Fourth Quarter 2006

Fourth Quarter 2006 At a glance From CIRO Dear KBank investors and analysts, KBank Interest rates Deposits (%) Effective Date In 4Q06, the Bank fully complied with the BOT’s new provisioning policy under the International Accounting Savings Vol.2 No.40.75 4 Jul 03 Standard no. 39 (IAS 39). Due to our excess loan loss reserve and stringent internal provisioning policy, the Bank Fixed-3m 3.50-4.25 22 Jan 07 was able to do a one time 100% provision for all NPLs, and did not need to set aside any additional provision to Fixed-6m 3.75-4.50 22 Jan 07 meet the new BOT requirement. Only the regular provision needed to be made in 4Q06, amounting to Bt1,596mn Fixed-12m 3.75-4.50 22 Jan 07 based on the consolidated basis. Fixed-24m 4.25 22 Jan 07 Fixed-36m 4.25 22 Jan 07 For 2007, the Bank’s business targets remain as set at the end of 2006. Loan growth is targeted at 8-13%, with Lending (%) Effective Date the SME segment continuing to be the primary growth driver as we continue to penetrate this untapped and MLR 7.75 1 Aug 06 underserved segment. NIM is likely to be steady around 3.8-3.9%, with the expectation of high yield SME lending MOR 8.00 1 Aug 06 to offset the likelihood of a lower interest rate environment. Fee income is set to grow above 20%. MRR 8.25 1 Aug 06

Max rate MRR+5.00 1 Aug 06 Note: Interest rates above are for domestic retail customers On the expense side, our cost to income ratio is expected to be above 55% due to the ongoing K-Transformation and the Channel Expansion projects. The K-Transformation project is designed to enhance the Bank’s business KBank NPL gross capabilities in this highly competitiv e environment. Average regular provis ion will amount to Bt1.35bn per quarter Bank Consol at the bank only level. The Bank will also continue to focus on asset quality and managing NPLs at a lower level.

Bt bn % Bt bn % Gross NPL is expected to fall to around 5% by the end of 2007. 4Q05 44.4 7.08 56.2 8.88 1Q06 42.9 6.89 54.8 8.73 We hope you find the information provided in this publication useful and interesting. Your suggestions and 2Q06 42.5 6.70 54.0 8.45 comments are always welcome. 3Q06 42.5 6.52 53.3 8.11 4Q06* 38.3 5.67 46.5 6.84 Best regards, Note: * In 4Q06, KBank NPL net stood at 3.17% on the Bank Only basis, and Adit Laixuthai, Ph.D. 4.13% on the consolidated basis in accordance with the new BOT regulation. NPL net is NPL after allowance for doubtful account of NPL. First Senior Vice President & Chief Investor Relations Officer

Corporate Secretariat Division Industry (14 Thai banks) Dec-06 (Bt bn) Chg(%) Bank-only YoY MoM Net Loans 4,899 6.25 0.53 Assets 7,487 7.18 -1.57 Deposits 5,932 6.19 -2.54 Equity 665.4 NPL gross 424.7 NPL gross% 8.07 NPL net 229.3 NPL net % 4.52 LDR (%) 82.59 Source: Bank of Thailand and KBank

KBank Price Performance Close 23/01/07 SET Index 650.76 Bank Sector Index 243.13 KBANK (L) 58.5 KBank IR Consensus Survey 3 Months -17.02 6 Months -3.31 The Investor Relations Unit has conducted the 4Q06 consensus survey among analysts to document their 1 Year -13.33 opinions, recommendations and earnings estimates for KASIKORNBANK PCL (KBank), and to get their general KBANK (F) 60.0 views on the Thai banking industry. Both telephone interviews and research reports provided the sources of 3 Months -18.92 information for our consensus survey, conducted Jan 11–15, 2007. The total number of analysts that currently 6 Months -2.44 cover KBank shares is 43 from 41 securities brokerage companies, both local and foreign. 39 analysts (91%) 1 Year -14.29 responded to this survey. The result is shown below. KBank Mkt. Cap. (Bt bn) 141 Note: Outstanding shares = 2,386,608,125 as of Jan 11, 2007. 4Q06 Earnings Forecasts Source: KBank

% KBank Price Performance (4Q06) 18 16 Mn shares Bt/shr 100 .0 80 14 12 80.0 70 10 60.0 8 60 6 40.0 4 20.0 50 2 - - 40 2,000-2,300 2,301-2,600 2,601-2,900 2,901-3,200 3,201-3,500 3,501-3,800 % Bt mn 1 Oct 06 23 Jan 07 Volume (L) Volume (F) KBANK (L) KBANK (F) N=39 Mean = 2,831 Std. Dev. = 366 Source: Bloomberg Note: KBank’s 4Q06 actual profit was Bt3,429mn.

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KBank Financial Summary (Consolidated) 4Q06

