Annual Report 2015 Contents
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ANNUAL REPORT 2015 CONTENTS MESSAGE FROM THE BOARD OF DIRECTORS 4 BOARD OF DIRECTORS 8 ECONOMIC CONDITIONS AND INDUSTRY REVIEW 21 PERFORMANCE AND PLANS 24 RISK MANAGEMENT AND RISK FACTORS 40 CORPORATE GOVERNANCE REPORT 48 MANAGEMENT DISCUSSION AND ANALYSIS 75 FINANCIAL STATEMENT AND NOTES 101 SUPPLEMENTARY INFORMATION 208 The annual report is part of a set that includes the sustainability report OUR VISION TO BE THE BANK OF CHOICE FOR OUR CUSTOMERS, SHAREHOLDERS, EMPLOYEES AND COMMUNITY OUR MISSION TO BE THE BEST UNIVERSAL BANK IN THAILAND 2015 FINANCIAL HIGHLIGHTS PROFITABILITY NIM / COST OF DEPOSITS The fall in 2015 net profi t was a result of the substantial higher NIM dropped year-on-year due to the lower yield on earning additional provisions relating to SSI, partly off set by one-time assets following the policy rate cuts. The decline was partly gains from the sale of equity investment. off set by lower cost of deposits. NET PROFIT NET INTEREST MARGIN AND COST OF DEPOSITS (%) (Consolidated, Baht billion) Net Interest Margin (%) Cost of Deposits (%) -11.5% yoy 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 * Excluding Baht 5.1 billion one-time gain on SCB Life. If included, 2011 net profi t would be Baht 36.3 billion. ** Following the adoption of deferred tax accounting in 2013, the prior year amounts for net profi t have been restated. Before such restatement, 2012 net profi t would be Baht 40.2 billion. ASSET QUALITY MARKET CAPITALIZATION An increase in non-performing loans ratio was mainly from Following a sharp drop in the SET listed stocks in 2015, the the default of one large corporate customer. However, the shares of SCB also dropped in tandem. Yet, SCB’s market loan loss reserve coverage remains adequate. capitalization remains the highest among Thai financial institutions NON-PERFORMING LOANS (%) MARKET CAPITALIZATION* AND RESERVE COVERAGE (%) (Baht billion) (Consolidated) Reserve Coverage (%) NPL (%) 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 * Calculated by using share price at the last trading day of each year ANNUAL REPORT 2015 3 MESSAGE FROM THE BOARD OF DIRECTORS Mr. Yol Phokasub Mr. Anand Panyarachun Dr. Vichit Suraphongchai Mr. Arthid Nanthawithaya President Chairman of the Board Chairman of the Chief Executive Offi cer Executive Committee and Deputy Chairman of the Executive Committee 4 ANNUAL REPORT 2015 DEAR SHAREHOLDERS, 2015 turned out to be yet another challenging year for farm goods. The Stock Exchange of Thailand’s key index Thailand’s economy and its banking industry. GDP growth was well tumbled 14% during the year, as capital fl owed out of the emerging below the expectations at the start of the year and a variety of markets in the expectation of rising interest rates in the U.S.A. adverse factors, locally and off -shore, stressed the exporters, SMEs, farmers and many of the low-to-middle income urban households. To mitigate the weak economic conditions, the government initiated fiscal measures to stimulate consumption and For the Bank, too, the year brought its share of disappointment, investment. Throughout 2015, the military-appointed particularly as two large customers in the steel industry government managed to sustain a reasonably stable socio- (Sahaviriya Steel Industries in Thailand and its affi liate in the political environment in contrast to the political upheaval that had UK) turned delinquent in the third quarter, with a consequent culminated in a coup in the previous year. Yet, despite the stability, large increase in credit costs and sharp drop in quarterly net the economy remained sluggish for most of the fi rst half but the profi t. Further, in the fi rst quarter, there was a fi re at the main stimulus measures in the second half, particularly towards the Head Offi ce building resulting in the Bank’s main building being end of the year, provided a much needed boost to the economy. declared off -limit to all personnel for a few weeks. While much of physical loss would be covered by the insurers, there was 2015 FINANCIAL RESULTS inevitable disruption to the Bank’s normal operations. Also, in the fi rst quarter, there was a major fraud at King Mongkut Amid the weaker than expected economic conditions and Institute of Technology, Ladkrabang (KMIT’L) with an underlying the consequent deterioration in asset quality together with conspiracy to embezzle funds from its accounts maintained signifi cantly higher credit costs, the Bank’s net profi t declined for with the Bank. Although the Bank eventually reached a fi nancial the fi rst time in over fi ve years. Yet, the Bank maintained its no. 1 settlement with KMIT’L, this incident had a material impact on position in terms of market capitalization (Baht 406 billion) among the fi rst quarter net profi t, pending