Contents 7 Message from the Board of Directors 30 Economic Conditions and Industry Review 36 Performance and Plans 52 Corporate Social Responsibility 60 Risk Management and Risk Factors 68 Corporate Governance Report 92 Management Discussion and Analysis 113 Financial Statements and Supplementary Information Financial Highlights Profitability Record net profit in 2010 24 24.2 21.4 21 20.8 18 2008 2009 2010 +16.6% yoy Net profit (Consolidated, Baht billion) Asset Quality Significant improvement in asset quality as the NPL ratio 120% 6% fell and corresponding coverage ratio increased 5.14% 4.41% 3.25% 90% 3% 107.5% 95.4% 83.3% 60% 0% 2008 2009 2010 NPL reserve coverage (%) NPL (%) 2 Annual Report 2010 Loan Growth Record loans outstanding, with growth across all business segments 1,100 1,059 940 900 917 700 2008 2009 2010 +12.6% yoy Loans (Consolidated, Baht billion) Market Capitalization 400 Highest market capitalization among Thai commercial banks 352 295 250 164 100 2008 2009 2010 +19.3% yoy Market Capitalization (Baht billion) Annual Report 2010 3 SCB’s 1,000th Branch Designed in an English garden theme, SCB’s 1,000th branch at the Paradise Park Shopping Center provides an invigorating change from the normal branch banking experience. “ Customers at our new garden décor setting at the 1,000th branch of the Bank find it refreshingly different. The branch provides an aesthetically pleasing environment for normal banking transactions and sets a unique milestone (the first bank in Thailand with over a 1,000 branches) in our century-plus history of serving Thais from all walks of life.” Pattinee Kokpaisansukwattana Branch Manager, Neungpan (1,000th) Branch Dr. ViCHit SurAPHonGCHAi Mr. AnAnD PAnyArACHun MrS. KAnniKAr CHALitAPorn Chairman of the Executive Chairman of the Board President Committee From SCB's art collection: 'Arna Chakrawan' ('Land of the Universe'), by Panya Vijinthanasarn, illustrating the ancient Thai concept of the cosmos based on Thai and Buddhist mythology. 6 Annual Report 2010 Message from the Board of Directors Dear Shareholders, As we look back at 2010, we see a landscape of sharp contrasts in Thailand: • On the one hand, the Thai economy regained its momentum from the recession of 2009, caused largely by the global financial crisis of late 2008. The economy expanded by 7.8% in 2010; driven by the rapid pace of export growth, particularly in manufacturing and agriculture, with overall export levels rising by 28% in US dollar terms. Further, it was boosted by the rising level of private consumption and investment which rose by 5% and 14%, respectively. • On the other hand, it is hard not to mention the political unrest in Thailand that characterized much of the period between March to May, culminating in scenes of violence rarely seen in the Kingdom. Even as an ostensible level of normality has returned, the causes of this discord remain unresolved and simmer not far below the surface. Yet, in these far from benign circumstances, Thailand demonstrated its amazing economic resilience in 2010 and, in economic terms, powers ahead. A sign of the returning confidence was in the sharp growth in tourist arrivals towards the second half of the year, reaching a record high of 15.8 million arrivals in 2010. Indeed, from a macro-economic perspective, Thailand enters the new decade with solid and enviable fundamentals – a sound fiscal position, modest level of inflation and relatively moderate asset prices. Annual Report 2010 7 A record year for SCB Corporate Social responsibility (CSr) 2010 net profit reached a historic high of Baht 24.2 billion, a growth The Bank regards CSR activities as a core element of its overall vision to of 16.6% compared to 2009. Equally, ROE and ROA were robust at 16.4% be ‘the bank of choice’. A Board committee spearheads the Bank’s CSR and 1.7%, respectively. The increase in net profit was attributable to both program with a strong focus on ‘youth Development and Learning higher non-interest income and net interest income as well as lower Promotion’. provisions following the sharp improvement in the Bank’s asset quality. The Siam Commercial Foundation drives the operational CSR activities, The Bank exceeded its loan targets and recorded a strong loan growth particularly the two core projects. The first, “Youth Development level of 12.6% yoy for 2010. This growth arose from all business segments through the Learning of Sufficiency Economy” is set to complete in 2011 – Wholesale, SME, and Retail and reflected the soundness with which the establishment of 84 learning centers across the country, and the the Bank has executed its new business strategies. Given the strong loan second, is a project for “Knowledge Management for the Youth in 4 Regions”. growth, albeit skewed towards the latter half of the year, and improving The Foundation also has a significant role in coordinating with other net interest margins, net interest and dividend