Description
Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase.
Review and Analysis of Financial Results, and Risk Management
88
I. Financial Status
Date Items Total Assets Total Liabilities Total Shareholders' Equities Dec.31, 2005 2,582,354,532 2,405,489,669 176,864,863 Dec. 31, 2004 (restated) 2,507,816,561 2,343,062,046 164,754,515 Unit: NT$1,000 Fluctuation Amount % 74,537,971 3 62,427,623 3 12,110,348 7 Unit: NT$1,000 % Change 6 21 (20) (2) (51) 22 43 (17) (44) 2
II. Operating Results
Year Items Operating revenues Operating costs Operating gross profit Operating expenses Operating income Non-operating revenues and income Non-operating expenses and losses Net income-before tax Income tax expense Cumulative effect of changes in accounting principles Net income-after tax 2005 63,746,176 45,451,694 18,294,482 14,308,216 3,986,266 10,719,269 1,726,957 12,978,578 972,928 2,264,170 14,269,820 2004 (restated) 60,298,601 37,531,935 22,766,666 14,619,019 8,147,647 8,776,634 1,208,244 15,716,037 1,722,335 13,993,702 Increase (Decrease) 3,447,575 7,919,759 (4,472,184) (310,803) (4,161,381) 1,942,635 518,713 (2,737,459) (749,407) 2,264,170 276,118
Reasons for increases or reductions in ratios: , 1. Operating revenues: The reason for the increase in the Bank s operating revenues during this year was mainly an increase in the volume of loans and a steady recovery of interest rate levels, which led to an increase of NT$7,376 million in interest revenues. Also, earnings from bills dealing and long-term investment declined by NT$2,105 million and NT$2,380 million, respectively. 2. Operating expenses: Deposits exhibited a growth trend during the year; because of the steady upturn in interest rates, there were relatively large increases in time deposits and preferential-interest deposits, leading to an increase of NT$7,844 million in interest expenses. , 3. Non-operating revenues and income: The main reason for this year s increase in non-operating revenue compared with the previous year was a reduction of about NT$569 million in profit from the sale of land and fixed assets while miscellaneous revenues increased by NT$2,512 million due to the recovery of allocations of reserves against bad debt. 4. Non-operating expenses and losses: This was caused mainly by the application of statement of Financial Accounting Standards (SFAS) 35 beginning this year, resulting in the recognition of an impairment loss for assets of NT$801 million, along with a reduction of NT$270 million in miscellaneous costs. 5. Cumulative effect of changes in accounting principles: Under the revised SFAS 5, starting this year the listing of profit and loss by invested companies can no longer be deferred for a year. This change added NT$2,264 million to the effect of accumulated changes on accounting principles.
III. Cash Flow
1. Liquidity Analysis for the Past Year (1) Cash Flow Analysis 2005 Net cash inflow (outflow) $ (347,039,646) Unit: NT$1,000 % Change (258)
2004 (97,073,995)
Increase or Decrease (249,965,651)
Net cash outflow in 2005 was NT$249.96 billion more than in the previous year. The main reasons were as follows: Amount
— — — — — — — — — —
Increase in net cash inflow from operating activities Decrease in placement with Central Bank Decrease in investment in bills and securities, net Increase in loans, discounts and bills purchased Decrease in other assets Decrease in deposits of Central Bank Decrease in deposits of banks Decrease in deposits and remittances Increase in payment of cash dividends and bonus for government, net Others
— — — — — — — — — — — — — — — — — — — —
$ 20,430,240 (379,832,242) 36,063,882 120,699,156 (11,499,268) (18,905,124) (19,841,879) (3,542,601) 5,483,236 978,949
$(249,965,651)
(2) Remedy for Estimated Shortage of Liquidity
Not applicable.
89
2. Cash Flow Analysis for the Coming Year Annual Net Cash Balance of Cash Flow from at Beginning Business Activities (a) (b) 211,087,866 (13,460,319) Unit: NT$1,000 Remedy for Estimated Cash Shortage Financial Investment Management Plan Plan -
Annual Cash Outflow (inflow) (c) (174,198,435)
Remaining of Cash (Shortage) (a)+(b)–(c) 371,825,982
(1) Cash Flow Analysis a. Business activities: Due primarily to a net cash outflow of NT$13,460,319,000 produced by business activities. b. Investment activities: Mainly due to a net cash inflow of NT$163,873,236,000 from investment activities produced by the sale of land and buildings. c. Financing activities: Primarily a net cash inflow of NT$10,325,199,000 produced by financing activities as a result of increases in deposits and remittances, interbank deposits, and Central Bank deposits. (2) Remedial action to make up for cash inadequacy, and liquidity analysis: Not applicable.
