accrued interest receivables, and interbank and money market


General

provisions

Specific

provisions Total

General

provisions

Specific

provisions Total

Balance, beginning of year 33,340 69,422 102,762 24,306 65,151 89,457

Charge-offs during period - (27,695) (27,695) - (13,602) (13,602)

Increase/decrease in provisions 9,102 29,615 38,717 9,034 17,873 26,907

Balance, end of year 42,442 71,342 113,784 33,340 69,422 102,762


General

provisions

Specific

provisions Total

General

provisions

Specific

provisions Total

Balance, beginning of year 33,340 70,180 103,520 24,306 65,914 90,220

Charge-offs during period - (27,780) (27,780) - (13,602) (13,602)

Increase/decrease in provisions 9,102 29,587 38,689 9,034 17,868 26,902

Balance, end of year 42,442 71,987 114,429 33,340 70,180 103,520


Table 14: Exposures Classified by Asset Type under the Standardized Approach (SA)

Unit: Baht million

1/ Off-balance sheet exposures (including Repo and Reverse Repo transactions) after multiplying by Credit Conversion Factor (CCF), net of

specific provision


On-balance

sheet

Off-balance

sheet Total

On-balance

sheet

Off-balance

sheet Total

Performing

Claims on Sovereign & Central Banks, MDBs,

PSEs-Sovereign 281,025 360,370 641,395 251,441 297,434 548,875

Claims on Bank, PSEs-Bank 52,716 166,944 219,660 62,641 133,826 196,468

Claims on Corporate, PSEs-Corporate 918,148 159,738 1,077,887 998,292 157,970 1,156,261

Claims on Retail portfolios 581,466 3,213 584,680 524,903 3,574 528,477

Claims on Retail mortgage loans 504,864 - 504,864 512,526 - 512,526

Other assets 220,189 - 220,189 208,085 - 208,085

Non-Performing loans 39,903 1,756 41,658 34,839 1,028 35,867

Total 2,598,311 692,022 3,290,333 2,592,727 593,833 3,186,560


On-balance

sheet

Off-balance

sheet Total

On-balance

sheet

Off-balance

sheet Total

Performing

Claims on Sovereign & Central Banks, MDBs,

PSEs-Sovereign 285,201 360,370 645,571 255,939 297,434 553,373

Claims on Bank, PSEs-Bank 54,810 166,812 221,622 64,144 133,200 197,344

Claims on Corporate, PSEs-Corporate 921,260 160,931 1,082,190 1,001,521 159,088 1,160,609

Claims on Retail portfolios 582,126 3,476 585,602 525,493 3,941 529,435

Claims on Retail mortgage loans 504,864 - 504,864 512,526 - 512,526

Other assets 219,442 - 219,442 240,365 - 240,365

Non-Performing loans 40,162 1,756 41,918 35,124 1,028 36,152

Total 2,607,865 693,345 3,301,210 2,635,112 594,692 3,229,804

1/1/

1/1/


Table 15: Exposures After Adjusting for Credit Risk Mitigation Classified by Asset Type and Risk Weights under the Standardized Approach (SA)

Unit: Baht million

Capital deduction prescribed by the BOT: - None -

Bank-Only

31 Dec 19 Rated exposure Unrated exposure

Risk weights (%) 0 20 50 100 150 0 20 35 50 75 100 250 625 938 100/8.5%

Performing

Claims on Sovereign & Central Banks, MDBs, PSEs-Sovereign 310,056 5,519 283 15 174

Claims on Bank, PSEs-Bank - 63,965 24,095 7,255 1

Claims on Corporate, PSEs-Corporate - 7,522 69,600 55,486 1,043 913,916

Claims on Retail portfolios 576,198 -

Claims on Retail mortgage loans 435,576 67,811 1,447

Other assets 145,669 - 74,520 - Risk weights (%) 0 20 50 100 150 75

Non-Performing loans 123 9,753 19,625 11,688 236

Bank-Only


Risk weights (%) 0 20 50 100 150 0 20 35 50 75 100 250 625 938 100/8.5%

Performing

Claims on Sovereign & Central Banks, MDBs, PSEs-Sovereign 274,170 5,863 152 13 85





Other assets 116,140 - 83,210 8,735 Risk weights (%) 0 20 50 100 150 75



Table 15 (Cont.)

Unit: Baht million

Capital deduction prescribed by the BOT: - None -

Consolidated


Risk weights (%) 0 20 50 100 150 0 20 35 50 75 100 250 625 938 100/8.5%

Performing

Claims on Sovereign & Central Banks, MDBs, PSEs-Sovereign 310,067 5,519 283 4,181 174



Claims on Retail portfolios 576,853 4


Other assets 148,725 - 70,717 - Risk weights (%) 0 20 50 100 150 75


Consolidated


Risk weights (%) 0 20 50 100 150 0 20 35 50 75 100 250 625 938 100/8.5%

Performing

Claims on Sovereign & Central Banks, MDBs, PSEs-Sovereign 274,702 5,863 152 3,978 85





Other assets 127,316 - 79,722 33,326 Risk weights (%) 0 20 50 100 150 75



Table 16: Exposures Covered by Risk Mitigation Classified by Asset Type and Type of Collateral under the

Standardized Approach (SA)

Unit: Baht million

1/ Eligible financial collateral that the BOT allows to use for risk mitigation. For applying the Comprehensive approach, the values after haircut

shall be disclosed.


