THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2007 AND 2006

Transcription

1 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2007 AND 2006

2 Report of Independent Auditor To The Shareholders of Thanachart Bank Public Company Limited I have audited the accompanying consolidated balance sheet of Thanachart Bank Public Company Limited and its subsidiaries as at 31 December 2007, the related consolidated statements of income, changes in shareholders equity, and cash flows for the year then ended, and I have audited the separate financial statements of Thanachart Bank Public Company Limited as at 31 December 2007 and 2006 and for the years then ended. These are the responsibility of the management of the Bank as to their correctness and the completeness of the presentation. My responsibility is to report on these financial statements based on my audits. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion. In my opinion, the referred to above present fairly, in all material respects, the financial position of Thanachart Bank Public Company Limited and its subsidiaries as at 31 December 2007, the results of their operations and cash flows for the year then ended and the financial position of Thanachart Bank Public Company Limited as at 31 December 2007 and 2006, and the results of its operations and cash flows for the years then ended, in accordance with generally accepted accounting principles. Ernst & Young Office Limited Bangkok : 27 February 2008 Ratana Jala Certified Public Accountant (Thailand) No. 3734

3 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES BALANCE SHEETS AS AT 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Note ASSETS CASH 3,274,606,674 3,274,344,083 2,465,680,903 INTERBANK AND MONEY MARKET ITEMS 5 Domestic Interest bearing 1,181,556,876 2,729, Non-interest bearing 3,094,203,371 2,884,499,724 2,356,177,847 Foreign Interest bearing 35,600,519,727 35,600,519,727 21,420,641,997 Non-interest bearing 181,005, ,005, ,083,340 Total interbank and money market items - Net 40,057,285,941 38,668,755,052 23,880,903,684 SECURITIES PURCHASED UNDER RESALE AGREEMENTS 6 2,500,000,000 2,500,000,000 6,300,000,000 INVESTMENTS Current investments - Net 7 4,185,576,423 1,088,424,357 2,460,534,046 Long-term investments - Net 7 17,861,124,482 14,584,641,555 19,433,837,723 Investments in subsidiary companies 8-4,294,857,378 - Investments in an associated company 9 1,125,124, Net investments 23,171,825,219 19,967,923,290 21,894,371,769 RECEIVABLES FROM CLEARING HOUSE 243,570, LOANS AND ACCRUED INTEREST RECEIVABLES 10 Loans 226,642,955, ,940,273, ,651,530,512 Securities business receivables 2,133,511, Total loans and receivables 228,776,466, ,940,273, ,651,530,512 Accrued interest receivables 209,110, ,114, ,866,673 Total loans and accrued interest receivables 228,985,577, ,149,387, ,885,397,185 Less : Allowance for doubtful accounts 11 (5,037,359,876) (4,522,130,101) (3,061,436,791) Revaluation allowance for debt restructuring 12 (10,156,754) (10,156,754) (71,237,127) Net loans and accrued interest receivables 223,938,060, ,617,100, ,752,723,267 PROPERTY FORECLOSED - Net 15 1,423,852,044 1,406,075,231 1,028,609,836 LAND, PREMISES AND EQUIPMENT - Net 16 2,086,877,878 1,782,616,102 1,198,302,080 INTANGIBLE ASSETS - SOFTWARE - Net ,564, ,394,091 24,574,680 VALUE ADDED TAX RECEIVABLES 1,095,085,586 1,060,238,117 1,470,695,348 OTHER ASSETS - Net 18 2,783,014,057 1,644,093,471 1,419,799,604 TOTAL ASSETS 300,786,743, ,097,540, ,435,661,171 The accompanying notes are an integral part of the.

4 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES BALANCE SHEETS (Continued) AS AT 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Note LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS 19 Deposits in Baht 190,491,698, ,917,800, ,981,230,988 Deposits in foreign currencies 628,475, ,475,240 75,568 Total deposits 191,120,173, ,546,275, ,981,306,556 INTERBANK AND MONEY MARKET ITEMS 20 Domestic Interest bearing 4,173,197,476 4,204,743,140 4,340,513,507 Non-interest bearing 588,938, ,018, ,353,653 Foreign Non-interest bearing 6,679,965 6,679,965 - Total interbank and money market items 4,768,815,900 4,865,441,266 4,588,867,160 SECURITIES BUSINESS PAYABLE 1,243,919, LIABILITY PAYABLE ON DEMAND 1,329,027,334 1,329,027,334 1,461,622,782 BORROWINGS 21 Short-term borrowings 59,082,967,154 58,547,967,154 15,524,806,406 Long-term borrowings 9,600,000,000 9,890,000,000 17,078,520,000 Total borrowings 68,682,967,154 68,437,967,154 32,603,326,406 ACCRUED INTEREST PAYABLE 1,429,147,279 1,439,220,424 1,777,324,846 UNEARNED PREMIUM RESERVE 1,207,394, LIFE PREMIUM RESERVE 5,593,424, CORPORATE INCOME TAX PAYABLE 227,122,846-54,134,832 ACCRUED EXPENSES 1,040,521, ,246, ,691,057 OTHER LIABILITIES 22 3,164,003,761 2,229,213,231 2,431,860,905 TOTAL LIABILITIES 279,806,518, ,402,392, ,237,134,544 The accompanying notes are an integral part of the.

