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Bangkok First Investment & Trust Public Company Limited
Risk Factors
The following risk factors might impact the business of the Company.
1. Credit Risk
1.1 Lending Risk
This arises from loans that default in payment of interest or principal, effectively
becoming a non-performing loan resulting from losses incurred by the debtor due to
several factors including an economic slump, the fall of purchasing power of
consumers, or excess production capacity.
Hence, the Company has to adopt a conservative lending policy and concentrate on
good quality assets covering all its lending activities. Lending is focused on medium
corporations, which normally have lesser financial risks than the small business
operators and individual borrowers. The Company utilizes its credit analysts who
scrutinize the customers’ financial status and make proposals to the credit committee
for final credit approval. The line of authority and credit approval process is clearly
defined. In order to reduce the concentration of risk in any particular industry, the
Company lends to industries that have high growth potential only. This credit policy is
to reduce the lending limit of each borrower, to aim on loans with working capital and
short maturity and also to be in line with the rules and regulations as stipulated by the
Bank of Thailand.
Notwithstanding, the Company has been adopting a proactive policy in risk
management through a credit committee, whereby all doubtful accounts are closely
monitored. The Company’s debt restructuring committee is ready to resolve and
speed up the recovery of non-performing loans and to provide assistance for all
doubtful accounts. If the Company needs to set aside provisions it will carry out this
strictly in accordance with the Bank of Thailand requirements. At present, the
Company has even surpassed the requirement of setting the provision, which
indicates its proactive and conservative role in taking on such action.
1.2 Risk arising from deteriorating quality of loans.
Non-performing loans can be classified into substandard, doubtful and doubtful of loss
that can be affected to the company’s earnings and capital funds of. As 31 December
2006, the company’s non-performing loan amounted to 127 million baht, accounting
for 4.17 percent of loans, receivables and accrued interest receivables. It’s decreased
from the end of year 2005 which amounted to 141 million baht.
The company concentrates on quality of loans by set up a conservative lending policy
which concentrates on quality of loans and assets. Moreover, as a safeguard against
losses from current non-performing loans and expectant non-performing loans, the
company has set the reserve for non-performing loans amounted to 212.80 million
baht that higher than the reserves required by the Bank of Thailand about 51.36
million baht, accounting for 131.81 percent of criterion by Bank of Thailand.
2. Market Risk
2.1 Interest Rate Volatility Risk
Interest rate volatility can normally affect the interest spread. The larger the interest
spread the higher the net earnings for the Company. If the interest spread is low due
to excess liquidity and when lending must be carefully monitored, the Company will
have lower bargaining power, and hence can also have negative impacts on the
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Bangkok First Investment & Trust Public Company Limited
earnings. Nevertheless, the Company is closely monitoring the interest rate
movement in order to effectively set the most suitable strategy of fixing both the
lending and deposit rates.
Interest rate volatility also affects investments in debt instruments such as bonds and
debentures. If the market interest rates move higher, the expected returns on the
investments in bonds would also increase. Hence, the market price of the bonds
would fall. Under such situation, the Company might choose to reduce its risks
exposure via adjustment to the duration of the bonds portfolio and selecting good
quality bonds that have liquidity for trading.
As at the end of 2006, the Company’s investments for sales in both short-term and
long-term bonds at market value excluding accrued interest were 1,661.72 million
baht. If the market interest rates rise by 1.00 percent it would affect the market
value of the bonds for sale portfolio by 1 percent of the investment value in opposite
direction. However, if the Company holds the bonds for sale until maturity the cost of
the investment in the bonds will not be affected by the interest rate volatility.
In addition, at the end of 2006, the Company also has investments in bonds that are
intended to hold until redemption worth 754.13 million baht. In this case, interest
rate volatility does not have any effect on the Company’s accounting. The yield of the
investment will be equivalent to the rate of return on the investment.
2.2 Price Risk
Price risk is a risk from change in bonds prices and securities prices which directly
affect net income and capital funds of the Financial Institution.
The company has invested in listed securities that have risk from volatility in stock
exchange market price. As 31 December 2006, domestic marketable equity securities
amounted to 43.46 million baht, accounting for 1.66 percent of total investments.