Eligible

financial

collateral

Guarantee

and credit

derivatives

Eligible

financial

collateral

Guarantee

and credit

derivatives

Performing

Claims on Sovereign & Central Banks, MDBs, PSEs-Sovereign 346,888 - 289,590 -

Claims on Bank, PSEs-Bank 103,626 21,541 77,473 20,996

Claims on Corporate, PSEs-Corporate 29,496 20,581 40,793 12,996

Claims on Retail portfolios 8,481 - 9,190 -

Claims on Retail mortgage loans 31 - 44 -

Other assets - - - -

Non-Performing loans 234 3,209 98 2,845

Total 488,757 45,330 417,187 36,838


Eligible

financial

collateral

Guarantee

and credit

derivatives

Eligible

financial

collateral

Guarantee

and credit

derivatives

Performing

Claims on Sovereign & Central Banks, MDBs, PSEs-Sovereign 346,888 - 289,590 -

Claims on Bank, PSEs-Bank 103,626 21,541 77,473 20,996

Claims on Corporate, PSEs-Corporate 29,842 20,581 41,317 12,996

Claims on Retail portfolios 8,745 - 9,444 -

Claims on Retail mortgage loans 31 - 44 -

Other assets - - - -

Non-Performing loans 234 3,209 98 2,845

Total 489,366 45,330 417,965 36,838

1/1/

1/1/


6. MARKET RISK

6.1 Market Risk Management

SCB and its Financial Group classify market risk

positions into trading books and non-trading books.

Trading books comprise trading transactions in the

financial markets and short-term positions held for

sale and/or trading or arbitrage, while non-trading

books mainly comprise positions from interest rate

risk management in the banking book and from

investment risk management.

6.2 Market Risk Management Policy

SCB and its Financial Group companies with material

market risk exposures are required to have a Market

Risk Policy and a Trading Book Policy or Investment

Policy for managing market risk. The policies must be

submitted to the Group Risk Management Committee

for review prior to seeking approval from boards of

directors of respective companies. These policies

must be reviewed at least once a year, or when

deemed appropriate and/or upon any significant

strategic or market change. Companies in the

Financial Group with material market risk exposure

are required to set up an independent market risk

management function responsible for measuring,

evaluating, controlling, monitoring, and reporting

market risk, as well as ensuring that market risk

exposure stays below the predetermined limits.

6.3 Market Risk Assessment

SCB and its Financial Group have adopted

appropriate statistical and non-statistical tools for

market risk assessment which depend on individual

company’s risk characteristics. These tools include

stress testing, value at risk (VaR) , position size,

sensitivity analysis, management action trigger, and

others.

SCB and its Financial Group are required to perform

stress testing for all material positions held in

portfolios. Stress testing is a methodology to quantify

potential losses on a portfolio in case of extreme yet

plausible market events. Risks from stress events,

although unlikely, can cause substantial losses and

may impact the stability of the Bank. The independent

market risk management function is responsible for

defining and reviewing market risk stress testing

methodology, performing stress testing, and reporting

stress exposure to senior management regularly.

6.4 Market Risk Limits

Market risk limits constitute a key control mechanism

to ensure that market risk exposure is aligned with

market risk appetite of SCB and its Financial Group.

Optimal limits to control market risk exposure of a

business is determined in a limit review process by

considering key factors, such as business strategy,

historical performance, market risk capital

requirement, market depth, liquidity, etc. Market risk

limits are reviewed and approved by the Board of

Directors or delegated committees of respective

companies at least once a year and/or upon any

significant strategic or market change. Market risk

limits are applied at the close of the business day and

are monitored daily. Foreign exchange net open

positions are subject to intraday limits as well as

interest rate sensitivity limits and are monitored

throughout a trading day.

6.5 Market Risk Monitoring and

Reporting

Market risk reports presenting trading risk exposure

against limits are prepared and delivered to relevant

parties including book owners and senior

management daily. Market risk exposures are

regularly reported to the Board of Directors or

delegated committees of respective companies. A

summary report of SCB and its Financial Group’s

market risk exposure is submitted to the Group Risk

Management Committee on a monthly basis.


6.6 Capital Adequacy

SCB and its Financial Group must meet the Bank of

Thailand's capital requirements for market risk using

the Standardized Approach. Effective as of December

31, 2013, SCB has obtained the Bank of Thailand’s

approval to apply the Duration Method for the

calculation of market risk capital charges for interest

rate risk and the Contingent Loss Method for foreign

exchange and equity options. The following table

shows capital requirements for market risk of the Bank

and its Financial Group as of December 31, 2019.

