Question

Credit Risk Management Credit

Risk Management Policy To achieve sustainable growth, our credit strategy focuses on a balance between portfolio value creation and protection within our risk appetite. Portfolio management, credit policy and related credit procedures must comply with this strategy and must be in line with the Bank of Thailand’s regulatory requirements, the government’s policy adjustment and the plan that focuses on United Nations Sustainable Development Goals (SDGs), including how to cope with climate change, that may affect business operations in terms of risk and business opportunity. KBank reviewed credit risk management policy, both in terms of credit risk and impacts on the environment and society, including the launch of new products and services in different circumstances, to ensure that our business operations are in compliance with relevant standards, accommodating changes in credit quality and sustainable growth of KBank. Such revisions were monitored for their impacts on portfolios, and updated for reference in KBank’s database available to relevant users covering criteria for credit granting, management and credit risk management tools.

Credit Risk Management Process A credit risk management process, from portfolio management to recovery and collection, has been established and continuously enhanced to appropriately reflect risk involved, as well as promote business capability.

Portfolio Management KBank emphasized active portfolio management corresponding to prevailing circumstances, particularly economic factors that could affect our customers and our portfolio quality. Via Active Credit Portfolio Management (ACPM) and stress testing, KBank ensured timely portfolio management towards any deviation against our planned targets. Meanwhile, KBank has also focused on portfolio management so as to control credit concentration within the established limits. Close monitoring of customer risk profile across industries was undertaken through the establishment of loan growth target in alignment with prevailing economic conditions, taking into account customer segments, product domains and industry outlooks, to maximize returns from each customer segment portfolio under defined risk appetite. KBank adopted credit risk management mechanisms as follows: • Set up Credit Risk Management Sub-committee and Credit Process Management Sub-committee. The committee managed a balance between credit risks and process efficiency to ensure effective risk management and consistency of relevant credit processes, thus allowing KBank to deliver a good customer experience. • Revise customer screening criteria on a regular basis to reflect customer risk profile. Credit policy has been tailored for each customer segment. Industry pre-screening criteria, which can be used as a guideline for customer selection, have been established to classify customers based on sector risk levels. • Establish risk management mechanism in response to risk events which may affect our customers. Early warning sign monitoring will trigger actions of responsible departments to assess impacts on affected customers and KBank by conducting in-depth analysis and stress testing. Thus, KBank shall be able to proactively prevent and solve any problems which may arise in a timely manner prior to deterioration of customers’ debt servicing capability and overall credit quality of KBank. • Monitor customers’ credit line utilization and customer status via early warning signs. Guidance has been provided for Relationship Managers (RMs) to contact customers at an early stage when early warning signs are detected. • Manage credit concentration risk in terms of borrower group concentration, sectoral concentration and country concentration. Credit exposures are maintained within predetermined limits, per the Bank of Thailand’s guidelines.

• Credit Underwriting and Approval KBank has formulated lending policy to ensure uniformity of good credit underwriting practices and comply with the Bank of Thailand’s consolidated supervision guidelines. Guidelines for preferable and discouraged practices are also defined to ensure quality of credit extension. KBank’s credit risk management is based on current, transparent and qualified data. The credit approval processes and systems are designed to align with customers’ characteristics. Medium and Large Business customers with sophisticated financial needs are served by Relationship Managers (RMs) with thorough understanding of customers’ business and financial profiles. RMs are responsible for analyzing and proposing suitable credit products and services to match customer needs, presenting credit proposal to credit underwriters according to the defined approval authorities, and continual monitoring customer status. For retail customers whose main products comprise home loans, credit cards and other types of financing, including loans for small and micro businesses, KBank deploys credit scoring as a credit approval tool, focusing on verification of income and liability information of each customer. KBank has also focused efforts on credit approval process improvement, while ensuring risk levels under a defined risk appetite. Aside from the above practices, KBank realizes the importance of responsibility toward society and the environment in our credit underwriting. Guidelines and policies for environmental and social impacts have been established for project finance requests at home and abroad, including project monitoring throughout the credit term. • Post-Credit Approval Operations To achieve standardized and efficient credit operations, KBank has centralized credit operations covering legal and contract-related arrangement, preparation of collateral agreements, credit limit setup, credit disbursement, creditrelated document storage and credit data support. KBank also set up processes to monitor customer credit-utilization behavior, business performance, compliance with contractual conditions as well as their debt servicing ability.

Please analyze credit risk of Kbank. around 300 words thanks

Answer 1

What is Credit Risk Analysis?