5 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES BALANCE SHEETS (Continued) AS AT 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Note SHAREHOLDERS EQUITY Share capital 23 Registered 2,134,619,292 ordinary shares of Baht 10 each (2006 : 1,500,000,000 ordinary shares of Baht 10 each) 21,346,192,920 21,346,192,920 15,000,000,000 Issued and paid-up share capital 1,734,619,292 ordinary shares of Baht 10 each (2006 : 1,458,356,092 ordinary shares of Baht 10 each) 17,346,192,920 17,346,192,920 14,583,560,920 Share premium 2,100,694,232 2,100,694, ,897,648 Revaluation surplus on investments ,168,306 70,775,754 18,776,937 Revaluation deficit on investments 24 (397,022,334) (382,732,553) (533,077,393) Surplus from business combination under common control 2.2 (123,378,934) - - Retained earnings Appropriated - statutory reserve ,432, ,432,979 77,902,848 Unappropriated 1,769,082,216 1,432,784, ,465,667 Equity attributable to the Bank s shareholders 20,923,169,385 20,695,148,061 15,198,526,627 Minority interest - equity attributable to minority shareholders of subsidiaries 57,054, TOTAL SHAREHOLDERS EQUITY 20,980,224,382 20,695,148,061 15,198,526,627 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 300,786,743, ,097,540, ,435,661, OFF-BALANCE SHEET ITEMS - CONTINGENCIES 36.1 Aval to bills 23,887,500 23,887,500 53,669,300 Liability under unmatured import bills 25,150,252 25,150,252 18,911,350 Letter of credits 399,286, ,286,956 94,146,696 Other commitments 74,645,655,880 74,617,605,880 53,567,232,272 The accompanying notes are an integral part of the.

6 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Note INTEREST AND DIVIDEND INCOME Loans 4,475,775,639 4,527,986,319 6,691,431,982 Interbank and money market items 1,221,581,467 1,182,708,658 2,121,190,008 Hire purchase and financial lease 10,649,049,648 10,370,457,937 5,836,166,884 Investments 1,142,001,291 1,042,335, ,086,733 Total interest and dividend income 17,488,408,045 17,123,488,404 15,519,875,607 INTEREST EXPENSES Deposits 7,262,101,102 7,267,975,526 8,216,135,450 Interbank and money market items 171,570, ,935, ,781,055 Short-term borrowings 1,259,698,452 1,235,479, ,653,979 Long-term borrowings 702,854, ,722,748 1,031,577,385 Total interest expenses 9,396,224,182 9,386,112,941 9,510,147,869 Net interest and dividend income 8,092,183,863 7,737,375,463 6,009,727,738 BAD DEBTS AND DOUBTFUL ACCOUNTS 13 (2,692,162,099) (2,605,588,978) (1,220,038,354) LOSS ON DEBT RESTRUCTURING (334,730) (334,730) (33,572,117) Net interest and dividend income after bad debts and doubtful accounts and loss on debt restructuring 5,399,687,034 5,131,451,755 4,756,117,267 NON-INTEREST INCOME Brokerage fees 440,710, Gain on investments 27 82,694,749 71,007, ,873,175 Share of income from investments accounted for under equity method 79,185, Fees and service income Acceptances, aval and guarantees 21,780,855 21,780,855 16,576,429 Discounted income on insurance premium 731,709, ,018, ,852,594 Others 850,858, ,007, ,033,049 Gain on exchanges and financial derivatives contracts 50,306,537 50,308,740 39,246,412 Insurance premium/life insurance premium income 3,364,686, Income on supporting service 251,698, ,529, ,393,190 Other income 236,868, ,071,925 58,426,465 Total non-interest income 6,110,498,086 2,004,724,364 1,318,401,314 The accompanying notes are an integral part of the.

7 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES INCOME STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Note NON-INTEREST EXPENSES Personnel expenses 28 2,335,315,342 1,825,395,763 1,279,550,795 Premises and equipment expenses 945,455, ,562, ,221,726 Taxes and duties ,283, ,511, ,576,927 Fees and charges 162,375,521 44,928,819 42,735,520 Directors remuneration 29 9,959,534 7,869,534 9,718,890 Loss (gain) on disposal of property foreclosed and other assets 30 66,224,791 63,719,090 (36,535,974) Contribution fee to the Financial Institutions Development Fund 814,591, ,591, ,352,585 Commission on hire-purchase ,445,856,826 Insurance/Life insurance expenses 2,859,280, Other expenses 2,395,617,280 2,235,042,955 1,306,977,816 Total non-interest expenses 9,904,103,717 6,104,621,602 5,744,455,111 INCOME BEFORE INCOME TAX AND MINORITY INTEREST 1,606,081,403 1,031,554, ,063,470 CORPORATE INCOME TAX 31 (259,499,625) (40,951,911) (104,983,954) INCOME BEFORE MINORITY INTEREST 1,346,581, ,602, ,079,516 NET INCOME ATTRIBUTABLE TO MINORITY INTEREST IN SUBSIDIARIES (19,681,685) - - NET INCOME FOR THE YEAR 1,326,900, ,602, ,079,516 EARNINGS PER SHARE 32 Basic earnings per share Weighted average number of ordinary shares (shares) 1,583,999,082 1,583,999,082 1,458,356,092 The accompanying notes are an integral part of the.