Table 17: Minimum Capital Requirements for Market Risk under the Standardized Approach (SA)

Unit: Baht million


31 Dec 19 31 Dec 18 31 Dec 19 31 Dec 18

Interest rate risk 4,028 3,538 4,031 3,539

Equity position risk 271 - 276 8

Foreign exchange risk 383 621 605 769

Commodity risk - - - -

Total minimum capital requirements for market risk 4,681 4,159 4,912 4,316


7. OPERATIONAL RISK

7.1 Operational Risk Management

Principles

SCB and its Financial Group recognize that

operational risk is inherent in any business and have

always considered operational risk management a

priority. This priority is more pressing in today's ever-

changing environment ranging from economic

uncertainties, increased competition, growing

complexity of products, dependency on technology, to

frequent occurrence of natural disasters, epidemics,

and political/civil unrests.

SCB’s Board of Directors requires all key business

functions to be responsible for managing their own

operational risks by using operational risk

management tools to identify, assess, control,

monitor, and report risks. Senior management has the

duty to manage operational risk within their areas of

responsibilities in parallel with implementing and

maintaining a sound internal control environment.

7.2 Governance Framework

SCB and its Financial Group have established a

governance framework for operational risk

management. The ‘three lines of defense’ principle

has been adopted for operational risk management to

ensure that SCB and its Financial Group effectively

identify, measure, assess, monitor, control, and report

operational risks. The three lines of defense are:

• 1st line of defense entails business and support

functions taking primary responsibilities for

identifying and managing risks within their own

functions and regularly assessing and reporting

the adequacy of internal controls.

• 2nd line of defense entails centralized risk

management and control functions, i.e. the

Operational Risk Management Function and

Compliance Function. These functions are

responsible for making recommendations on

policy framework, risk management process and

internal control, while also supporting, assisting,

and providing guidance to implement the 1st line of

defense for operational risk management.

• 3rd line of defense comprises mainly the internal

audit function, which is responsible for

independent verification and reviews of SCB

Group’s business processes and operations to

assure the Board of Directors and the Audit

Committee of the effectiveness of the Group’s

internal control system.

7.3 Risk Management Process and

Approaches

Because operational risk is a major risk from

conducting business, SCB and its Financial Group

place great emphasis on operational risk

management with the goal of fostering a strong risk

culture over time.

Business and support functions within SCB and its

Financial Group are responsible for managing their

operational risks with appropriate methodologies and

approaches which require risk identification and

assessment, evaluation of internal control

effectiveness, formulation of risk mitigation or

prevention plans, and execution of action plans to

ensure that operational risk is within our risk appetite

level given the nature of the business.

As part of the risk mitigation effort, SCB and its

Financial Group make use of diverse operational risk

management methodologies. In addition to the core

operational risk framework, SCB and its Financial

Group have also implemented other risk management

tools, such as risk and control self-assessment

(RCSA), key risk indicators (KRI) containing

qualitative and quantitative measurement, and

incident and loss management (ILM).

The Bank also applies international best practices to

mitigate the overall operational risk through tools such

as business continuity planning (BCP) and business

impact analysis (BIA), new product approval (NPA),

insurance management, and outsourcing/insourcing

management.


7.4 Operational Risk Report

Key functions of the Bank and Group companies are

required to regularly report operational risk to senior

management so that any key risk issues are brought

to management attention. Moreover, Group

companies are required to report their operational

risks to SCB. The Operational Risk Management

Function analyzes this risk information to prepare a

monthly report for the Group Risk Management

Committee which will then be used as input into the

Committee’s risk management decisions.



Standardized Approach to calculate regulatory capital

for operational risk. The table below shows capital

requirements for operational risk as of December 31,

2019.

Table 18: Minimum Capital Requirements for Operational Risk under the Standardized Approach (SA)

Unit: Baht million


31 Dec 19 31 Dec 18 31 Dec 19 31 Dec 18

Operational risk - Standardized Approach 17,896 17,505 18,407 18,036

Total minimum capital requirements for operational risk 17,896 17,505 18,407 18,036


8. INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)

Interest rate risk in the banking book arises from

financial instruments or other positions held by SCB

and its Financial Group for non-trading purposes

which may impact the Group’s net interest income and

economic value due interest rate fluctuations. Four

main sub-types of interest rate risk are defined for the

purposes of these principles:

• Repricing risk is the risk from maturity/timing

mismatches of the Bank’s assets and liabilities,

which cause interest rates at reset to differ due

to yield curve movements. For example,

assuming all other factors are constant, if the

Bank’s assets can be repriced faster than

liabilities (a positive gap), interest margins

increase when interest rates rise. On the other

hand, if the Bank’s ability to reprice assets is

slower than liabilities (a negative gap), then

interest margins narrow when interest rates rise.

• Yield curve risk arises from interest rates at

different maturities changing differently.

• Basis risk occurs when the Bank's assets and

liabilities are based on different reference

interest rates, e.g. fixed-deposit rates, interbank

lending rates, THBFIX interest rates. Therefore,

any change in reference rates will affect interest

rates tied with assets and liabilities differently.

• Options risk arises from implicit and explicit

options in the Bank’s assets and liabilities and

off-balance sheet items where exercising these

options might affect the Bank’s revenue and

costs. For example, an option on three-month

deposit that allows early withdrawal before

maturity will, if exercised, cause the Bank’s costs

to rise sooner than expected.