Credit risk analysis can be thought of as an extension of the credit allocation process. After an individual or business applies to a bank or financial institution for a loan, the lending institution analyzes the potential benefits and costs associated with the loan. Credit risk analysis is used to estimate the costs associated with the loan. To learn more, check out CFI’s Credit Analyst Certification program.

Credit risk or credit default risk is a type of risk faced by lenders. Credit risk arises because a debtor can always renege on their debt payments. Commercial banks, investment banks, asset management companies, private equity funds, venture capital funds, and insurance companies all need to analyze the credit risks they are exposed to in order to profitably operate in the market.

What is Credit Risk?

Credit risk or credit default risk associated with a financial transaction is simply the expected loss of that transaction. It can be defined as follows:

Credit Risk = Default Probability x Exposure x Loss Rate

Where:

• Default Probability is the probability of a debtor reneging on his debt payments.
• Exposure is the total amount the lender is supposed to get paid. In most cases, it is simply the amount borrowed by the debtor plus interest payments.
• Loss Rate = 1 – Recovery Rate, where Recovery Rate is the proportion of the total amount that can be recovered if the debtor defaults. Credit risk analysts analyze each of the determinants of credit risk and try to minimize the aggregate risk faced by an organization.

Types of Credit Risk

1. Concentration risk

Concentration risk, also known as industry risk, is the risk arising from gaining too much exposure to any one industry or sector. For example, an investor who lent money to battery manufacturers, tire manufacturers, and oil companies is extremely vulnerable to shocks affecting the automobile sector.

2. Institutional risk

Institutional risk is the risk associated with the breakdown of the legal structure or of the entity that supervises the contract between the lender and the debtor. For example, a lender who gave money to a property developer operating in a politically unstable country needs to account for the fact that a change in the political regime could drastically increase the default probability and the loss rate.

Credit Risk, the Housing Bubble, and the Great Recession

Improper risk management by banks and other financial institutions was a key factor behind the US housing bubble in the mid-2000s that eventually led to the 2008 recession. Commercial banks, investment banks, and other financial markets participants underestimated both the default probability and the loss rate and consequently underestimated the credit risk they were facing.

In the lead-up to the recession, most lenders gave loans to individuals and businesses with questionable credit history. The fact was most evident in the housing market, where easy credit led to house prices rising rapidly in the mid-2000s. Increased house prices meant borrowers could refinance their mortgages and borrow even more money, which fueled the bubble even further.

Kasikornbank (KBank)

Kasikornbank (KBank) is adjusting its management team in preparation for post-pandemic conditions and to fill the void left by former co-president Predee Daochai.

Mr Predee, who was also chairman of the Thai Bankers' Association, left the posts in late July to become finance minister, replacing Uttama Savanayana.

Mr Predee played a key role in overseeing KBank's risk management operations.

The country's largest commercial lender by assets is reconfiguring its management team and offering more job functions to new-generation executives, in line with the changing economic landscape during the post-coronavirus era, said chief executive Kattiya Indaravijaya.

For the post-Covid period, the bank will need more than one executive to manage several risk areas.

Besides the banking business focused mainly on market risk and credit risk as a traditional practice, other key risks areas, such as cybersecurity, will have to be covered under the new norms.

"The new [management] team will be tasked with business operations in the post-Covid period, and the bank has been moving forward to implement new norms for our business operations," Ms Kattiya said.

Regional banking business and digital banking remain the bank's new S-curve growth strategy.

These business areas will generate new income sources amid lower revenue from traditional and domestic-based banking businesses, Ms Kattiya said.

KBank and its subsidiaries announced a net profit for the first half of 9.6 billion baht, down 52.2% year-on-year. Higher loan-loss provisions and financial aid measures for the outbreak weakened the bank's operating results.

The bank will also pay more attention to innovative service development in order to improve business potential, lower operating costs and strengthen competitiveness in preparation for changes occurring in the post-Covid era, Ms Kattiya said.

KBank's digital banking services via the Line app, called Line BK, are scheduled to launch this quarter, delayed from mid-year because of the pandemic's impact.

The bank also needs to completely prepare both the front and back offices because Line BK will be set up as a new banking entity, Ms Kattiya said.

For the initial stage, Line BK services will include digital deposits, digital loans and digital debit cards offered by Kasikorn-Line, a joint venture of KBank and Line Corporation.

The bank has also developed financial services under a partnership with Grab Thailand, focusing mainly on digital payment.

KBank uses Grab Thailand's data analytics to offer digital loans to Grab drivers.

In 2018, Beacon Venture Capital, an arm of KBank, bought 0.45% of Singapore-based Grab Holdings for US$50 million in order to expand its customer base.