IV. Influence of Major Capital Expenditures on Financial Operations During the Past Years
1. Utilization of Major Capital Expenditures, and Sources of Funds
Unit: NT$1,000 Actual or Plan Items Projected Sources of Funds Fixed assets - NonConstruction of Information Building plan capital expenditures Buildings and structures Fixed assets - NonConstruction of Nantze Branch Premises plan capital expenditures Buildings and structures Fixed assets - NonConstruction of Tali Branch Premises plan capital expenditures Buildings and structures Fixed assets - NonConstruction of Aanan Branch Premises Total plan capital expenditures Buildings and structures 1,177,819 45,844 2,555 769,055 344,341 Dec. 2007 120,219 718 77,557 41,944 May 2006 118,404 736 57,980 59,688 Oct. 2007 187,706 1,101 81,820 104,785 Dec. 2005 751,490 45,844 551,698 137,924 Actual or Projected Date of Completion Needed Capital 2002 2003 2004 2005 2006 2007 2008 Actual or Projected Funds Utilization
2. Projected Potential Benefit , Potential benefits are expected through enhancement of the Bank s corporate image and service quality, , stabilization of the Bank s business locations, and expansion of the service network; in addition to saving rental costs, via increased rental income through the leasing of excess office space.
90
V. Reinvestment Policy for the Past Year
The Bank actively plans for the disposal of reinvested enterprises that are performing poorly, or for which the , original purpose of investment has been achieved, or which are unrelated to the Bank s business in order to heighten , the overall performance of reinvestment. The Bank s profit on long-term equity investment in 2005 amounted to more than NT$10 billion. To assure the quality of investment and to heighten return on investment, the Bank actively implements sharerelease plans to release the weak and keep the strong, and participates in meetings of the boards of directors and , supervisors of invested enterprises so as to maintain a grasp of their business conditions and protect the Bank s investment interests. The BOT is currently engaged in a merger project with the Central Trust of China, and the merger of some of its reinvested enterprises with the BOT is expected to be completed in the first half of 2007.
, 1. The BOT s Risk Management Organizational Framework and Policy (1) Risk Management Organizational Framework , A Risk Management Committee was set up on Jan. 7, 2005 to reinforce the Bank s risk control capabilities and meet the provisions of the Basel 2 agreement. A Risk Management Center was established on Apr. 8 that year, and a , formal Department of Risk Management was included in the Bank s organizational chart on Sep. 21. Four management sections-credit, market, operational, and general business risk-have been set up within the , department to take charge of the establishment of the Bank s risk control policies and systems, and to carry out identification, assessment, monitoring, and management of risk. The framework of this mechanism is shown below: Board of Directors
VI. Risk Management
President
Risk Management Committee
Vice President
Department of Risk Management
Risk-control Units
Credit Risk Management Section
Market Risk Management Section
Operational Risk Management Section
General Business Risk Management Section
(2) Risk Management Policy a. Self-owned capital has been augmented in accordance with business growth so as to maintain a suitable , ratio of capital adequacy and to strengthen the Bank s financial structure. b. An independent and effective risk management mechanism has been set up, and risk management for different areas of business is being strengthened through appropriate risk management policies, procedures, and system tools. c. All types of risks that are involved in businesses both on the balance sheet and off-book are subject to , control under the BOT s risk management, including credit risk, market risk, operating risk, interest rate risk, liquidity risk, national risk, and legal risk. d. Risk factors for all areas of business have been placed under risk management in accordance with the nature of the business and the principle of risk diversification; while risk indicators and an early-warning mechanism have been established using systematic risk assessment and measurement.