8.1 Governance

For the purpose of managing interest rate risk in the

banking book, SCB and its Financial Group divide

companies into two groups:

• SCB and companies with material interest rate

risk in the banking book i.e. Banking business.

• Companies with non-material interest rate risk

in the banking book i.e. Securities, asset

management, debt management, and other

supporting businesses.

Interest rate risk in the banking book management

approaches may differ from one company to another,

depending upon the company’s size, along with scope

and complexity of transactions. Furthermore, the

company’s own risk appetite level, and local rules and

regulations are also taken into consideration.

Companies with material interest rate risk in the

banking book exposure are required to set up an

independent risk management function responsible

for measuring, evaluating, controlling, monitoring, and

reporting interest rate risk in the banking book, as well

as ensuring that interest rate risk in the banking book

exposure stays below the predetermined limits.

SCB has established the Management Policy for

Interest Rate Risk in the Banking Book which has

been approved by the Board of Directors. The Assets

and Liabilities Management Committee is responsible

for ensuring compliance with such policy.

Other relevant functions include the Group Treasury

Function, which manages the overall interest rate risk

in the banking book, and the Balance Sheet

Monitoring Unit under Finance Function, which

monitors and controls risk through impact assessment

on Net Interest Income (NII) and Economic Value of

Equity (EVE).

8.2 Risk Assessment and Control

The Bank sets risk limits for IRRBB by measuring

impact of net interest income and economic value of

equity (EVE) to interest rate fluctuations under stress

situations. To monitor IRRBB, the Bank produces

repricing gap reports for risk analysis and risk

assessment. This analysis, assessment, and risk

management strategies are then reported to the

Assets and Liabilities Management Committee

(ALCO) for further actions. For asset and liability

structure, the Bank relies upon budgeting target,

together with various derivative transactions in order


to hedge against residual interest rate risk. Risk

analysis reports are submitted to the Assets and

Liabilities Management Committee, the Risk

Management Committee, the Risk Oversight

Committee, and the Board of Directors on a regular

basis.

The Bank measures the risk of interest rate

fluctuations by measuring the impact on net interest

income and economic value of equity (EVE) on a

monthly basis for the Bank and on an annual basis for

the SCB Financial Group.

At the end of December 2019, a 1% interest rate

increase would have lowered the Bank’s net interest

income by Baht 1,380 million or 1.43% of target net

interest income. For the SCB Financial Group, net

interest income would have declined by Baht 1,346

million or 1.40% of target net interest income

Table 19: Impact on Net Interest Income in the Event that Interest Rates Rise by 1%

Unit: Baht million

Table 20: Impact on Economic Value of Equity in the Event that Interest Rates Rise by 1%

Unit: Baht million


Currency 31 Dec 19 31 Dec 18 31 Dec 19 31 Dec 18

THB (1,250) (2,380) (1,219) (2,341)

USD (222) (64) (219) (57)

EURO and other foreign currencies 92 82 92 82

Total impact on net interest income (1,380) (2,363) (1,346) (2,317)

% of target net interest income -1.43% -2.60% -1.40% -2.54%


Currency 31 Dec 19 31 Dec 18 31 Dec 19 31 Dec 18

THB (14,369) (14,722) (14,369) (14,710)

USD (334) (249) (334) (249)

EURO and other foreign currencies (7) 19 (7) 19

Total impact on economic value of equity (14,710) (14,951) (14,710) (14,940)

% of total capital -4.33% -4.29% -3.92% -4.03%


9. LIQUIDITY RISK

Liquidity risk is the risk that SCB and its Financial

Group may not be able to meet their obligations as

they fall due, because of an inability to realize assets

or to cover funding requirements at an appropriate

price, thus resulting in losses to the Bank.

9.1 Governance

For liquidity risk governance, SCB and its Financial

Group separates companies into two groups:

• SCB and companies with material liquidity risk

i.e. Banking, securities, asset management.

• Companies with non-material liquidity risk i.e.

Debt management and other supporting

businesses.

SCB and companies with material liquidity risk

develop their own liquidity risk management policies

and guidelines. Companies may pursue different risk

management approaches depending on size, nature

of business, as well as local regulations and rules

required by regulatory agencies, including their own

risk appetite levels.

In order to manage liquidity risk, SCB has established

the Liquidity Risk Management Policy. The policy has

been approved by the Board of Directors, with the

Assets and Liabilities Management Committee taking

an oversight responsibility to ensure compliance with

the policy. The Group Treasury Function is

responsible for managing the overall liquidity risk

while the Balance Sheet Monitoring Unit, Finance

Function, is responsible for monitoring and controlling

liquidity risk.

9.2 Liquidity Coverage Ratio (LCR)

An important lesson learned from the 2008 financial

crisis is that not only inadequate capital, but liquidity

problem can also cause tremendous damages to

financial and real sectors. In response, the BCBS

introduced new liquidity standards under Basel III,

namely Liquidity Coverage Ratio (LCR) and Net

Stable Fund Ratio (NSFR), to promote strong liquidity

positions among commercial banks both short-term

and long-term. In Thailand, the BOT has prescribed

the LCR standard in line with the BCBS’s guidelines

since January 1, 2016.