Balance Sheet 4Q06 3Q06 QoQ 4Q05 YoY Performance (%) 4Q05 1Q06 2Q06 3Q06 4Q06 (Bt mn) (Bt mn) %Chg (Bt mn) %Chg ROA 1.27 1.67 1.63 1.40 1.49 ROE 13.83 18.07 17.25 14.69 15.83 Cash 17,857 14,646 21.9 14,913 19.7 Interest spread 3.99 3.96 4.10 3.89 3.84 Interbank & Money Market Items 82,842 82,356 0.6 65,929 25.7 NIM 4.08 4.07 4.26 4.07 4.05 Sec under resale agreement 22,200 30,560 (27.4) 9,500 133.7 Cost-to-Income Ratio 55.72 47.41 49.07 52.04 60.43 Investments -net 101,987 101,305 0.7 99,565 2.4 Note: ROA, ROE and NIM are calculated using QoQ averages of total assets, total Loans & AIR 679,573 655,981 3.6 628,692 8.1 shareholders’ equities and total earning assets, respectively, as denominators. Total Reserves 32,993 36,263 (9.0) 37,439 (11.9) Loans & AIR - net 646,580 619,718 4.3 591,253 9.4 Properties foreclosed - net 16,496 16,769 (1.6) 17,463 (5.5) Asset Quality & Premises & equipment 22,301 22,087 1.0 21,441 4.0 CAR (%) 4Q05 1Q06 2Q06 3Q06 4Q06 Other assets 25,247 21,018 20.1 17,247 46.4 Asset Quality (%) Total Assets 935,509 908,459 3.0 837,309 11.7 Total reserve / Loans 6.0 5.9 5.7 5.5 4.9 Deposits 750,985 730,209 2.8 690,337 8.8 Total reserve / NPL gross 66.6 67.5 66.8 68.0 71.0 Interbank & Money Market items 24,479 25,494 (4.0) 23,597 3.7 CAR (%) Borrowings 45,793 47,216 (3.0) 26,986 69.7 Tier I 9.53 9.94 10.47 11.17 10.45 Other liabilities 26,013 20,495 26.9 18,273 42.4 Tier II 4.93 5.12 5.03 4.92 4.29 Total Liabilities 847,270 823,414 2.9 759,193 11.6 CAR 14.47 15.07 15.51 16.09 14.74 Fully paid-up share capital 23,821 23,819 0.0 23,733 0.4 ∗ If 2H06 net profits were included, the tier-1 and total capital funds would be 11.41%, Premium on share capital 17,904 17,900 0.0 17,737 0.9 15.70% respectively. Premium on expired warrants Appraisal surplus 9,883 9,918 (0.4) 10,024 (1.4) Revaluation surplus on investments (157) 84 (286.8) (529) 70.4 Legal reserve 2,160 1,470 46.9 1,470 46.9 Deposit Structure (%) 4Q05 1Q06 2Q06 3Q06 4Q06 Other reserves - - - Current 5.75 5.82 5.59 5.19 5.53 Retained earnings (deficit) 34,627 31,853 8.7 25,679 34.8 Savings 56.50 52.38 49.34 44.11 45.99 Total Shareholders' Equity 88,238 85,044 3.8 78,116 13.0 Term-Less than 6 months 27.55 28.57 26.55 24.02 23.51 Liab & Shareholders' Equity 935,509 908,459 3.0 837,309 11.7 Term-6 months - 1 year 2.52 5.70 10.54 16.48 14.17 Term-1 year - over 1 year 7.68 7.53 7.98 10.19 10.80 Income Statement 4Q06 3Q06 QoQ 4Q05 YoY Total 100 100 100 100 100 (Bt mn) (Bt mn) %Chg (Bt mn) %Chg

Interest & dividend income 14,504 13,144 10.3 10,363 40.0 Interest expenses 5,614 4,632 21.2 2,160 159.9 AMC Progress (%) 4Q05 1Q06 2Q06 3Q06 4Q06 Net income from interest & dividend 8,889 8,513 4.4 8,202 8.4 PhethaiAMC (Principal balance: Bt74bn) Non-interest income 3,956 3,740 5.8 3,392 16.6 Portfolio Resolved (%) 79 82 83 85 87 Non-interest expenses 7,762 6,377 21.7 6,461 20.1 Recovery Rate (%) * 52 51 51 50 50 Pre-provision profit 5,083 5,876 (13.5) 5,134 (1.0) * Recovery rate = Present value of future cash flow Provision expenses (reversal) 1,596 1,458 9.5 1,468 8.7 Principal balance

Income before income tax 3,487 4,418 (21.1) 3,665 (4.9) Income tax expense 59 1,343 (95.6) 993 (94.1) Net income 3,429 3,076 11.5 2,660 28.9 EPS 1.44 1.29 11.5 1.12 28.4

4Q06 Performance: Interest income went up by a Non-Interest Income 4Q06 3Q06 QoQ 4Q05 YoY larger extent than interest expenses. NII thus improved slightly in (Bt mn (Bt mn) %Chg (Bt mn) %Chg 4Q06. NIM, however, remained fairly stable as the earning assets Gain on investments (23) 69 (133.6) 50 (146.4) base widened. Non-interest income picked up slightly, while non- Gain (Loss) on transfer of financial assets 0 0 0 0 interest expenses continued to increase. As a result, cost-to- Share of profit (loss) from invt on equity method 39 73 (46.7) 13 192.2 income ratio increased from 52.0% in 3Q06 to 60.4% in 4Q06. Fees and service income 2,968 2,739 8.4 2,485 19.5 However, the smaller income tax expenses caused by the one- Gain on exchanges 419 552 (24.0) 310 35.5 time benefit received from closing down Ploy Asset Management Other income 552 307 80.1 534 3.5 Company Limited helped enhance the Bank’s 4Q06 net income. Total non-interest income 3,956 3,740 5.8 3,392 16.6

NPL Movement: NPLs gross in 4Q06 dropped by 85 bps Non-Interest Expenses 4Q06 3Q06 QoQ 4Q05 YoY QoQ from 6.52% to 5.67% on the Bank Only basis, and by 127 (Bt mn) (Bt mn) %Chg (Bt mn) %Chg bps QoQ from 8.11% to 6.84% on the consolidated basis. The NPL gross decrease was mainly from write-offs and debt Personnel expenses 2,383 2,070 15.1 2,363 0.9 restructuring. Coverage ratio increased to 71%. NPL net stood at Premises and equipment expenses 1,604 1,308 22.6 1,145 40.0 3.17% on the Bank Only basis, and 4.13% on the consolidated Taxes and duties 636 559 13.8 480 32.5 Fees and service expenses 862 705 22.4 833 3.6 basis in accordance with the new BOT regulation. Directors' remuneration 14 23 (39.4) 14 1.7 Contributions to FIDF 689 689 0.0 701 (1.7) 1,574 1,024 53.8 925 70.2 Other expenses Total non-interest expenses 7,762 6,377 21.7 6,461 20.1

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4Q06 Performance Based on Consolidated Financial Statements

Interest Income Higher interest income from loans contributed to higher interest income.

