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Published on January 28, 2008

Siam Commercial Bank will lower its US-dollar-denominated foreign deposits to prevent deterioration in its capital-base ratio, as it has to comply with Basel II by the end of this year.

Basel II is the new international banking standard for risk management, which will be implemented in Thailand soon.

The bank invested Bt74.78 billion in the foreign interbank and money markets last year, while Bangkok Bank invested Bt159.28 billion. Krung Thai Bank (KTB), Kasikornbank (KBank) and Bank of Ayudhya (BAY) had overseas exposures of Bt20.89 billion, Bt31.75 billion and Bt21.98 billion respectively. Banks usually hold offshore deposits in greenbacks.

The country's third-biggest bank will likely take the biggest hit to its capital base among large banks in adjusting to the new financial standard.

It has estimated that covering "operational risk" under Basel II will slash its capital-risk ratio by 2.4 percentage points, compared with just 0.8 point and 1 point for KTB and KBank.

Overseas deposits are one factor that can affect banks' capital bases under Basel II calculations. But they can reduce this risk by adjusting their deposit portfolios, Yokporn Tantisawetrat, SCB's chief executive officer, said last week.

If banks deposit in the local currency of the overseas bank, the risk weight will be low under Basel II's counting method, he said. For example, if banks deposit in Singapore, they should deposit in Singapore dollars.

However, converting deposits from global currencies. including US dollars, to local currencies will reduce return on investment, so banks should consider both risk and return as well as conforming to the new financial standard, he said.

KBank believes its offshore investment portfolio will hardly be changed this year because it has been investing judicially, said Chongrak Boonchawan-urak, senior vice president and head of the bank's central treasury department.

It is necessary to consider investing more prudently ahead of Basel II implementation, he said. Risk and return are the two key criteria to consider for investment. The bank's total investment portfolio stands at about Bt100 billion, but only a small share is in deposits.

Tak Bunnag, executive vice president at BAY, said the bank had no plan now to adjust its overseas deposit portfolio. It will continue to watch the impact from Basel II on deposits abroad.

BAY's capital base has been eroded mainly by mark-downs on structured investment and collateralised debt obligations. But the bank took additional provisions last year, so its loan-loss reserve will be back to normal this year.

Somruedi Banchongduang

The Nation