The LCR requirement aims to ensure that a

commercial bank has an adequate stock of

unencumbered High-Quality Liquid Assets (HQLA) to

meet its liquidity needs, specifically to cover total net

cash outflows for a 30-calendar day severe liquidity

stress scenario according to the BOT’s computation

methodology. The intent is to allow commercial

banks, along with the BOT and relevant regulators,

sufficient time to identify and implement appropriate

measures to address the situation.

The LCR components:

I. High-quality liquid assets (HQLA)

HQLA under the LCR requirement must have the

following characteristics:

• Fundamental characteristics such as having low

risk, straightforward valuation; and

• Market-related characteristics such as being

actively traded, having low volatility, and attracting

high demand during a crisis

Additionally, HQLA is categorized into two levels

according to their convertibility under stress

conditions.

• HQLA Level 1 generally include cash, central

bank reserves, and certain marketable securities

issued or backed by governments and central

banks which have the highest ratings and the

highest liquidity.

• HQLA Level 2 are considered lower tier in terms

of asset quality and liquidity. This level of assets

is further sub-categorized into Level 2A and Level

2B which consist of lower-rated government

securities, and corporate bonds. Level 2 assets

LCR =

High-quality liquid assets

Total net cash outflows


are subject to a range of haircuts as specified by

the BOT. For a given commercial bank, Level 2

assets and Level 2B assets may not exceed 40%

and 15% respectively of the bank’s aggregate

HQLA.

In addition, HQLA must meet certain operational

requirements to ensure timely convertibility through a

secondary market either by outright or repo

transactions during periods of financial stress.

Commercial banks should ensure that their HQLA

portfolios are properly diversified even though certain

classes of liquid assets are likely to remain liquid both

under normal and stressed conditions. Banks should

also impose limits to avoid concentration risk with

respect to asset types, issue and issuer types, and

currency within each asset class.

II. Total net cash outflows

Total net cash outflows are defined as total expected

cash outflows less total expected cash inflows in a

specified stress scenario for the subsequent 30

calendar days. In this computation, total expected

cash inflows are capped at 75% of total expected cash

outflows.

• Total expected cash outflows are the sum of

outstanding balances of various categories of

liabilities and off-balance sheet commitments

multiplied by their expected run-off or drawdown

rates over the next 30 days under severe liquidity

stress scenario. Cash outflows can be categorized

into 5 types as follows:

- Retail deposits and borrowings

- Unsecured wholesale funding

- Secured funding

- Contractual obligations

- Non-contractual obligations

• Total expected cash inflows are the sum of

outstanding balances of various categories of

contractual receivables multiplied by their

expected flow-in rates over the next 30 days under

severe liquidity stress scenario. In this

computation, total cash inflows are capped at 75%

of total expected cash outflows. Cash inflows can

be categorized into 3 types as follows:

- Secured lending

- Fully performing loans

- Contractual obligations

Minimum requirement as prescribed by

the BOT

A commercial bank must maintain its LCR above 90%

in 2019 with a 10% per annum step-up until reaching

100% on January 1, 2020.

LCR report

This LCR disclosure presents information on a bank-

only basis and all data are simple averages of month-

end observations of the previous quarter in Baht

currency. Specifically, the Bank’s average LCR,

HQLA, and total net cash outflows for the 4th quarter

of 2019 was a simple average of month-end LCR,

HQLA, and total net cash outflows, respectively, in

October, November and December 2019 (3 months).

Liquidity Coverage Ratio (LCR)

Under the new requirement, the Bank has been able

to maintain its LCR well above the regulatory

requirement on both bank-only and consolidated

basis.

The Bank’s average LCR for the 4th quarter of 2019

was 203%. This level exceeded both the Bank’s limit

and the BOT’s minimum requirement at 90% in 2019,

showing the Bank’s ample liquidity.

High-Quality Liquid Assets (HQLA)

The average HQLA for the 4th quarter of 2019 was

Baht 688,586 million, of which 99.3% were level 1

assets mainly consisting of government bonds and

BOT debt instruments. It is the Bank’s policy to hold

high quality liquid assets unencumbered by legal,

regulatory, or operational restrictions for use to obtain

funding as cushion and protection against a range of

liquidity stress scenarios.

Total net cash outflows

Total expected cash outflows

Total expected cash inflows= -


Total net cash outflows (Net COF)

The average net cash outflows over the next 30 days

for the 4th quarter of 2019 was Baht 339,831 million.

Most of the estimated cash outflows were from

withdrawal of retail and wholesale deposits using the

BOT’s run-off rates. Meanwhile, most of the estimated

cash inflows were from repayment of normal loans

using the BOT’s inflow rates.


The Bank manages and controls liquidity risk to

ensure adequate liquidity and sufficient future cash

flows to cover its activities under both normal and

stress situations by using cash flows report or liquidity

gap report to monitor and control the Bank’s overall

liquidity risk. The Bank’s policy is to maintain Liquidity

Coverage Ratio (LCR), Net Stable Funding Ratio

(NSFR) and the liquidity ratio (liquid assets as a

percentage of total deposits) at an appropriate level

and to monitor net cash outflows over different time

horizons to ensure that the Bank will be able to meet

its liquidity needs on a timely basis.