• Interest income on loans amounted to Bt11.7bn, an increase of Bt743.3mn or 6.8% QoQ, as a result of loan growth. Loans increased by Bt23.7bn or 3.6% QoQ. • Interbank and money market items increased by Bt443.6mn, or 45.7% QoQ as a result of a higher yield received from interbank and money market assets such

as Nostro time deposits at foreign financial institutions.

Interest Expense Higher expenses from fixed deposits led to an increase in interest expense.

• Interest expenses on deposits increased by Bt920.2mn, or 23.2% QoQ, due to an increase in fixed deposit rates during the year, together with the Bank’s special deposit campaigns.

Bad Debt and Doubtful Accounts or Loan Loss Reserves (LLR) The Bank was in full compliance with the new BOT provisioning rule under IAS 39 in 4Q06.

• In 4Q06, the Bank set aside an additional regular reserve of Bt1,531mn, based on bank only, and Bt1,596mn, based on consolidated basis. This was slightly higher than the reserve set aside in 3Q06, due to the higher amount of new loans extended during 4Q06. In 3Q06, the reserve amount was Bt1,449mn and Bt1,458mn, respectively.

Non-interest Income Higher fee and service income as well as other income sources contributed to higher non-interest income.

• Fee and service income increased by Bt229.8mn or 8.4% QoQ, mainly from higher fees received from merchant fees on credit cards, advisory fees and

underwriting fees. • Other income increased by Bt245.6mn or 80.1% QoQ, partly due to gains resulting from the Bank’s disposal of foreclosed properties.

Non-interest Expense Higher personnel expenses and other expenses were the main factors in the increase in non-interest expenses.

• Personnel expenses increased by Bt313.1mn or 15.1%, mainly due to an increase in number of employees, the reserve for employee bonuses and normal retirement. The Bank set aside a higher reserve amount for bonuses in the second-half as compared to the first-half of the year. • Other expenses increased by Bt550.4mn or 53.7%, due mainly to higher expenses on the Bank’s strategic projects, promotions and public relations.

Summary:

Interest income increased by a larger extent than interest expense. NII thus improved slightly in 4Q06. NIM, however, remained fairly stable as the earning assets base widened. Non-interest income picked up slightly, while non-interest expenses continued to increase. As a result, the cost-to-income ratio increased from 52.4% in 3Q06 to 60.6% in 4Q06. However, the smaller income tax expenses caused by the one-time benefit received from closing down Ploy Asset Management Company Limited helped enhance the Bank’s

4Q06 net income.

3 4

What’s up?

KASIKORNBANKGROUP (KASIKORNBANKGROUP.COM) Dec 06 • KBank has issued K-B/E Investment which is offered to retail and corporate customers who reside in Thailand. There are four types of B/E offered and all of them are non-refundable, for 3 and 6 month period with interest at 4.875% p.a. and a minimum subscription of Bt5mn, without limit over maximum subscription.

Corporate Business

Dec 06 • KASIKORNBANK, Government Saving Bank, Mizuho Bank and KfW Bank issued Bt5.5bn in loans to Amata-EGCO Power Limited and Amata Power (Bangpakong) Limited, who produces electricity and supply to Electricity Generating Authority of Thailand and Amata Nakorn Industrial Estate, with tenor of seven and ten years. KBank acted as business consultant and lent Bt1.356bn while GSB, Mizuho and KfW lent Bt1bn, Bt1.5bn and USD45mn, respectively. The Amata group would use these funds to refinance its old loans, invest in the distillation plant and help increase financial flexibility.

Retail Business

Nov 06 • The Bank launched Money Plus Fair from November 16 through December 29, 2006 at every KBank branch. The

Bank offered a variety of fixed deposits and mutual funds to customers before the anticipated interest rate decline in

2007. The rates offered to Fixed-Plus Fixed Deposit 3-6 months as 4.00 – 4.75% and Fixed Deposit Flexible 8

Month 4.50% with a minimum deposit of Bt50,000. Moreover, customers seeking a tax-exempt high return can

invest in our Long Term Equity Fund (LTF) or Retirement Mutual Fund (RMF) that can be used to reduce tax

payments up to a maximum of Bt600bn within an investment year.

• The Bank plans to expand business in Phuket, which is a highly economically efficient province in southern areas. To

increase market shares in Phuket, the Bank plans to expand business to 9 branches, 9 foreign exchange booths and

65 ATMs.

KBank launched the Smart Shopping Program in December • 2006 to give perks to customers who pay through KBank’s

smart chip credit cards. Both KBank Visa and KBank

MasterCard are included at more than 39 KBank partners,

with more than 300 shops. KBank expects this program to

increase spending per card by 5-10%. KBank currently has

about 1mn credit cards issued.

SME

Dec 06 • As KBank continues to focus on SMEs in the year 2007, the Bank has created K SME Care Program to build stronger SME business. KBank expects SME loans to grow 20% or Bt50bn in 2007. The K SME Care will cover several issues, such as capital, Advice, Research/Market Information and Education/Training. In the beginning of 2007, the first program that will be launched is K SME Venture Capital

Corporate Recognition

Sept 06

• Received “Best Single Electronic Trading Platform” and “Best for Innovative FX Products and Structured Ideas” in Thailand from Corporate FX Poll,

2006 by Asiamoney Magazine.

4 5

Hot Stuffs

Change in new BOT provisioning rule under International Accounting Standard no. 39 (IAS 39) and new NPL definition Source: Bank of Thailand On December 7, 2006, the BOT announced the new provisioning rule for NPLs related to the IAS 39. Please note, at this time the IAS 39 in Thailand only covers provisioning and the NPL calculation method as detailed below.