However, the company does not have a large number of investments in listed
securities. Most of investment will focus on listed securities with well-fundamental and
highly dividend payment. Moreover, the investment committee also has a policy to
stop loss whenever a listed securities share price falls below a designated level.
The company has Domestic non-marketable equity securities after allowance for
impairment loss amounted to 43.96 million baht. The company has no policy to
increase investment in non-listed securities but concentrated on quality of securities
and sells the securities at designated level.
In debt instruments, the volatility of price caused from change in interest rate which
mentioned on (2.1) Interest rate volatility risk.
3. Liquidity Risk
A liquidity risk will arise when the Company cannot make payment on its debt when it
is due. The Company utilizes a risk control system that complies with the Bank of
Thailand requirement that states that liquid assets must be maintained at not less
than 6 percent of the Company’s total borrowings from the public, both domestic and
overseas. These liquid assets can be cash deposits with the Bank of Thailand,
government and state enterprise bond holdings and cash deposits at locally-registered
financial institutions. The excessive liquidity could expand to loan and investment
which raised Company’s earning.
When there is a need for cash, for example in case of debt repayment on the
promissory notes at expiration or expansion of new credits, the responsible
department will know in advance and will maintain sufficient liquidity for such
matters. By reviewing the daily financial status report, the Company is able to
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Bangkok First Investment & Trust Public Company Limited
effectively manage its liquidity. However, in an emergency case or there is no
advance notice, the Company was established an emergency backup account with
financial institution to provide liquidity.
From the balance sheet, as 31 December 2006 the Company’s financial assets and
financial liabilities classify by maturity are followings:
Not more than Over
one year one year
Financial assets
- Cash and deposits at financial institutions 47.8 -
- Loans to Financial institutions – net 49.8 -
- Securities purchased under resale agreements 506.0 -
- Net investments 1,046.1 2,890.8
- Financial business loans and receivables 1,703.3 1,217.7
Total Financial assets 3,353.3 4,108.5
Financial liabilities
- Borrowings and deposits 4,966.4 140.8
- Securities business payables 0.1 -
Total Financial liabilities 4,966.5 140.8
* Excluded Non-performing loans
The Company had risk from Maturity Mismatch. The Majors Source of Funds came
from short term borrowings and deposits which were usual structure of deposit.
However, a majority of them are rolled over automatically upon maturity.
Notwithstanding, the majors investment funds both short term and long term were
domestic securities and loan from financial institution that could be sufficiency for
liquidity problem. Moreover, the Company was established an emergency liquidity
plan for liquidity crisis which included emergency liquidity manual.
As 31 December 2006, the Company had liquidity assets accounted for 21.54 percent
of Total borrowings and deposits which exceeded the requirement of the Bank of
Thailand.
4. Operation Risk
4.1 Management Risk
The majority of management executives has been employed with the Company for a
long time and possesses high experience and knowledge about the nature of the
business. The fact that the management has steered the Company through the
economic crisis of the past few years has been evident. In accordance with the
Company policy of decentralization the management has continued to provide and
transfer knowledge and experience to the mid-level management officers in
attempting to reduce risks.
4.2 Information Technology System Risk
A modern IT system-linked database with high accuracy and timely service is very
crucial to the decision-making process for the day-to-day business operation amid the
intense competition in the industry. Such system is categorized as follows:
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Bangkok First Investment & Trust Public Company Limited
4.2.1 Workflow and Database: These have been developed internally by the
Company’s staffs that have been responsible for the efficiency and
effectiveness of the systems to provide support for all the needs of the end-
users. Concurrently, the IT system is being upgraded on a continual basis and
in line with local industry standards to cope with the increasing demand and
competitive edge of the securities business.
4.2.2 System Hardware: The Company has set up a contingency back-up plan for
all its computer hardware including the peripheral equipment. A back-up
system has been developed to safeguard the Company’s databases. A set of
stand-by computer system is available in the event that the central computer
system fails so that the daily business operation would not be affected.
4.2.3 System Network: A modern local area network (LAN) system is currently in
use to provide interactive on-line access for all users within the Company. A
network firewall is also in place to prevent any illegal entry. Moreover, the
Company's system network has the capability to link up with other outside
sources such as the Stock Exchange of Thailand and the Bank of Thailand. A
contingency plan and a back-up system network have been prepared and
would be ready to provide support and ensure that the daily business
operation can run smoothly should the existing LAN network faces a link-up
difficulty with the external sources.