8 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS Surplus from Issued and Revaluation Revaluation business Retained earnings paid-up surplus on deficit on combination under Appropriated - Minority share capital Share premium investments investments common control statutory reserve Unappropriated interest Total Balance - as at 1 January ,583,560, ,897,648 18,776,937 (533,077,393) - 77,902, ,465,667-15,198,526,627 Increase from share capital issuance 2,762,632,000 1,759,796, ,522,428,584 Increase in revaluation surplus on investments ,391, ,391,369 Decrease in revaluation deficit on investments ,055, ,055,059 Surplus from business combination under common control (123,378,934) (123,378,934) Increase in minority interest in subsidiaries ,373,312 37,373,312 Net income for the year ,326,900,093 19,681,685 1,346,581,778 Dividend paid (Note 23) (218,753,413) - (218,753,413) Transfer of retained earnings to statutory reserve (Note 25) ,530,131 (49,530,131) - - Balance - as at 31 December ,346,192,920 2,100,694, ,168,306 (397,022,334) (123,378,934) 127,432,979 1,769,082,216 57,054,997 20,980,224,382 The accompanying notes are an integral part of the.

9 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 (Unit : Baht) SEPARATE FINANCIAL STATEMENTS Issued and Revaluation Revaluation Retained earnings paid-up surplus on deficit on Appropriated - share capital Share premium investments investments statutory reserve Unappropriated Total Balance - as at 1 January ,583,560, ,897,648 91,899,233 (643,914,708) 66,648, ,229,149 15,300,321,115 Decrease in revaluation surplus on investments - - (73,122,296) (73,122,296) Decrease in revaluation deficit on investments ,837, ,837,315 Net income for the year ,079, ,079,516 Dividend paid (364,589,023) (364,589,023) Transfer of retatined earnings to statutory reserve ,253,975 (11,253,975) - Balance - as at 31 December ,583,560, ,897,648 18,776,937 (533,077,393) 77,902, ,465,667 15,198,526,627 Increase from share capital issuance 2,762,632,000 1,759,796, ,522,428,584 Increase in revaluation surplus on investments ,998, ,998,817 Decrease in revaluation deficit on investments ,344, ,344,840 Net income for the year ,602, ,602,606 Dividend paid (Note 23) (218,753,413) (218,753,413) Transfer of retatined earnings to statutory reserve (Note 25) ,530,131 (49,530,131) - Balance - as at 31 December ,346,192,920 2,100,694,232 70,775,754 (382,732,553) 127,432,979 1,432,784,729 20,695,148,061 The accompanying notes are an integral part of the.

10 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Cash flows from operating activities Net income 1,326,900, ,602, ,079,516 Adjustments to reconcile net income to net cash provided by (used in) operating activities :- Net income attributable to minority interest 19,681, Share of income from investments accounted for under equity method (79,185,366) - - Depreciation and amortisation 350,123, ,132, ,347,621 Bad debt and doubtful accounts and loss from debt restructuring 2,692,496,829 2,605,923,708 1,253,610,471 Amortisation of discounts on investment in debt securities (250,504,617) (242,109,142) (36,442,713) Amortisation of discounts on borrowings 28,028,979 28,028,979 28,810,694 Increase in allowance for impairment of investments 35,676,107 35,676,107 7,952,863 Increase (decrease) in allowance for impairment of property foreclosed 58,461,179 57,333,108 (1,439,168) Interest income and other income from the assets transferred for debt repayment (1,285,960) (1,285,960) (1,045,403) Loss from disposal of other assets - - 8,640,867 Loss (gain) from disposal of equipment 16,938,200 13,963,520 (725,596) Unrealised loss on exchange 93,176,944 93,176, ,057,670 Gain from sales of investment in an associated company (6,913,845) - - Increase in unearned premium reserve/life insurance premium reserve 1,655,114, Increase in allowance for impairment of other assets 33,194,003 29,982,394 8,272,019 Gain from redemption of subordinated debenture before maturity date - - (7,485,243) Decrease (increase) in accrued interest and dividend income receivable 44,804,438 55,501,454 (272,283,108) Decrease (increase) in other income receivable (183,430,261) (3,066,190) 6,801,105 Decrease in fees and rental received in advance (21,526,095) (21,526,095) (16,278,551) Amortisation of deferred income (146,795,668) (146,795,668) (82,723,957) Increase (decrease) in accrued interest payable (353,537,396) (338,104,422) 622,303,003 Increase in accrued expenses 472,318, ,555, ,622,208 Income from operating activities before changes in operating assets and liabilities 5,783,735,171 3,678,989,605 2,237,074,298 Decrease (increase) in operating assets Interbank and money market items (13,076,286,867) (14,841,984,559) (20,283,637,890) Securities purchased under resale agreements 3,800,000,000 3,800,000,000 6,200,000,000 Receivables from clearing house (14,315,037) - - Loans and receivables (27,295,863,657) (29,609,287,400) (43,629,105,300) Property foreclosed 3,787,365,913 3,718,764,703 1,425,713,603 Other assets (98,968,769) 1,827, ,543,456 The accompanying notes are an integral part of the.