1. Change in guidelines on provision and allowance

Period Old Guideline New Guideline based on IAS 39 Loan Overdue Classification % Allowance % Allowance (mon th) Collateral Value Collateral Value (Net of collateral Value) (Net of collateral Value) Normal X<1 1% 1% Special Mention 1

Doubtful 6

Doubtful of Loss X>12 100% Historical Loss Experience

2. Guidelines on new collateral value calculation

Type of Collateral Principal Value Discount Rate Discount Period

PV of Cash Flow Estimate of Future Cash flows 7% Based on Estimate

PV of Collateral Value - Real Estate 90% of appraisal value 5.5 yr - Machinery Appraisal value estimated according to BOT 2.5 yr (In market demand only) guideline after deduction of depreciation until the

expected saleable date 7% - Automobile Appraisal value estimated according to BOT 1 yr

(Insured only) guideline after deduction of depreciation until the expected saleable date - Others Historical Loss Estimate based on historical loss of each customer group, and modified with current information that has impact on the paying ability of Experience the customer. Proof of historical loss must be documented.

3. Implementation Date

Phase 1 (DEC 06) Phase 2 (JUN 07) Phase 3 (DEC 07)

Use former allowance guideline (20%), except for Use former allowance guideline (20%), except for Sub-Standard Implement under IAS 39 litigated loans, implement under IAS 39 litigated loans, implement under IAS 39

Use former allowance guideline (50%), except for Doubtful Implement under IAS 39 Implement under IAS 39 litigated loans, implement under IAS 39

Doubtful of Loss For litigated loans, implement under IAS 39 Implement under IAS 39 Implement under IAS 39

4. NPL reporting The definition of NPL has been changed as shown in the following table.

OLD NEW

NPL Gross = Loans in Class 3, 4 & 5 NPL (net) = NPL – Allowance for NPL

% NPL to Total Loans = NPL % NPL (net) to Total Loans (net) = NPL – Allowance for NPL

Total Loans Total Loans – Allowance for NPL

Impact on KBank: The Bank fully complied with the new BOT provisioning rule under IAS 39 in 4Q06. Due to an excess reserve and stringent internal provision policy, the Bank was able to meet a one time new provision requirement for all NPLs without setting aside additional provision for this purpose.

5 6

Industry Updates

The BOT reserve requirement on short-term capital inflows Source: Bank of Thailand website To stabilize the Baht as it continued to strengthen, the BOT announced on the evening of December 18, 2006 that foreign currencies bought or exchanged against the Baht would be subject to a 30 percent foreign currency reserve requirement for one year. Any funds withdrawn before a year would be refunded at only 2/3 of the amount. This requirement went into effect December 19, 2006.

However, as this regulation had a strong impact on the investor sentiment, especially in the Thai stock market, the BOT made another announcement on the evening of December 19, 2006 to exempt some transactions from this requirement. Later on January 15 and January 29, 2007, after further reviews, the BOT also relaxed some issues so as to make the regulation more effective. For the purpose of easier understanding, we have grouped and summarized the announcements of the BOT reserve requirement into three items as shown below.

1. Three types of Baht account in Thailand that non-residents can open:

1.1. Non-resident Baht Account (NRBA): for all transactions in accordance with exchange control regulations

- The outstanding balances are allowed to exceed Bt300mn without limit until 8 January 2007. After that, the outstanding balances shall not exceed Bt300mn. - The requirement for the Baht in NRBA to be withdrawn and remitted is extended from the same day to within three working days. The amount less than Bt1mn shall not be required for this measurement. Interest and dividends obtained from securities investments in Thailand are allowed to be retained in NRBA for reinvestment.

1.2. Special Non-resident Baht Account for Securities (SNS): for investment in equity and future contracts in the Stock Exchange of Thailand (SET), the Thai Future Exchange (TFEX) and the Agricultural Future Exchange of Thailand (AFET) with the outstanding balance not exceeding Bt300mn

1.3. Non-resident Baht Account for Trade and Services (SNT): for trade and services payments with the outstanding balance not exceeding Bt100mn

The Baht in the same type of accounts can only be transferred among themselves, except the NRBA that can transfer to the SNS, but the SNS cannot transfer to the NRBA.

2. Transactions exempt from the 30 percent foreign currency reserve requirement:

2.1. Foreign exchange transactions related to current account activities including transactions related to exchange of goods, services, income, transfers and aid.

2.2. Inflows for equity investment in companies listed in the SET and Market for Alternative Investment (excluding mutual funds), investment in the TFEX, and investment in the

AFET. Funds destined for the aforementioned investments should be deposited in the SNS.

2.3. Investment in real estate such as land and condominiums (excluding real estate mutual funds)

2.4. Loans (including inter-company loans and foreign currencies receipt from the issuance of debt instruments) that are fully hedged both in notional amount and maturities and in plain vanilla FX Swap or Cross Currency Swap with onshore financial institutions in Thailand. Loans with maturities over one year must be fully hedged for at least one year.

2.5. Currency swap transactions associated with rolling over existing exchange rate hedging contracts with the original financial institution.

2.6. Packing credits not exceeding 180 days and the borrower agrees to repay the credits with foreign currencies obtained from the impending trade.

2.7. Purchase of NPL or obligated guarantee payment to residents in Thailand having undergone final legal proceeding or supported by documents issued by related authorities.

2.8. FDI defined as investments by non-residents in resident entities where the investor owns at least 10 percent of the equity capital and has managerial power.

2.9. Foreign currency borrowings transacted prior to 19 December 2006.

2.10. Foreign currencies bought or exchanged against the Baht amounting to less than USD20,000 or equivalent.

2.11. Foreign exchange bought or exchanged against the Baht from clients or authorized money changers in the form of travellers' cheques and bank notes.