Additionally, the Bank conducts stress testing on a

regular basis under the BOT’s scenarios and the

Bank’s own scenarios. Stress test results are

incorporated into the Bank’s contingency funding plan

which establishes scenario-specific action plans and

explicit roles and responsibilities for liquidity

management in the event of crisis.

The Bank has a policy to maintain its daily liquidity

ratio of at least 20%, measured as total liquid assets

to total deposits. At the end of December 2019, the

Bank’s liquid assets represented 31% of total

deposits.

Table 21: Liquidity Coverage Ratio (LCR)

Unit: Baht million

Table 22: LCR data for comparison 3/

Unit: Percentage

1/ Calculation based on a simple average using month-end data for each quarter. For example, Q4 data were calculated by taking a simple

average of month-end data in October, November and December.

2/ Data of item 3 (LCR) might not be equal to item 1 (Total HQLA) divided by item 2 (Total net cash outflows).

3/ LCR data will show Q1-Q2 for the first half period and Q3-Q4 for the second half period.

Bank-only Q4/2019 Q4/2018

(Average) (Average)

(1) Total HQLA 688,586 545,948

(2) Total net cash outflows 339,831 367,449

(3) LCR (%) 203 149

Minimum requirement by the BOT (%) 90 80

1/ 1/

2/

Bank-only 2019 2018

(Average) (Average)

3rd Quarter 165 139

4th Quarter 203 149

1/ 1/


10. EQUITY INVESTMENTS IN THE BANKING BOOK

SCB and its Financial Group maintain long-term

equity investments in the banking book, which

comprise:

• Equity investments intended mainly for generating

dividend yield and/or long-term capital gains from

changes in equity prices and/or for strengthening

business alliances in some cases.

• Strategic equity investments with growth potential

and/or those intended for supporting the

businesses of the SCB Financial Group.

SCB, as the parent company of the Financial Group,

has established the Group's Risk Management Policy

to cover risk management of Equity Investments. The

Policy states that equity investments are permissible

only to companies that engage in the financial

business under regulation of supervisory bodies and

those permitted to invest.

10.1 Governance


approval authority for investment at a committee level

and/or individual executive level. Investment approval

authority is approved by SCB’s Board of Directors

and/or each company’s board of directors.

Investment approval authority varies by transaction

type, risk attribute, and investment value.

The Equity Investment Management Unit under

Finance Function has key duties to manage equity

investments of the Bank and monitors its Financial

Group companies to ensure compliance with policies

and guidelines. The Equity Investment Management

Unit oversees, supervises, and controls equity

investment transactions to be in line with relevant

rules and regulations, including internal and external

factors that may affect SCB and its Financial Group.

In addition, the Equity Investment Management Unit

is responsible for proposing approval requests and

reporting equity investment transactions to the Equity

Investment Management Committee, the Executive

Committee, and/or the Board of Directors in

accordance with approval authorities.

Furthermore, SCB and its Financial Group also

monitor and control investment risks by setting

investment policies and risk ratios related to

investment transactions, through either the Group

Risk Management Committee or, if applicable, the risk

management committees of companies in the

Financial Group in accordance with the specified risk

management structure.


To comply with the new financial reporting standards,

TFRS 9, SCB and its Financial Group estimate the fair

value of equity investments based on type of each

investment.

Market risk limit is also expanded to include equity

investments to handle impacts of equity investments

in accordance with TFRS 9.

Moreover, a review of equity investment portfolio is

carried out on an annual basis. The criteria to evaluate

and monitor each investment is set to determine an

appropriate investment strategy.



Standardized Approach to calculate regulatory capital

for equity exposures in the banking book. The

following table shows SCB and its Financial Group’s

capital requirements for equity exposures in the

banking book as of December 31, 2019.


Table 23: Minimum Capital Requirements for Equity Exposures in the Banking Book

Unit: Baht million


31 Dec 19 31 Dec 18 31 Dec 19 31 Dec 18

Equity exposures - Standardized Approach (domestic and foreign)

Listed equity exposures

Cost value 1,270 5,690 1,291 5,711

Market value 952 6,785 972 6,805

Others 11,346 23,482 4,411 48,191

Total gains (losses) arising from sales during the period 65,285 2,637 27,404 2,637

Increase (decrease) in value from remeasuring available-for-sale investments (319) 1,095 (319) 1,094

Total minimum capital requirements 964 3,161 405 7,963


11. STRATEGIC RISK

Strategic risk refers to risks on financial performance

(e.g. revenues, profits, capital), reputation and

stability of the Bank and its Financial Group both at

present and in the future that arise from changes in

business environment, poor strategic decisions,

ineffective strategic implementation, or untimely

responses to industry, economic, and technological

changes. The Board of Directors sets the Strategic

Risk Management Policy as a framework to formalize

and provide a structured approach to manage

strategic risk. Strategic risk is managed through

strategy process and strategic risk assessment. The

strategy process – including strategic planning,

alignment and change management, implementation

and monitoring, performance evaluation and

feedback – ensures adequate input into strategy

formulation and implementation. Strategic risk

assessment, which is part of the Bank’s risk

materiality assessment framework, is performed to

monitor potential strategic risk arising from both

external and internal factors.