income rose 6.0% yoy. organizations to build a network to supplement on-going projects and to exchange ideas and knowledge to promote education and quality of At the same time, non-interest income rose 20.6% yoy, principally the life of the younger generation. result of robust growth in fee and service income (+19.4% yoy) from the card business, bancassurance products, and loan-related activities. The Bank’s flagship project remains the “SCB Challenge”, which has This growth was boosted by one time gains in investment, mainly as just completed its 5th successful year. This initiative continues to gather the result of the divestment of a non-core investment of the Bank. momentum in schools and universities across Thailand and in 2010 Importantly, in 2010, non-interest income accounted for 42% of total attracted a record number of participants. income (compared to 39% in 2009), while fee income made up 29% of total income (compared to 27% in 2009). This shift is in line with the Bank’s Finally, the Bank actively encourages its personnel to manage or medium-to-long-term objective of having non-interest income account participate in, on a volunteer basis, the Bank’s CSR projects. for more than 40% of total income. The Bank was successful in containing costs while still investing for business growth. 2010 operating expenses grew modestly by 8.6%, and the cost-to-income ratio declined from 51.5% in 2009 to 50.0%. The Bank was able to sharply improve its asset quality, as manifested by the lower nPL ratio of 3.25% (compared to 4.41%) at the end of 2009 – the lowest NPL level post the Asian economic crisis. Consequently, the Bank reduced its provisioning levels, while the NPL coverage ratio rose to 107.5% at the end of 2010 compared to 95.4% at end 2009. This favorable result was supported by the Bank’s proactive procedures to restrict new NPL formation and facilitate more effective NPL workouts. The total capital funds remained solid (Tier 1 and Tier 2) of the Bank, and as of December 31, 2010 were at a high of 15.5% of total risk-weighted assets, representing Tier-1 capital of 11.6% and Tier-2 capital of 3.9%. (The aforementioned ratios do not take into account the 2H10 net profit. Should the 2H10 net profit be taken into consideration, total capital ratio and Tier 1 capital ratio would be 16.7% and 12.8%, respectively). This strong capital base positions the Bank to withstand any unexpected contingencies that may arise and, at the same time, supports future growth. 8 Annual Report 2010 Key Developments at the Board of Directors Changes in Board composition: In March 2010, the Board appointed Mr. Robert Ralph Parks as an independent director to fill the seat vacated The Board believes that the adoption of best corporate governance by Mr. Peter Seah Lim Huat’s resignation. In addition, in January 2011, practices will enhance shareholder value. In 2010, the focus of the the Board appointed Mr. Thevan Vichitakul as a director, representing Board was to review the Board’s and Board Committees’ overall roles the Ministry of Finance, to fill the seat vacated by Dr. Areepong Bhoocha- and responsibilities to enhance their efficiency in governing the Bank’s Oom’s resignation. operations and also to achieve a higher standard of corporate governance practices. Key activities in 2010 included: the road Ahead • Implemented a revised Board Committee’s structure: The Thai economy is projected to maintain its current upward momentum and grow at around 4-5% in 2011. Yet, significant risks to this projection • Formed the Nomination, Compensation and Corporate Governance remain. In particular, with slowing import and growth levels in many Committee, by merging the existing Compensation Committee major economies, a slowdown in exports and GDP growth in 2011 is and the Nomination and Corporate Governance Committee. likely. In addition, there are clear signals that a tighter monetary policy to curb inflation will be adopted by the regulators and this may dampen • Plan to propose to the shareholders to approve a new structure credit demand. Finally, domestic political uncertainty and the relatively of the Executive Committee to increase flexibility and efficiency of fragile state of a few major global economies pose an ongoing threat the management’s operations and decision making. to economic growth in 2011. • Amended the Board Charter and the Nomination, Compensation, and The SCB Group will pursue its healthy strategic course of sustainable and Corporate Governance Committee Charter to align with the business profitable growth. Most importantly, the Bank will ensure that thestrong operations of the Bank and to meet regulatory requirements. esprit de corps within the Bank is further enhanced through giving priority to the development of the capabilities of the employee base – as this is • Established a guideline on the tenure of directors to foster greater the bedrock of the Bank’s competitive edge.