91
2. Methods of Risk Measurement and Control, and Quantitative Information (1) General Qualitative Disclosure a. Credit Risk Management A system of graded delegation of authority is used in loan cases and the disposition of bad loans, and the review of loan cases is carried out strictly in accordance with the limits of authorization so as to assure the quality of loan assets. , Loans to the BOT s responsible person, BOT employees, persons having material interests with the Bank, single persons, single persons with material interest, and single conglomerates are controlled in accordance with stipulated quotas. The Bank has established rules for credit risk management of loans to enterprise groups and ratios for loan risk exposure to different industries, and it controls credit quotas for trading partners, issuers, and guarantors in accordance with their external credit ratings. After loans are extended, they are reviewed during the loan period in accordance with their review ratings. For important loans, follow-up evaluation is carried out and reserves against bad loans are allocated for loan assets at the end of every month in order to reinforce the Bank s operating system. b. Market Risk Management To control risk, each trading unit carries out a daily assessment of forex trading for trading objectives in accordance with market prices. Authorization quotas, types of dealing, investment objectives, investment and loss quotas are set for the management of different kinds of securities, forex positions and derivatives in order to control market risk effectively. In the management of New Taiwan Dollar funds, advance assessment is made of long-term interest-rate trends; and, before the start of business each day, central interest rates as well as trading amounts of short-term notes of different maturities are set for that day. In addition, add-or-subtract authorization limits are set for personnel at different levels. c. Operating Risk Management To lower operating risk, the Bank has established rules and operating manuals for its different businesses to serve as a basis for undertaking those businesses. Rules have also been established for online operations, information and Internet security management, internal auditing and investigation, the outsourcing of data processing, and the commissioning of operations. Follow-up monitoring is also carried out in order to facilitate legal conformance and control operating risk. Trading standards have been established in recent years to cope with the increasing internationalization , and complexity of trading in financial derivatives, and the Bank s different units are charged with assuring protection against operating risk by signing ISDA contracts with trading partners in accordance with international practice. d. Banking Book Interest-rate and Liquidity Risk Management The Bank has set up an Assets and Liabilities Management Committee to maintain stable operations, reinforce assets and liabilities management, and strengthen the structure of assets and liabilities. Under the leadership of the president, this committee is responsible for the management and analysis of bankwide liquidity positions, the analysis of interest-rate risk, and the review of the deposit and loan structure. In addition, an Assets and Liabilities Management Information System has been established in order to list interest-rate-sensitive assets and liabilities in accordance with their natures, and, on a regular basis, to analyze assets and liabilities maturity gaps and changes in maturity structure. This analysis provides a basis for the management of interest-rate risk and the setting of prices. Moreover, the appropriate allocation and utilization of funds, and the adjustment of the capital structure, are carried out in accordance with the capital situation with the aim of reducing liquidity risk and enhancing earnings.
92
(2) Credit Risk a. On-Balance Sheet Items - Credit Risk and Risk-Weighted Assets Dec. 31, 2005 Items Loans to or guaranteed by the central government or central bank, loans to or guaranteed by the central governments or central banks of OECD countries, and local-currency-valued loans to or guaranteed by the central governments or central banks of non-OECD countries Loans to or guaranteed by government agencies (excepting central government agencies) of Taiwan, and loans secured by bonds of government agencies of Taiwan (excluding those of central government agencies) Loans not valued in local currencies to the central governments and central banks of non-OECD countries, loans to international cooperation institutions, loans to or guaranteed by non-central government agencies of OECD countries, loans to or guaranteed by domestic banks, loans to or guaranteed by banks of OECD countries, loans with maturity within one year to or guaranteed by banks of non-OECD countries, loans guaranteed by the credit guarantee fund Loans secured by residential real estate Loans with maturity of one year or more to or guaranteed by banks of nonOECD countries, loans not valued in local currencies to central governments and central banks of non-OECD countries, holdings of non-equity capital instruments of other banks, loans and other assets not listed above Total b. Off-Balance Sheet Items-Credit Risk and Risk-Weighted Assets Dec. 31, 2005 Items General off-balance sheet transaction Derivatives Bonds sold under agreements to repurchase Bonds investment under agreements to resale Total Risk Weight