11 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 (Unit : Baht) CONSOLIDATED FINANCIAL STATEMENTS SEPARATE FINANCIAL STATEMENTS Increase (decrease) in operating liabilities Deposits (7,861,132,569) (7,435,030,637) 49,966,381,231 Interbank and money market items (1,295,051,260) 276,574,106 1,941,051,441 Payable to clearing house (287,742,048) - - Securities business payable 158,398, Liability payable on demand (132,595,448) (132,595,448) 464,467,493 Other liabilities (223,537,277) (194,942,736) 1,132,072,396 Net cash flows used in operating activities (36,755,993,125) (40,737,684,698) (219,439,272) Cash flows from investing activities Decrease (increase) in investments in securities held for investment 3,910,287,328 6,484,702,549 (4,632,336,577) Cash paid for acquisition of investment in subsidiaries (4,236,048,859) (4,241,357,378) - Cash received from sales of investment in an associated company 345,970, Cash paid for purchase of equipment (888,090,803) (816,439,730) (713,009,830) Cash received from disposal of equipment 10,014,070 9,155,497 5,133,820 Net cash flows from (used in) investing activities (857,868,044) 1,436,060,938 (5,340,212,587) Cash flows from financing activities Cash received from issued additional share capital 4,522,428,584 4,522,428,584 - Cash received from borrowings 46,416,811,769 46,545,811,769 7,687,075,385 Cash payment for borrowings (12,297,700,000) (10,739,200,000) (97,514,757) Cash paid for dividend (218,753,413) (218,753,413) (364,589,023) Net cash flows from financing activities 38,422,786,940 40,110,286,940 7,224,971,605 Net increase in cash 808,925, ,663,180 1,665,319,746 Cash at beginning of the year 2,465,680,903 2,465,680, ,361,157 Cash at end of the year 3,274,606,674 3,274,344,083 2,465,680,903 Supplemental cash flows information : Cash paid during the year for Interest 9,653,796,384 9,696,188,385 8,859,034,171 Corporate income tax 251,805,813 50,761,412 53,776,868 Non-cash transactions Transfer of properties foreclosed from receivables for debt settlement 4,221,349,520 4,148,546,450 1,671,594,315 Accounts payable for purchase of fixed assets 78,486,737 63,931, ,010,420 Bad debt written-off 1,207,874,410 1,207,874,410 - The accompanying notes are an integral part of the.

12 THANACHART BANK PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2007 AND GENERAL INFORMATION 1.1 The Bank s information Thanachart Bank Public Company Limited ( the Bank ) was incorporated as a public limited company under Thai laws and commenced operation as a commercial bank on 22 April The Bank s registered address is 900, Tonson Tower, Ploenchit Road, Lumpini, Pathumwan, Bangkok. Its parent company is Thanachart Capital Public Company Limited ( the Parent Company ), a public limited company also existing under Thai laws. As at 31 December 2007, the Parent Company holds percent of its shares (2006 : holds percent of its shares), and the Bank had 166 operational branches. On 1 October 2007, Extraordinary Shareholders Meeting of the Bank approved the delisting of the shares of the Bank from the Stock Exchange of Thailand ( SET ). On 9 October 2007, the SET granted permission to delist the Bank s common shares. In addition, on 15 January 2008, the Bank has registered the delisting from the SET. 1.2 Restructure of business performance in financial institution a) On 5 July 2007, the Bank of Thailand ( the BOT ) approved a proposal for the Bank and the Parent Company to change the structure of the financial business group in accordance with the principle of consolidated supervision. In this regard, in accordance with a resolution of the Annual General Meeting of the Shareholders of the Parent Company and the Bank held on 30 April 2007, the Bank has to purchase investments in 8 subsidiaries from the Parent Company. These subsidiaries are Thanachart Securities Public Company Limited, Thanachart Insurance Company Limited, Thanachart Life Assurance Company Limited, Thanachart Fund Management Company Limited, Thanachart Broker Company Limited, Thanachart Group Leasing Company Limited, Thanachart Management and Services Company Limited and Thanachart Legal and Appraisal Company Limited. On 12 July 2007, the Bank purchased the said 8 subsidiaries from the Parent Company for a total of Baht 4,158 million, with the price being referenced to the book value of the subsidiaries as of the end of June

13 Moreover, the BOT granted permission for the Parent Company to be shareholder of the three companies in the financial business group, comprising the Bank and two asset management companies, together with one of the companies outside the financial business group that carries on financial business (in this respect, the existing conditions of permission are to be complied with and the investment in this company does not need to be deducted from the capital fund of the financial group). In this permission, the Parent Company can invest in an another four companies, comprising MBK Public Company Limited, Pathum Rice Mill and Granery Public Company Limited, Puen Pob Paet Company Limited, and Saturn Inc., outside the financial business group that do not operate financial business, another company, HTR Corporation Limited, acquired as a result of debt restructuring, in which shareholding is to be reduced to not more than 10% within 20 December 2009, and another two companies, Prosperity Industrial Estate Company Limited and V.M.C. Safety Glass (Thailand) Company Limited, acquired as a result of debt restructuring, in which investments should comply with the former permission condition that the Group has to reduce its holding to not more than 10% within 31 December The Group has already met this condition. In calculating capital funds under the consolidated supervision level, the Parent Company must apply full consolidation, such that investments where direct and indirect shareholdings in companies in the financial business group amount to less than 50% of the issued and paid-up capital, investments in companies in which the Parent Company is not permitted to hold more than 10% of paid-up share capital and investments in insurance and life-assurance companies are to be deducted from the capital funds of the financial business group. The Bank is also to prepare on a solo consolidation basis, consolidating the financial information of the Bank and Thanachart Group Leasing Company Limited, with the Bank s direct and indirect shareholdings being deducted in the same way as those of the Parent Company. b) On 11 July 2007, the BOT announced that the minister of the Ministry of Finance had agreed to a relaxation of the rule whereby the Bank of Nova Scotia Asia Limited ( BNSAL ) could hold the Bank s shares but such holding was not to exceed 24.99% of the total paid-up capital, permitting the Bank to have non-thai shareholding of up to 49% of its total issued capital and allowing non-thai nationals directors to comprise more than one fourth, but no more than one half and no more than the proportion of non-thai shareholding, of the total number of directorships