4.2.4 Trained Staffs: The Company has well-trained and skilled IT staffs who
continue to receive support from the management in terms of training and
workshop attendance in order to enhance each staff member's efficiency and
knowledge about this fast-changing global technology.
4.3 Risk arising from key personnel
The majority of staffs has been employed with the Company for a long time and has
accumulated extensive professional experience. However, given the highly
competitive nature of the Company's business amid the fast-changing investment
conditions over the past few years, some staffs might find it difficult to adjust to the
changes. Hence, the Company has introduced a policy to provide training and
orientation for further development of its human resources. New staffs with special
skills and knowledge are also being recruited to help lift the efficiency of the business
operation.
5. Strategic Risk
5.1 Capital Adequacy Risk
The Company’s capital fund is primarily used for extending new credits and for making
further investments through the most proper and effective allocation of funds. The
Company maintains a capital-to-risk assets ratio higher than that required by the Bank
of Thailand. The capital adequacy risk factor is closely monitored on a daily basis by
the responsible credit control section of the loan and placement department which
checks and re-examines the outstanding balance to ensure that they are in line with
the approved credit.
The Company’s investments in equity are monitored so that the value of the initial
investment cost does not exceed 60 percent of the capital fund at any one time,
excluding that equity that has been derived from debt restructuring. To control the
single credit risk factor, the Company also factors in the investment in equity and
debts instrument with credit extension. The responsible credit officer must make sure
that the total exposure to each customer does not exceed that required by the Bank of
Thailand.
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Bangkok First Investment & Trust Public Company Limited
As at the end of 2006, the Company’s capital-to-risk assets ratio was at a high level
of 28.97 percent, in comparison with the Bank of Thailand’s requirement of 8.0
percent. Hence, there is more than sufficient capital for new lending and further
investments, including provisions for assets deterioration in the foreseeable future.
Moreover, the present Company’s capital-to-risk assets ratio calculated follow to
BASEL II standards will be sufficient also.
5.2 Regulation Risk
The risk arises from improvements or changes in regulations, law or requirements of
the authorities concerned which might affect the Company’s business operations.
At the end of 2006, the Bank of Thailand was changed the announcement about
regulation, loan classifies, reserves and appraisal which was related to an
International Accounting Standard (IAS) No.39: Financial Instruments: Recognition
and Measurement. The Bank of Thailand was expected to regulate IAS no.39 in year
2008 which announced this regulation for Financial Institutions to prepare. If the
company adopts IAS no.39, the company will increase reserves to 100 percent of
non-performing loans subtract present value of expecting cash flow from sale
collateral assets. This change is more regulate in non-performing loans. However, it’s
not significant effect from this change because the company has non-performing
loans in a small amount and the company was set the reserves higher than the
criterion by Bank of Thailand.
Moreover, changes in Thai accounting standard No.44 regarding investment in
subsidiaries from recognize subsidiary’s business operation by portion of equity
shares (equity method) to recognize whenever subsidiary’s dividend payment (cost
method) which affected the company’s recognition in business operation of
subsidiaries. This change regulated since 2007. However, the consolidate balance was
not affected from this change.
5.3 Risk from investment in subsidiary
The risk from investment in subsidiaries that the company’s earnings or capital funds
are adversely affected by recognition of losses from its investment in the subsidiary,
as a result of theirs negative performance.
As fourth quarter 2006, BSEC (the subsidiary) was listed in Stock Exchange of
Thailand by offering newly ordinary shares to the existing shareholder of BFIT and
public.
As a result of increase equity capital of BSEC, its affect the company’s equity which
was decreased from 100 percent to 50 percent of total stock offered by BSEC. So, the
company’s recognize gain and loss in subsidiary decreased to 50 percent.
The mainly income of BSEC come from brokerage fees that related to economic
condition, money market and capital market condition. Moreover, competition risks in
securities business which finding quality marketing officer, large customer base. It’s
importance subsidiary’s risk. In addition, they have the risk of default in payment or
securities transferring by customers.
For the details of risk in BSEC could find in the Annual Report (Form 56-2) of BSEC.
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