The Strategy Group currently supports the Board of

Directors and senior management in formulating and

reviewing SCB Group’s strategies as well as

recommending corrective actions (if required). Also,

the Strategy Group is responsible for conducting

strategic risk assessment on a regular basis.


12. REPUTATIONAL RISK

Reputation is of paramount importance for every kind

of business, especially for financial businesses, which

can only be built gradually by earning confidence and

trust for the business over a long period of time. As

the old adage says, it takes years to build one’s

reputation, and only seconds to destroy it.

The Bank recognizes the importance of reputational

risk and therefore has developed reputational risk

guidelines and process to promote a risk culture that

supports proactive risk management. The guidelines

and process apply to all companies in SCB Group

whereby each company is expected to implement

reputational risk management in their business

operations to ensure that no internal or external

activity (whether revenue generating or not) will

impact their reputation.

The reputational risk guidelines apply to SCB and its

Financial Group. Companies in SCB Group with

material reputational risk are encouraged to establish

risk mitigation and prevention process. Companies

assessed with non-material reputational risk must

report any incidents that may jeopardize the

company’s reputation to their senior management for

further mitigation and preventive actions.

For any business transactions or issues with potential

reputational risk, the management concerned must

seek approval from the Executive Committee prior to

participating in such transactions. The Chairman of

the Executive Committee may escalate the matter to

the Board of Directors if necessary.

The Marketing Function is responsible for

coordinating with business and functional units within

the Bank and its Group companies to identify and

monitor reputational risk factors. This Function also

conducts an assessment of the overall reputational

risk and reports reputational risk issues to the senior

management and related committees.


13. TECHNOLOGY RISK

Today’s technology is changing rapidly. Failure to

adapt or lack of a long-term plan to accommodate

changes may result in the Bank’s market share loss.

Specifically, the Bank may not be able to serve

customers effectively in terms of meeting their product

or pricing needs. Moreover, technology risk may also

cause business and service disruptions which may

lead to lower profitability and market share for the

Bank.

Because of these wide-ranging and inter-related

impacts, the Bank has placed a priority on technology

risk management. The Bank adopts a technology risk

management framework that meets global standards

with the following key components; 1. Risk

Identification, 2. Risk Assessment, 3. Risk Response,

and 4. Monitoring and Reporting.

Furthermore, the Bank recognizes and has taken

steps to build and enhance the organization’s risk

culture, particularly for technology risk, by educating

and training employees, managing technology risk

database and knowledge to be accurate and up-to-

date, applying risk management tools that meet

international standards along with continuously

improving its risk management framework to be in line

with global practices.

Moreover, the technology risk management process

enables the Bank to adequately manage technology

risk at both strategic and operational levels.

At the strategic level, the Bank aims to build a modern,

flexible, and secure technology architecture to

support a wide variety of customer service platforms

along with providing data management capability for

marketing and credit management analysis.

At the operational level, the process covers assessing

organizational structure on the technology side;

technology people; system acquisition, development

and maintenance; accuracy and security of

technology systems and important data (e.g.

customers’ information); system’s capacity to

accommodate high volume transactions, as well as

service continuity during crises and IT vendor

management. These components of technology risk

management process will add to the Bank’s

competitiveness and profitability.


14. PEOPLE RISK

People are vital resources in the banking business.

Not only must the Bank provide suitable products and

services that meet customer needs, there are also

rules and regulations on customer protection which

the Bank and its employees must strictly obey to avoid

market misconduct risk. Therefore, the Bank needs

knowledgeable and capable people to help achieve its

business goals in a sustainable manner.

The Bank recognizes the importance of human

resources which face significant and constant

challenges in today’s environment. A key challenge is

the advent of new technologies which may replace

existing service delivery platforms and put pressure

on an organization to reform or transform itself. Such

broad-scale organizational change raises demand on

human resources both in terms of quality and quantity.

Specifically, an organization requires knowledgeable,

well-rounded, and adaptable people to drive its

transformation efforts.

The Bank manages such risks by implementing

several key initiatives which include:

• Building a risk culture in which risk awareness

and ownership are the norm and risk

prevention and mitigation are the responsibility

of all employees

• Establishing SCB Academy to build additional

skills and knowledge necessary for future

business changes, such as knowledge in

product areas and data analytic skills for

business analysis and planning

• Separation of sales and services functions

• Providing attractive career paths for employees

to ensure business success and sustainable

growth

• Providing safe and conducive work

environment to foster employee engagement

with the Bank

Governance

Boards of directors of the Bank and Group companies

shall ensure that effective people risk management is

implemented with periodic reviews of the overall risk.

Senior management is responsible for managing

people risks within their areas of responsibilities and

establishing effective control as well as coordinating

with the People Function and other relevant functions.