14 On 19 July 2007, the Bank proposed the sale of 276,263,200 additionally issued shares to BNSAL at a price of Baht per share, and BNSAL s purchase of 157,130,216 existing ordinary shares of the Bank from the Parent Company at a price of Baht per share. As a result, BNSAL s shareholding in the Bank would total 433,393,416 shares, or 24.98% of its total issued capital, and the Parent Company would hold 1,291,912,593 of the Bank s shares, or 74.48%. Under the Shareholders Agreement made between the Parent Company and BNSAL on 29 April 2007, BNSAL had indicated its intention to purchase up to 49% of the issued and outstanding ordinary shares of the Bank as a strategic partner, in terms of both investment and management, with all additional shares to be purchased from the Parent Company, under conditions whereby the shares are to be purchased in 2 periods. However, the purchase of additional shares of the Bank depends on the receipt of regulatory approval. In addition, the Parent Company, the Bank and BNSAL agreed on other matters under the agreements, whereby each company had rights and performance obligations as per the conditions outlined in the agreements, such as stipulations on dividend payment, the sale of the Bank s shares, the issuance of additional securities or convertible securities by the Bank, the right of first refusal to purchase the Bank s share, obligation to purchase the Bank s share, call and put right to purchase the Bank s share, the appointment of directors of the Bank and its subsidiaries, and the assignment of experts to work at the Bank. Furthermore, under the conditions of the agreements among the Parent Company, the Bank and BNSAL, the Parent Company and the Bank must disclose information relating to the business performance, operations, and legal compliance of the Bank and its subsidiaries and certify the correctness of disclosed information, to assist BNSAL in deciding whether to purchase shares in the Bank. In the event that the Bank or its subsidiaries have to pay any damages, compensation or penalties to any other party, as a result of events or information that the Parent Company and the Bank failed to disclose to BNSAL before BNSAL purchased the shares of the Bank, the Parent Company and the Bank will compensate BNSAL for any losses, in accordance with the conditions and timeframe stipulated in the agreements

15 On 11 January 2008, BNSAL transferred all of its shares in the Bank to the Bank of Nova Scotia ( BNS ), which is the parent company of Nova Scotia Group. The transfer was approved by the minister of the Ministry of Finance, who has permitted BNS to hold up to 24.99% of the total paid-up capital of the Bank. As a result, BNS is a shareholder in the Bank instead of BNSAL, and all conditions of agreements pertaining to business between the Bank and BNSAL are to be fulfilled by BNS. c) On 19 July 2007, the Bank accepted the transfer of assets and liabilities of the Bank of Nova Scotia - Bangkok Branch in accordance with the One Presence Policy in line with the Financial Sector Master Plan. Under this policy, when BNSAL became a shareholder of the Bank, it had to return the commercial bank operation license of the Bank of Nova Scotia - Bangkok Branch to the Ministry of Finance and transfer its assets, liabilities and commitments denominated in Thai Baht and foreign currencies to the Bank, at their net book values, which are summarized in Thai Baht below :- Transactions Amount Assets - Loans Equipment 4 Liabilities - Deposits 53 Net amount paid 775 Letter of guarantee and letters of credit 1,754 Other commitment - foreign exchange contracts 10 d) During 2007, the Parent Company transferred 547 employees of the Parent Company to the Bank for support the operations of the Bank and its subsidiaries. All transferred staff will receive identical compensation and benefits. Moreover, the Parent Company transferred assets totaling Baht 221 million used by those staffs in carrying out their duties, including intellectual property, which comprising all related rights, obligations and benefits in IT-related intellectual property relevant to the business of the Bank and its subsidiaries. e) The Bank is in the process of requesting permission from BOT to change the structure of the financial business group by purchasing shares of Thanachart Leasing 2000 Company Limited from Thanachart Group Leasing Company Limited, in order to include Thanachart Leasing 2000 Company Limited as a subsidiary company in the solo consolidation group

16 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS 2.1 The have been prepared in accordance with accounting standards enunciated under the Accounting Profession Act B.E. 2547, with reference to the principles stipulated by the BOT. The presentation of the has been made in compliance with the Notification of the Bank of Thailand relating to the format of the of commercial banks dated 10 May The have been prepared on a historical cost basis except where otherwise disclosed in the accounting policy Basis of consolidation These consolidated include the of the Bank and the following subsidiary companies, in which the Bank invested during the current year. Therefore, the consolidated balance sheet as at 31 December 2007 include the subsidiary companies balance sheets and the consolidated income statement include the subsidiary companies results from the date of investment (1 July 2007 : Under the agreement made between the Bank and the Parent Company on 12 July 2007, the Parent Company agreed to transfer all of their benefits in those subsidiaries to the Bank since 1 July 2007) Subsidiary companies directly held by the Bank Thanachart Securities Plc Thanachart Insurance Co., Ltd Thanachart Life Assurance Co., Ltd Thanachart Fund Management Co., Ltd Thanachart Broker Co., Ltd Thanachart Group Leasing Co., Ltd Thanachart Management and Services Co., Ltd Thanachart Legal and Appraisal Co., Ltd Thanachart Training and Development Co., Ltd Subsidiary companies indirectly held by the Bank Thanachart Leasing 2000 Co., Ltd National Leasing Co., Ltd