any future recoveries from the Thai fi nancial institutions as at December 30, 2015. the insurers. Consolidated net profi t was reported at Baht 47.2 billion, an 11.5% The thrust of the Bank’s response to these negative events has decrease from 2014. The Bank’s profi t decline was in line with the been in strengthening its risk management practices through: results of its peer group, as the aggregate net profi ts of Thailand’s close monitoring of the rising customer delinquency levels in a top four commercial banks fell by 12%. slowing economy; strengthening its safety and security policies The decrease in the Bank’s net profit was mainly from the and practices, particularly to address issues arising from the fi re; substantially higher impairment provisions for two large and enhancing its system of internal control through upgrading the non-performing loans (Sahaviriya Steel Industries in Thailand internal control system to better prevent transactions that are not and its affi liate in the U.K.) which were both hit by an unexpected in line with established policy, and to promptly detect anomalies, and sustained fall in global steel prices. In addition, the Bank particularly suspicious transactions or behaviors. faced an unexpected loss from the settlement related to Despite these headwinds, the Bank and its employees, working the KMIT’L fraud case. Both of these adverse events were collaboratively, remained committed to delivering sustainable partly offset by the large one-time gains from the sale of growth. This drive to excellence is refl ected in the many public equity investments, higher net interest income, higher net fee awards that the Bank received during the year, including the income and higher net trading and foreign exchange income. Financial Management Excellence Award 2015, which As a result of the decline in net profi t, earnings per share (EPS) the Bank has achieved for the third consecutive year under decreased to Baht 13.88 in 2015, down 11.5% from Baht 15.69 in Thailand’s Corporate Excellence Awards Program, and the Best 2014. Return on average equity (ROAE) fell to 15.9% in 2015, Foreign Exchange Provider Award 2015, which the Bank received down from 20.1% the year before, while return on average assets from the Global Finance magazine for the eight successive year. (ROAA) slid to 1.7%, down from 2.0% in the year preceding. THE THAI ECONOMY IN 2015 Net interest income rose to Baht 82.8 billion in 2015, an increase of 2.1% compared to 2014. This increase was mainly from Thailand’s economy attained a slight recovery in 2015, the substantially lower cost of deposits, in line with the Bank’s albeit lower than expected, growing at 2.8% year-on-year. strategy to proactively reduce its cost of deposits. Tourism and fi scal stimulus measures were the main growth drivers during the year. Yet, weak domestic consumption, falling Non-interest income increased 16.0% year-on-year to Baht 54.6 exports and slumping private investment limited the rebound billion in 2015, primarily due to higher investment income after the from the low growth in 2014. Drought, high indebtedness levels Bank booked large one-time gains on the sale of equity investments and low crop prices signifi cantly impacted household spending. to mitigate the impact of the substantial additional provisions. In Thailand’s exports fell for the third consecutive year, dragged addition, the Bank recorded modest increases in its net trading down by China’s economic deceleration, as well as the sharply and FX income and net fee income. lower prices for oil and oil-related items, commodities and ANNUAL REPORT 2015 5 Non-interest expenses increased only slightly, to Baht 48.9 billion • Revised procedures for the nomination of directors by in 2015, up by just 1.8% year-on-year from Baht 48.1 billion in 2014. improving the criteria used for selection to ensure that the Expenses were contained through eff ective cost management new directors will be in line with the Bank’s Board skills matrix and its business strategy. culminating in a lower cost-to-income ratio of 35.6%, compared to 37.5% in 2014. The increase in operating expenses was limited • Restructured the Bank’s internal organization to respond by the Bank’s strategy of containing the growth of discretionary eff ectively to changes in the business landscape, with an expenditure through, among others, better resource deployment emphasis on specialized expertise, eff ective resource allocation and successful deployment. and process optimization. Asset quality deteriorated as a result of the slower-than- CHANGES IN THE BOARD OF DIRECTORS expected domestic economic recovery and the weaker pace of global recovery in 2015. The ratio of NPLs to total loans stood At the 2015 AGM, Maris Samaram retired as an independent at 2.89% at the end of December 2015, surging from 2.11% at director.