2.12. Foreign currencies bought or exchanged against the Baht from (a) foreign embassies, foreign consulates, specialized agencies of the United Nations, international organizations/ institutions incorporated in Thailand; and (b) Thai embassies, Thai consulates or other Thai government entities located outside Thailand.

2.13. Foreign currency borrowings of government entities.

3. Exchange Control Regulations, Capital Outflows and Holding of Foreign Currency

3.1. The amount of Thai direct investment or lending to a business abroad is not to exceed USD50mn per person per year

3.2. A Thai juristic person shall invest in or lend to a business abroad by not exceeding USD20mn per person per year.

3.3. Seven institutional investors - Government Pension Fund, Social Security Fund, provident funds, mutual funds, securities companies, insurance companies and specialize financial institutions - shall invest in securities issued abroad by Thai juristic persons, without limit.

3.4. Foreign currencies received from abroad without future foreign exchange obligations are allowed to be deposited in a foreign currency account with an outstanding balance on all accounts to not exceed USD50,000 for an individual or USD2mn for a juristic person.

3.5. The maximum outstanding deposit balance with obligations remains at USD500,000 for an individual and USD50mn for a juristic person.

6 7

Industry Updates (continue)

The guidance of the BOT policy in 2007 Source: Bank of Thailand website

Late last year, the BOT announced the direction of its policy for 2007. The BOT also mentioned that in 1Q07 it would take part in the Financial Sector Assessment Program, FSAP, a joint project conducted by the IMF and the World Bank to assess the strengths and weakness of the financial system and its supervisory framework.

1. The main issues of the guidance of the BOT policy in 2007 are: 1.1. The BOT will continue working on Basel II, the new provisioning rule under IAS 39 and consolidated supervision to strengthen regulatory and supervisory standards to meet international best practices.

1.2. The BOT will increase emphasis on good corporate governance

1.3. The BOT will encourage financial institutions to improve operational efficiency, especially in the area of risk management, by requiring greater investment in information systems, technology and human resources.

1.4. The BOT will develop the second phase of the Financial Sector Master Plan, which will focus on the potential entry of new players and capital market development. The BOT plans to induce improvement in the efficiency of domestic financial institutions through competition under a phased introduction of new players, both domestic and foreign.

1.5. The BOT will urge all parties to promote greater financial literacy to the public.

2. The BOT also plans to develop the Bank of Thailand Act, the Financial Institutions Business Act and a Deposit Insurance Agency.

2.1. The Bank of Thailand Act will enhance the effectiveness of monetary policy conduct by giving the BOT more independence while securing an appropriate system of checks and balances. It will also give the BOT more power in supervising financial institutions.

2.2. The Financial Institutions Business Act will help handle a completely new set of financial businesses, empower the BOT, supervise and regulate financial institutions, protect customers more effectively and deal promptly with financial institution problems.

2.3. The Deposit Insurance Agency will gradually replace the existing blanket guarantee scheme with a limited guarantee on deposits. The level of the amount guaranteed will gradually reduce over a period of four years, until the guarantee only covers Bt1mn per account per financial institution. At this time, the bill is pending re-submission by the interim Cabinet for House approval.

Change in the policy interest rate benchmark from 14-day repo to 1-day repo Source: Bank of Thailand

Starting from the first Monetary Policy Committee (MPC) meeting in 2007, which was held on Jan 17, the policy interest rate benchmark has been changed from a 14-day repurchase rate to a 1-day repurchase rate. The BOT stated that the benchmark has changed to better reflect the movement of money in the market and to be in line with international standards. The picture below shows an example of the difference between the 14-day repurchase rate and the 1-day repurchase rate in the past two months (from Nov 1, 2006 to Jan 31, 2007) and presents the gap between those rates as ranging from 0 to 25 bps or averaging of 9 bps. The 1-day repurchase rate, which is the new policy benchmark rate, ended at 4.9375% on Jan 16, 2007 before the BOT reduced the rate to 4.7500% on Jan 17, 2007.

7 8

Econ wrap-ups

Economic Summary- October-December 2006 Source: Bank of Thailand

Oct 06 Nov 06 Dec 06 Industrial Capacity Utilization (%) 73.0 72.9 74.5 Consumer Price Index: (Headline)(%) 2.8 3.5 3.5 Consumer Price Index: (Core) (%) 1.8 1.7 1.5

Export (US$mn) 11,371 11,767 10,843

Export (%chg) 20.9 21.7 16.4 Import (US$mn) 10,648 10,498 10,111 Import (%chg) 8.9 6.3 6.5 Trade Balance (US$mn) 723 1,269 732 Current Account Balance (US$mn) 856 1,512 1,215 Net Capital Flow (US$mn) -1,154 -390 n.a.

Balance of Payments (US$mn) 287 1,103 3,171

Interbank Rate (%-average) 4.95 4.95 4.95 Official Reserves (US$bn) 62.3 64.5 67.0 Exchange Rate (average Baht: US$) 37.34 36.54 35.83

Highlights for the Year 2006

Manufacturing production: The Manufacturing Index (MPI) increased 7.4% from the previous year. Production in the electronics and food and beverages categories increased very well. However, there was a decrease in production in leather products, household electrical appliances and steel products.

Domestic spending: The private consumption index (PCI) rose by 1.3% from the previous year, in connection with the slight improvement in passenger car sales and benzene and gasohol usage. Meanwhile, other private consumption indicators decreased as consumers were more cautious to spend as a result of sustained high inflation and interest rates.

Inflation : Headline inflation and core inflation increased 4.7% and 2.3% respectively from the previous year. The increase was mostly due to the energy prices and prices in the raw food category.