17 Total assets and total income of the subsidiaries that have significant impact to and are included in the consolidated as at 31 December 2007 and for the year then ended (after eliminating significant intercompany transactions) are as follows :- Total assets as at 31 December 2007 Total income for the period ended 31 December 2007 Thanachart Life Assurance Co., Ltd. 6,023 2,365 Thanachart Securities Plc. 3, Thanachart Group Leasing Co., Ltd. 5, Thanachart Insurance Co., Ltd. 2,422 1,117 a) On 12 July 2007, the Bank purchased eight subsidiaries from its parent company for a total of Baht 4,158 million. The purchase price was based on the net book value of each subsidiary company as at the end of June Company Number of shares Percentage of holding Percent 1. Thanachart Securities Plc. 1,499,999, Thanachart Insurance Co., Ltd. 38,999, Thanachart Life Assurance Co., Ltd. 49,999, Thanachart Fund Management Co., Ltd. 7,499, Thanachart Broker Co., Ltd. 9,999, Thanachart Group Leasing Co., Ltd. 35,999, Thanachart Management and Services Co., Ltd. 599, Thanachart Legal and Appraisal Co., Ltd. 999,

18 This purchase of subsidiaries was treated as a business combination under common control since the Bank and the eight subsidiaries were all subsidiaries of and controlled by the Parent company. Therefore, the Bank recorded the investments based on a pooling-of-interests method, which means that the Bank records both assets and liabilities of all companies at book value at the date of combination under common control. The difference between the business combination cost and the interest of the Bank in the book value of the subsidiaries, amounting to Baht 123 million, was recognised in Surplus from business combination under common control and separately presented in shareholders equity. However, the Bank did not prepare consolidated from the latest date for which were presented, but prepared consolidated only from the date of investment, since no accounting standards have yet been announced. To provide additional information on the Bank s financial position and its operations for comparison purposes, the pro forma condensed consolidated balance sheet and consolidated income statement have been prepared and presented as though the merger between the Bank and its subsidiaries took place since prior years, as follows: Condensed balance sheets (Under business combination) Assets Cash 3,275 2,466 Interbank and money market items net 40,057 26,408 Securities purchased under resale agreements 2,500 6,300 Investments net 22,791 26,142 Loans and accrued interest receivables net 223, ,836 Property foreclosed net 1,424 1,041 Land, premises and equipment net 2,087 1,412 Other assets 4,334 3,681 Total assets 300, ,

19 Liabilities and shareholders equity Deposits 191, ,807 Interbank and money market items 4,769 4,507 Securities business payable 1, Liability payable on demand 1,329 1,462 Borrowings 68,683 33,408 Accrued interest payable 1,429 1,771 Life premium reserve 5,593 3,550 Other liabilities 5,639 9,688 Total liabilities 279, ,851 Shareholders equity of the Bank 20,558 14,344 Minority interest - equity attributable to minority shareholders of subsidiaries Total liabilities and shareholders equity 300, ,286 Condensed income statements (Under business combination) Consolidated For the years ended 31 December Interest and dividend income 17,788 15,955 Interest expenses (9,425) (9,519) Bad debt and doubtful accounts (2,744) (829) Non-interest income 8,768 5,624 Non-interest expenses (12,278) (10,179) Corporate income tax (423) (328) Net income attributable to minority interest (28) (19) Net income for the year 1, Earnings per share, under business combination (Baht) Weighted average number of ordinary shares as at the end of the year (Million shares) 1,735 1,

20 b) On 28 September 2007, the Bank purchased additional 6,000,000 ordinary shares of Thanachart Insurance Co., Ltd. from a third party, representing 12 percent of the paid-up share capital, for a total of Baht million. The purchase price is based on its book value as at the end of July As a result of this additional purchase, the Bank holds a 100% interest in such company. c) On 27 April 2007, the Bank invested in Thanachart Training and Development Company Limited, in which the Bank holds a 100% interest. d) The outstanding balances and significant intercompany transactions between the Bank and its subsidiaries have been eliminated in the consolidated. The investments in subsidiaries as recorded in the Bank s and subsidiaries books of accounts have been eliminated against shareholders equity of the subsidiaries. The remaining amount was presented as goodwill from the business combination. 2.3 The separate, which present investments in subsidiaries under the cost method, have been prepared solely for the benefit of the public. 3. ADOPTION OF NEW ACCOUNTING STANDARDS The Federation of Accounting Professions (FAP) has issued Notifications No. 9/2550, 38/2550 and 62/2550 regarding Accounting Standards. The Notifications mandate the use of the following new Accounting Standards. a) Thai Accounting Standards which are effective for the current year TAS 44 (revised 2007) TAS 45 (revised 2007) TAS 46 (revised 2007) Consolidated and Separate Financial Statements Investments in Associates Interests in Joint Ventures - 9 -