People Function, business functions, and relevant

supporting functions are responsible for identifying

people risks using appropriate analyses given the

function’s inherent business complexity with regular

updates/reviews of potential risks.

For people risk management, the Bank and its

Financial Group also apply the ‘three lines of defense’

principle used in operational risk management to

ensure effectiveness in people risk management and

internal control.


15. MODEL RISK

The Bank is fully prepared to deal with changes which

may affect its business operations. It has developed

models used for business analysis and decision

making, which may trigger model risk, such as models

that give unverifiable or inaccurate results, or models

adopted for irrelevant purposes. The natures of such

risks are divided into 4 categories, as follows:

• Input data and risks arising from low quality

input data, data not yet ready, insufficient

historical data or size of data, and others.

• Methodology which may arise while models are

being developed or data processing, including

application of irrelevant theories, models

learned from the past which may not be applied

in the current context, or inappropriate

assumptions, etc.

• Implementation arising from incorrect

implementation or inappropriate IT

environments affecting results derived from

calculation.

• Usage which may arise from the usage of

models beyond intended purposes or scope of

model constraints.

To minimize potential model risks, the Bank has laid

out a Model Risk Management Policy to be adopted

as an operational framework, comprising a Model

Risk Governance Framework and Model Validation at

appropriate timing to manage and control potential

model risks.

15.1 Model Risk Management

Structure

The Bank has established a unit responsible for Model

Risk Management to have a balance of authority and

independently work to validate models and to

increase the effectiveness of model usage as the

second line of defense and serve to offer consultation,

support, and validation after the first line of defense.

Model risk oversight covers the validation of models

using both quantitative and qualitative approaches to

ensure that the usage of models achieves the

expected target, and controls have been in place

according to model governance to prevent any

misuse of models and minimize model risks. The

Model Risk Management Unit is incorporated as part

of the Risk Management Function, as follows:

• Model Governance is responsible for

overseeing model risk management and other

relevant conceptual frameworks, collecting

details and numbers of all models employed by

the Bank on the Model Inventory. The unit will

oversee the development and implementation

of models to align with model governance

according to model life cycles and make a plan

for appropriate resources required to validate

models.

• Model Validation is responsible for validating

models independently and effectively under the

scope of the Model Risk Management Policy to

ensure that models work as expected and in

line with design and usage purposes.

Validation of model effectiveness shall indicate

any possible constraints or weaknesses of

models and assess any potential impacts

arising from such models.

15.2 Model Risk Management Policy

and Guideline

The Model Risk Management Policy lays out main

components to manage and control model risks,

supporting the Model Risk Management Framework

of the Bank. Model tiering has been determined to

manage and control model risks according to their life

cycles, including principles and procedures to validate

models according to acceptable standards. The

Model Risk Management Committee has been

formed to validate model risk and oversee all models

used within the Bank and to validate that the Model

Risk Management Framework is effective as

expected and to approve models and model test

results.


15.3 Model Risk Monitoring and

Control

Approval of models to perform in accordance with the

predetermined standard. In some cases where

models are approved with conditions, model

monitoring will be conducted according to schedule to

ensure that the employed models are effective or

require any mitigation, actions or compensating

controls to minimize any potential risks arising while

using such model.

15.4 Model Risk Report

The policy requires that model risks, risk status, and

the effectiveness of risk management shall be

reported to the Model Risk Management Committee,

Risk Management Committee, and the Risk Oversight

Committee.


APPENDIX

Details of companies within SCB Financial Group (Solo and Full Consolidation)

Solo Consolidation Group Business Type Non-Solo Consolidation Group Business Type

Siam Commercial Bank PCL Banking SCB Securities Co., Ltd. Securities

Cambodian Commercial Bank Co., Ltd.

Banking SCB Asset Management Co., Ltd. Asset management

Rutchayothin Asset Management Co., Ltd.

Asset management

Mahisorn Co., Ltd. Property management

SCB Abacus Co., Ltd. Data analytics and digital lending

SCB Training Centre Co., Ltd. Training center

SCB Plus Co., Ltd. Collection

Digital Ventures Co., Ltd. Financial technology

SCB Protect Co., Ltd. Non-life insurance broker

SCB-Julius Baer Securities Co., Ltd. Securities

SCB-Julius Baer (Singapore) Pte. Ltd.

Securities

The structure of the Consolidated Supervision Group can be divided into two levels:

(1) Solo consolidation which includes the Bank and its subsidiaries whose businesses involve lending or lending-related

transactions for which the Bank holds more than 75% of issued and paid-up shares.

(2) Full consolidation which includes the parent company and subsidiaries categorized as solo and non-solo consolidation

subsidiaries, whereby non-solo consolidation subsidiaries mean any of the Bank’s subsidiaries engaging finance or

supporting business for which the Bank holds more than 50% of issued and paid-up shares with the Bank having

management control over the subsidiary’s business. (The Bank is assumed to have management control over a

subsidiary’s business if the Bank holds more than 20% of issued and paid-up shares unless proven otherwise.)

the siam commercial bank pcl · pillar i provides guidelines on minimum capital requirements for...

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