Trade Balance: Export value totaled USD128.2bn, up by 17.4% from the previous year. In this year, major exporting products which expanded very well were high-tech products. Import value totaled USD126bn up by 7% from the previous year. This resulted in a trade surplus of USD2.2bn. The service and transfers account showed a surplus of USD1bn and the current account recorded a surplus of USD3.2bn.

Inflation Report Source: Bank of Thailand (January 26, 2007)

The Bank of Thailand issued an Inflation Report in January 2007, citing that during the third quarter of 2006, the Thai economy grew by 4.7%, decelerating from a

5% growth in the second quarter. This reflected the softening domestic demand in the private sector. Exports of goods and services showed moderated growth because of the high base effect. In the fourth quarter of 2006, recent indicators continued to show a softening in private consumption and private investment. However, the recent decrease in oil prices along with a stable interest rate helped support the overall economic and financial stability. The corporate and household sectors' balance sheets remained good, while the strength of financial institutions remained satisfactory.

Going forward, the assessed risks to the economy included fluctuations in world oil prices due to supply uncertainty, consumer and investor confidence and a slower-than-expected trading partner's economic growth. The MPC predicted that the Thai economy in 2007 and 2008 would expand 4-5% and 4-5.5% respectively, and expected headline inflation in 2007 and 2008 to be around 1.5-2.5% and 1-2.5%, respectively. Meanwhile, core inflation is expected to be around 1-2% in both 2007 and 2008.

With regards to the appropriate monetary policy stance, the MPC stated that domestic demand continued to slow down both in consumption and investment while inflationary pressure has clearly subsided. The MPC assessed that the risk to growth outweighed that of price stability, and thus decided to cut the policy rate to 4.75% in the January meeting.

8 9

Econ wrap-ups (continue)

Thai Economy Outlook in 2007

Source: KASIKORN RESEARCH CENTER (February 2, 2007) KResearch have recently cut the economic projections for 2007 from 4-5 percent to 3.5-4.5 percent against the growth of 5.0 percent in 2006 due to some political and regulations risks that remain, and that should have an impact on domestic consumption and investment. Thailand Economic Indicators in 2006-2007

(Units: % y-o-y change, unless otherwise stated) 2006 2007

Private consumption 3.4 3.0-4.0 Total investment 3.9 1.1-2.5

Private investment 4.5 1.7-2.8 Public investment 2.1 -0.6 to 1.4

Exports 17.4 10.0-12.0 Imports 7.0 7.0-10.0

Current account balance (USD Billion) 3.2 6.1 to 7.3

Current account balance (% to GDP) 1.6 2.6 to 3.1 Average Brent Crude Price (USD) 65.1 53.0-57.0

Headline CPI inflation 4.7 1.5-2.5 Core CPI inflation 2.3 1.0-2.0

Repo-1 Day (at the year end) 4.95 3.50-4.50 GDP 5.0 3.5-4.5

Thai Major Political and Economic Events since November 2006 Source: The Nation Newspaper, The Daily Manager Newspaper

Date Event Nov 23, 2006 Prime Minister Gen Surayud Chulanont said his government would designate the 5 southernmost provinces as a

special development zone to aid the area's economy, which as badly hurt by the violent insurgent attacks. Dec 4, 2006 A senior director of the BOT's Financial Markets Operations Group said the Bank of Thailand (BOT) has threatened to slap a tax on short-term capital if it exhausts its measures to curb the fierce Baht speculation. Dec 4, 2006 Mr. Ampon Kittiampon, head of the National Economic and Social Development Board, said that the NESDB revised its economic growth forecast in 2006 from 4.5% to 5% because of falling fuel prices and strong exports.

Dec 5, 2006 On the eve of his birthday, His Majesty the King Bhumibol Adulyadej expressed his support for Prime Minister Gen Surayud Chulanont. Dec 18, 2006 The Bank of Thailand (BOT) announced a new measurement to curb Baht speculation. The new measurement requires all Thai banks to hold in reserve for one year 30% of foreign capital inflows that are not trade- or services- related or repatriation of Thai residents' investments abroad. (See more details on page 6) Dec 19, 2006 The SET Index dropped to almost 20% hitting the lowest level at 587.92 during the day before rebounding slightly to

close the day at 622.14, or a 15% drop. After the SET market closing, Finance Minister Pridiyathorn Devakula announced the capital control measure no longer applied to stock market investments. Jan 2, 2007 His Majesty the King signed a royal command to appoint the 100 members of the Constitution Drafting Assembly. Jan 4, 2007 Standard & Poor's and Moody's Investors Service maintained Thailand credit ratings despite the New Year’s Eve bombings in Bangkok. Jan 4, 2007 After the bombings in Bangkok on New Year's Eve, Prime Minister Gen Surayud Chulanont warned the Thai people to

be alert and prepare for a new threat to their lives in the next 1-2 months. Jan 5, 2007 The SET invited 10 brokerages with a strong foreign customer base to discuss their concerns and to find out what foreigners want to know to improve their understanding of the recent developments. Jan 10, 2007 The cabinet approved the final draft amendment of the Foreign Business Act to limit foreign shareholding and voting rights to less than 50 percent and give companies up to two years to meet the new rules. Finance Minister said about 1,300 companies, six of them listed in the SET, may be affected by the new Thai foreign ownership rules.

Jan 12, 2007 Gen Chalit Phukphasuk, Deputy chief of the Council for National Security (CNS), expected that the draft constitution could be done in four months and we should have a new government within this year. Noranit Setabutr, chairman of the Constitution Drafting Council said the earliest possible date for the general election would be October. Jan 12, 2007 The University of the Thai Chamber of Commerce said the Thai consumer confidence index dropped to 76.5 in December from 77.2 in November and hit a 3-month low due to the impact of floods and the BOT capital controls.