21 These accounting standards become effective for the for fiscal years beginning on or after 1 January During the current year, the Bank invested in subsidiary and associated companies and has recorded such investments in its separate in accordance with the revised Accounting Standards No. 44 and 45. However, Accounting Standard No. 46 is not relevant to the business of the Bank. b) Thai Accounting Standards which are not effective for the current year TAS 25 (revised 2007) TAS 29 (revised 2007) TAS 31 (revised 2007) TAS 33 (revised 2007) TAS 35 (revised 2007) TAS 39 (revised 2007) TAS 41 (revised 2007) TAS 43 (revised 2007) TAS 49 (revised 2007) TAS 51 Cash Flow Statements Leases Inventories Borrowing Costs Presentation of Financial Statements Accounting Policies, Changes in Accounting Estimates and Errors Interim Financial Reporting Business Combinations Construction Contracts Intangible Assets These accounting standards will become effective for the for fiscal years beginning on or after 1 January The Bank s management has assessed the effect of these revised accounting standards and believes that they will not have any significant impact on the for the year in which they are initially applied. In addition, Accounting Standard No. 31, 33 and 49 are not relevant to the business of the Bank and its subsidiaries

22 4. SIGNIFICANT ACCOUNTING POLICIES 4.1 Revenue recognition a) Interest and discounts on loans Interest on loan is recognised as income on an accrual basis, based on the amount of principal outstanding. Interest on financial lease is recognised on the effective interest rate. From 1 January 2007, the Bank and its subsidiaries changed their revenue recognition method for interest on hire purchases from the sum-of-the-year-digits method to the effective interest method, whereby income from hire purchases which originated on or after 1 January 2007 is recognised based on the effective interest method and income from hire purchases which originated before 1 January 2007 is recognised based on the effective interest method, using the brought forward balances of hire purchase receivables as of 1 January 2007 as the beginning balances and recognising interest under the effective interest method over the remaining periods of the contracts. For loans on which principal or interest payments have been defaulted for more than three months past the due date, the Bank and its subsidiaries cease accrual of interest income, and accrued interest already recorded is reversed from the Bank and its subsidiaries accounts. Interest is then recognised as income on a cash basis until settlement of such overdue balance has been received from the debtors. Interest income on restructured loans is recognised as income on an accrual basis, with reference to the interest rate stipulated in the agreements, with the exception of interest on loans that are subject to monitoring for compliance with restructuring conditions, which the Bank and its subsidiaries recognise as income on a cash basis until the receivable is able to comply with the restructuring conditions for a period of no less than three months or three installments, whichever is longer

23 Interest or discounts already included in the face value of notes receivable or loans are recorded as deferred interest and taken up as income evenly throughout the term of the notes or loans or in proportion of debt repayment. Deferred interest income on hire purchase represents discounted on interest given to debtors by dealers, is recognised based on the effective interest method, in the same manner as interest income recognition on hire purchase receivables. b) Interest and dividends on investments Interest on investments is recognised as income on an accrual basis based on the effective interest rate. Dividends are recognised as income when the right to receive the dividend is established. c) Brokerage fee income Brokerage fee charged on securities trading are recognised as income on the transaction date. d) Interest on loans for purchase of securities Interest on loans for purchases of securities is recognised as income over the term of the loans based on the amount of principal outstanding. The subsidiary company ceases accruing interest for certain loans that fall under the conditions set by the Securities Exchange Commission ( SEC ). e) Gains (losses) on investments and derivatives Gains (losses) on investments and derivatives are recognised as income/expenses on the transaction dates. f) Fees and service income Fees and service income are recognised as income on an accrual basis

24 g) Insurance/life insurance premium income - Insurance premium income on insurance policies is recognised on the date the insurance policy comes into effect, after deducting premium ceded and cancelled for insurance policies with coverage periods of up to 1 year. For long-term insurance policies with coverage periods of longer than 1 year, related revenues and expenses are recorded as unearned and prepaid items, and amortised to income and expenses over the coverage period. - Life insurance premium income is recognised on the date the insurance policy comes into effect, after deducting premium ceded and cancelled. - Reinsurance premium income is recognised when the reinsurer places the reinsurance application or statement of accounts. 4.2 Expenses recognition a) Interest expenses Interest expenses are charged to expenses on an accrual basis. Interest on notes payable included in the face value is recorded as deferred interest and amortised to expenses evenly throughout the term of the notes. b) Commission and expenses charged on hire-purchase business For hire purchase contracts originating on or after 1 January 2007, the Bank and its subsidiaries changed their method of recognition of initial direct expenses charged on hire purchase contracts (such as commission expenses and stamp duty expenses) from fully recognising them as expenses at the transaction date to amortising them under the effective interest method and deducting the amortisation from interest income throughout the contract period to reflect the effective rate of return of hire purchase contracts. Unearned income on hire purchase is presented after netting commission expenses and initial direct cost on the inception of the contracts. The change is in accordance with Accounting Standard No. 29 (revised 2007) Leases. The Bank and its subsidiaries did not restate the for the year 2006 for comparative purpose

25 4.3 Unearned premium/life insurance premium reserve Unearned premium reserve of a subsidiary company is set aside in compliance with the Notification of the Ministry of Commerce regarding the appropriation of unearned premium reserve as follows :- Fire, marine (hull), motors and miscellaneous - Monthly average basis (except for traveling accident with coverage (the one-twenty fourth basis) of not more than 6 months) Marine and transportation (cargo) - Net premium written for the last ninety days Traveling accident with coverage of not more than 6 months - Net premium written for the last thirty days Life insurance premium reserve represents the accumulated total reserve for liability up to the balance sheet date, for all life insurance policies in force. The reserve is calculated by the subsidiary company under the actuarial method prescribed by the Regulation on Life Insurance Policy Reserve as promulgated by the Ministry of Commerce. a) Reserve for life insurance policies of over 1 year is determined using the fractional reserve method. b) Reserve for life insurance policies of 1 year or less is determined based on the full unearned premium reserve and the period of coverage. 4.4 Investments Investments in trading securities are determined at fair value. Changes in the value of the securities are recognised as income (loss) in the income statements. Investments in available-for-sale securities, both held for short-term and long-term investment, are determined at fair value. Changes in the value of the securities are shown as separate items in shareholders equity until the securities are sold, when they are then included in determining income

26 - 15 -

27 Investments in debt securities, both due within one year and expected to be held to maturity, are recorded at amortised cost. Premiums/discounts on debt securities are amortised by the effective rate method with the amortised amount presented as an adjustment to the interest income. Investments in non-marketable equity securities which are classified as other investments are stated at cost net of allowance for impairment (if any). The Bank and its subsidiaries do not treat investments in mutual fund as being in associated or subsidiary companies because the Bank and its subsidiaries do not have control or influence over the financial and operating policy of these funds, which are independently managed by the fund manager in accordance with the details of each fund project and the funds are under the supervision of the Securities and Exchange Commission. The fair value of marketable securities is based on the latest bid price of the last working day of the year as quoted on the Stock Exchange of Thailand. The fair value of government bonds, state enterprise securities and private sector debt securities is determined using the formula quoted by the BOT, which is based on the yield rate quoted by The Thai Bond Market Association adjusted by an appropriate risk factor. The fair value of unit trusts is determined based on their net asset value. The weighted average method is used for computation of the cost of investments. The Bank and its subsidiaries recognised loss on impairment (if any) of available-for-sale securities, held-to-maturity debt securities and other investments in the statements of income. In the event of the Bank and its subsidiaries transfer investments to another category, the investments are valued at their fair value prevailing on the transfer date. Differences between the carrying amount of the investments and their fair value on that date are recorded as gains (losses) in determining income or surplus (deficit) from revaluation of investments, which is presented as a separate item in shareholders equity and amortised over the remaining period to maturity of the debt securities, depending on the type of investment which is reclassified

28 4.5 Investments in subsidiary and associated companies Investments in subsidiaries, jointly controlled entities and associates are to be presented in the separate under the cost method net of allowance for impairment (if any). Loss on impairment is recognised as expenses in the income statements. Investments in associated companies in consolidated are accounted for under the equity method. Under this method, investments are initially recorded at acquisition cost and are adjusted to reflect the attributable share of the income from the operations of each associated company, in proportion to the investment. Goodwill, presented as an asset in the consolidated of the Bank, is the excess of the purchase price over the net assets value of investment in subsidiaries as of the acquisition date and is stated at cost less allowance for impairment (if any). 4.6 Securities purchased under resale agreements The Bank enters into agreements to purchase securities under conditions to resell at certain dates in the future at a fixed price. Amounts paid for securities purchased subject to a resale commitment are presented as assets under the caption of Securities purchased under resale agreements in the balance sheets and the underlying securities are treated as collateral to such receivables. The difference between the sale and purchase considerations is recognised as interest income on an accrual basis over the transaction periods. 4.7 Receivables from/payable to Clearing House Receivables from/payable to Clearing House comprises the net balance receivable from/payable to Thailand Securities Depository in respect of securities trades settled through the Clearing House of Thailand Securities Depository and the net receivable from/payable to Derivatives Clearing House. These also include amounts pledged with Derivatives Clearing House as security for derivatives trading

29 4.8 Loans The Bank and its subsidiaries present loans at the principal balances, excluding accrued interest receivable, except for overdrafts which are presented at the principal balances plus accrued interest receivable. Unrecognised deferred income and discounts on loans are deducted from the loan balances. Hire purchase receivables and financial lease receivables are stated at the contract value of the hire purchase receivables and financial lease receivables net of unearned income, which is presented after netting commission expenses and initial direct cost on the inception of the contracts. Securities and derivatives business receivables comprise the net securities receivable and derivatives business receivables. Securities business receivable comprise the net receivable balances of cash accounts and credit balance accounts (for which the securities purchased are used as collateral) as well as other receivables, such as overdue amounts in cash accounts and securities receivables which are under legal proceedings, are undergoing restructuring, or are being settled in installments. 4.9 Allowances for doubtful accounts a) The Bank provides allowances for doubtful accounts in accordance with the Notifications of the BOT and adjusts these by the additional amount which is expected not to be collectible based on an evaluation of the current status of the debtors, taking into consideration the recovery risk and the value of collateral. The Bank set provision for normal loans (including restructured receivables) and special mention loans at minimum rates of 1% and 2%, respectively, of the loan balances (excluding accrued interest receivable) net of collateral value, as required by the BOT s guidelines. Collateral values included vehicles under hire purchase contracts. For non-performing loans, the provision has to set up at a rate of 100% of the debt balance remaining after deducting the present value of expected future cash flows from debt collection or from collateral disposal, based on the use of the discount rate and the time needed to dispose of collateral, in accordance with the BOT s guideline which was announced on 21 December The timeline for implementing these provisioning guidelines is presented below :