Jan 17, 2007 The BOT reduced its one-day repurchase rate to 4.75% from 4.9375%, representing the first shift toward relaxing monetary policy since August 2004. (See more details on page 7) Jan 19, 2007 The Council for National Security (CNS) named its 10 handpicked drafters to join 25 others selected by the Constitution Drafting Assembly. Constitution Drafting Assembly (CDA) chairman Noranit Setabutr said by January 29, charter-writers should complete their guidelines, and the actual drafting of a new constitution will begin no later than January 31.

Let’s talk

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Let’s Talk

The fol lowing is an interview with KBank executive:

Mr. Krit Jitjang, Head of Internal Risk Management Department

Q: KBank has been one of the most aggressive in terms of setting up the internal risk model, and is the only one in Thailand who has a specialized credit-pricing model for the SME sector. What is your view on the development and implementation of the risk management framework?

A: In terms of risk management, we want to develop a system whereby we can trade-off risk and return systematically and objectively. In order to do so, we need a model, a rating system and the know-how. We also need the right organizational structure and the buy-in from the business units. Most importantly, we need to understand the market we are in. When we develop this model and rating system, we go through a comprehensive list of validation. When we first started, we needed external help and hired the best there was in the market, Oliver Wyman. They laid out the fundamentals and transferred the know-how to us.

Q: How has the risk model system worked so far? A: We have had this system in place for a while. If you are asking how the actual default would compare with the one predicted from the model, first we need to understand whether the model is designed to capture the ‘point in time’ credit risk or ‘through the cycle’ credit risk, which is one of the most debated topics in the credit risk world.

We are aiming for a system which is for ‘through the cycle’, because credit risk is a ‘through the cycle’ business, not a ‘point in time’ business. We do everything we can to make sure that the risks we capture take into account the business cycle. If we compare the result from the model with the actual result, the default in the model somewhat overstates the actual default. This is because right after the crisis, we experienced the good side of the cycle and have not been on the bad side of the cycle. That’s why I say that overall, our model default rate is still above the actual default rate, which is expected.

Q: Have you done any back testing? A: We have set up the process to back test the model and utilize the back testing methodology to make sure that the predicted and the actual result is explainable, as we do not aim for the ‘point in time’ estimate of credit risk.

But going forward I would foresee that we might need both extremes, the ‘point in time’ and ‘through the cycle’ estimates. This is because we want to capture the dynamic of the credit risk, especially for the credit derivative. Although we still do not have the market for credit derivative now in Thailand, looking forward I think we would expect the market to try to understand the product and try to utilize this technique and framework to actively manage their credit portfolio. It might take years, but I think that’s the trend.

Q: Since the model can track for both the ‘point in time’ and ‘though the cycle’ credit risk, what happens, for example, if the cycle is turning down and there is a situation where at the lower part of the cycle there are defaults which are acceptable ‘through the cycle’ but are not acceptable at the ‘point in time’. What is the Bank’s strategy for this kind of loan? A: First we have not yet reached the bottom, so that kind of situation has not happened. But for the customer who defaults, we will make sure that the assessment of the loss and the risk is tailor-made to that particular customer, and the economic loss is calculated. I use the term economic loss because we have to look at the very far end, to analyze if this customer could survive in the future and what his opportunity would be. If it is not viable in the long term, we need to think of a strategy to minimize the loss. If it is viable, we might need to look at restructuring the company. That’s the way we have handled it.

Q: Are you trying to fine tune the model to achieve a predictive indicator of worsening credit? A: That is the aim of every institution, but to achieve it depends on the available information. As you know, we are an emerging market, and most companies are not listed. We can only get information about a company if it is listed or if its bond is traded in the market, and then try to come up with our estimate of the risk. As for the majority that aren’t listed, we use information that we gather from the customer, and we make sure that we have the most current information and use it to objectively assess the credit rating of the customer.

Q: How many years of historical information does the Bank have? A: 5 years.

Q: In terms of ‘through the cycle’ risk tracking, if you look at the stress-test of the asset quality, what do you see?

A: We have done some stress-testing on the credit portfolio, which is based on hypothetical stress-testing of a particular industry which we think is relevant. But in terms of doing the stress-test based on macro economic indicators, we are still in the development phase. I think only a few banks in the world have done that. You need to be a global or regional bank to perform well in that. We know that stress-testing is important in terms of capturing the tail risk of the credit. But we think for our portfolio, doing the hypothetical test based on selected industries and important risk factors is sufficient.

Q: How do you track the credit risk of retail and SME customers? A: For the mortgage and SME portfolio, we use credit scoring as a tool to help us pick customers, to decide whether we would accept or reject a customer. We make sure that the scoring on the model is being compared against the actual outcome. From time to time we need to redevelop the scoring because customers change their behavior based on economic situations. We may also enter into a new segment in which we have learned new information and redevelop the model accordingly.

Especially for the retail side, I think there is room for improvement of the model because there is still the limitation of using the credit bureau data in Thailand. We hope the new government will look into this issue and expand the scope of the credit bureau, to provide the credit score as well as credit information. That would make the credit decision more robust in terms of acquiring and monitoring customers.

Q: How does the Bank make decisions when there are loans that are good at one point in time but may turn bad at another time? A: In reality, you cannot totally separate those two - the good loans and the bad loans. In fact, there is an overlap, so what we do is try to minimize the overlap. We try to make sure that we use all information available and make an optimal decision regarding the profits generated by accepting or rejecting a customer.

We need to closely monitor the result of the credit decision each month and also try to incorporate new information into our model. If we have enough information, we may then need to redevelop the model to adjust to changes in customer behavior, depending on the situation and the product, as well as changes stemming from competition in the financial market.

This is a dynamic environment in which the winner is the one who learns fast enough and quickly responds to changes in behavior. The faster we adapt, the more business we gain and the less risk we take. But it’s a dynamic environment. What you learn, what you think is the right scoring and model, might not work in a year, in 6 months or in 18 months. The question is whether you have enough data to learn from your experience. You need to be large enough to have that kind of information, otherwise you cannot learn systematically. I think KBank is large enough, although from my point of view, I would prefer to have a larger portfolio. It w ould be easier to have Let’sa robust talk model that is not considered a hurdle. In terms of our market share, our portfolio size, we can still develop a sensible or reasonable model. However for very small banks, in terms of modeling, they definitely face the problem of being too small.

(The Q&A is continued on the next page)

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Let’s Talk (Continue)

Q: How do you manage the fine balance between credit risk and growth? Is it always possible to grow faster by loosening credit? A: This is the trade off that has to be made at the Board level, with management giving recommendations. Our task is to manage for long-term sustainable profitability. That’s why the risk management numbers mean something to us. But we also want to make sure that we are competitive in the market, that we are not afraid of growth and taking more risk. I think there is no right or wrong answer to whichever direction taken. But there ought to be a process whereby management and the Board discuss the issue, to make sure all know that there is expectation from investors, that there is competition from competitors, that there is risk in the business we are doing and there is a trade off. We need to make sure we have the right balance on the perspectives of growth and risk.

It has been proven for some years now that we should not forego quality for growth. But, again, we have not yet experienced a downturn in the economy. If the Thai economy were to slip, it would prove how well we have developed our model and framework. When that happens, we hope we will come out of the situation with minimal affect.

Q: How do you, as a risk manager, work with the business team regarding the risk and growth issue? In working together, there are discussions and there are arguments about things, constructive ones. For instance, when we need to present our analysis based on the facts and translate those facts into suggestions, we need to understand how the business side views the issues. It is then up to the management to reach some kind of conclusion on how far we can push growth, and if we push that far, how the risk profile of the bank will change. That is the way it has been done. But it is not an easy process. We may not have all the facts and information that we need to be as objective as we want. But first you need to have some belief in the risk numbers.

Q: Do you have a specific mandate, e.g. to achieve some specific NPL target?

A: My mandate is to make sure that the information we provide is being used by the bank and the business side, that we generate the risk adjusted return and improve it to a level satisfactory to investors. We also make sure that we are not being too aggressive, taking into consideration the downside of risk taking and incorporating it into the formulation of strategies for growth and quality. This is my mandate. It is not just a measure of the NPL level. I think even a good model can be altered in the future. We cannot foretell the future.

The important thing is that there is a belief, not only by the risk side but also the business side, that the way we do business is a balance and tradeoff between risk and return. We can have a very good risk management team and good risk management model, but if it is not being used by all parties, the benefit will be zero.

Q: What does the Bank do when there is a loan proposal that does not fit into the Bank’s credit scoring model? How does the Bank deal with such cases?

A: An example on the corporate side. For corporate customers, we do customer rating. The rating is derived from the model and is translated into the probability of default of the customer. We then use that probability of default to calculate the RAROC and the economic profit, so that we know the revenue that the customer generates for the Bank, based on his existing facilities.

Suppose this existing customer wants a new term loan for capacity expansion. When we calculate the term of the new product, we may realize that the new RAROC is very low due to high competition in the market. In such a case, we will compare the new RAROC with the existing RAROC and come up with an overall RAROC. So, even with a very low new RAROC, we may still grant the loan because overall we make a lot of money on the customer. Or we may end up saying that we need to add some fees to this type of product. Or we may realize that we need to bundle another product to make the whole package more profitable.

We do not use these numbers to simply accept or reject a customer, we use them to make sure that we do everything we can to get the customer. In acquiring a customer, we make sure there is analysis on both the existing facility and the new facility, and make the most objective decision possible.

Q: What if your competitors do not use this kind of framework, how would you compete with them?

A: We are aware that some banks may believe in this framework and some may not. But in the long term, looking forward through the cycle, those that believe in this framework and manage business the way it should be managed, ought to come out healthier and more profitable. Those who lag behind will need to do a lot of catching up to compete.

Basel II would require banks to understand the business risk and to translate it into numbers and capital, and make decisions accordingly, e.g. credit pricing. For us I think we have done a lot and there are still a lot to be done in the future. We surely have been trying to make the best of the information that we have.

Q: Are there any changes in consumer behavior? Have you seen any changes in the rejection ratio proven by your credit scoring? A: There are no drastic changes. The rejection ratio has increased a bit recently, as expected, because of the economic situation we are in. There was uncertainty in the economy, the effect from the oil pricing, etc. But the change was minor.

Q: Was the change in the SME or Retail portfolio, or both? A: Retail. As you know, on the mortgage side we are moving from a low interest rate environment to a higher interest rate environment. As we do not change our scoring requirement, the same customer we acquired two years ago in the low rate environment might be rejected by us in the current higher rate environment. But this also depends on the way we view the market and which segment we want to go after - the very high income, the middle income or the low income.

Q: In terms of risk management, what customer segments do you prefer? A: Regarding risk management, I love consumer finance and SME better than large corporate. There is no model to predict the large or the extra large customer, and concentration risk is very hard to manage. As you know, we have a large SME portfolio, and for consumer finance we are seeing a lot of opportunity. In Thailand, consumer finance is still not as large when compared to the rest of the world. So there is still a lot of opportunity. We can see from the entry of GE capital and other foreign competitors. This is an attractive market.

Q: How has KBank’s risk model for consumer finance developed? A: We have done scoring and developed the model. I think we are now advancing to a more dynamic risk model in which we continuously learn from the customers we acquire and formulate new strategies based on that learning. We are in the learning process.

I think consumer finance is about learning and trying new things. That is the way it should be done. It’s like being given a business opportunity without having any data about it because it has been untapped. How would you go about making it a good business? The challenge is to set up a business decision model, and then learn and grow with the market. We see that this as a good opportunity!

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