Unit:NT$1,000 Risk-Weighted Assets 0
0%
10%
23,491,190
20%
37,500,085
50% 100%
102,737,944 713,354,406 877,083,625 Unit:NT$1,000
Risk-Weighted Assets 125,055,821 1,558,463 623,112 1,371,720 128,609,116
c. Classes of Securities Issued, Total Amount Issued, Amount in Circulation, and Repurchase of Assets Entrusted or Transferred by the Originators up to Quarter Prior to Publication of the Annual Report None (3) Market Risk Capital Accrual and Amount of Risk Assets by Using Standard Method Dec. 31, 2005 Unit:NT$1,000 Risk Category Accrued Capital Risk-Weighted Assets (Accrued Capital 12.5) Interest rate risk 4,021,242 50,265,525 Equity security risk 793,032 9,912,900 Foreign exchange risk 462,878 5,785,969 Commodity risk 0 0 Adoption of simplified method for options 34,230 427,875 Total 5,311,382 66,392,269 (4) Market Risk Capital Accrual by Using Internal Models None (5) Liquidity Risk The Bank uses two methods to manage liquidity risk: total amount management, and flow management. , Total amount management is carried out according to the Central Bank s Liquidity Reserve Checking Guidelines for Financial Institutions, and liquidity reserves are allocated in reference to fluctuations in the , Bank s flow of funds. The implementation of flow management depends on the time and place of in- and outflow of funds and is divided into real-time management and medium- and long-term management. When the flow of funds reaches a set limit, business units are required to submit a report immediately so as to maintain a grasp of the status of capital and provide for the adoption of advance countermeasures. Mediumand long-term management calls for the compilation of a New Taiwan Dollar Cash Flow Gap Analysis Table, in which 1-10 day and 11-30 day gaps are calculated, each week. In addition, a monthly analytic report on the , Bank s New Taiwan Dollar funds liquidity risk and interest-rate risk is compiled and submitted to the Assets and Liabilities Management Committee and to the Board of managing Directors.
93
a.New Taiwan Dollars Maturity Date Structure Dec. 31, 2005 Unit:NT$ million Amounts by Time Remaining before Maturity 181days1-30 days 31-90 days 91-180 days Over one year one year
Total
Major inflows of 2,341,932 575,434 259,594 251,993 176,957 1,077,954 matured funds Major outflows of 2,605,984 263,077 287,571 242,517 509,223 1,303,596 matured funds Period gap (264,052) 312,357 (27,977) 9,476 (332,266) (225,642) Note:The table includes only New Taiwan Dollar Amounts held in head office and the domestic and overseas branches, excluding foreign currencies. b.Foreign Currencies Maturity Date Structure Dec. 31, 2005 Unit:US$1,000 Amounts by Time Remaining before Maturity 1-30 days 31-90 days 91-180 days 181days- Over one year Total one year Assets 12,330,828 4,860,677 1,295,289 1,367,278 1,221,218 3,586,366 Liabilities 12,319,924 6,332,838 1,632,258 1,447,787 1,030,584 1,876,457 Gap 10,904 (1,472,161) (336,969) (80,509) 190,634 1,709,909 Accumulated Gap 10,904 (1,472,161) (1,809,130) (1,889,639) (1,699,005) 10,904 Note:The table includes only foreign currencies: US dollar, HK dollar, Japanese Yen, Euro (equivalent to US dollar) held in head office and the domestic and overseas branches. , 3. Impact of Changes in Major Domestic and Overseas Policies and Laws on the Bank s Financial Operations, and Countermeasures The Bank will remain attentive to the influence of major government financial and economic policies, and will provide appropriate responses in a timely fashion so as to lower the impact on its financial operations. , 4. Impact of Technological and Industrial Changes on the Bank s Financial Operations, and Countermeasures (1) Impact of Technological Changes, and Countermeasures The rapid advancement and widespread adoption of information technology throughout the world have gradually accustomed customers to use different trading channels to carry out funds-flow services. The Bank continuously uses the Internet, ATMs, and other electronic channels to provide a diversified, convenient, and safe service system that can attract new customers and keep old ones. The Bank has also established and integrated management and decision-making resource information systems so as to provide management with effective and timely decision-making data and achieve the goals of controlling risk, upgrading operating performance, allocating capital reasonably, and generating profits. (2) Impact of Industrial Changes, and Countermeasures The Bank holds key industry status and prospects seminars annually, purchases industrial, economic, and specialized databanks, and has established a databank for inter-industry comparison and analysis of the financial conditions of companies listed on the stock and over-the-counter markets. In addition to these resources, employees , can use the Bank s global information network to maintain grasp of the latest industrial changes, enhance the quality , of credit investigation and loans, and lower the Bank s business risks. At the same time, the Bank is strengthening its management of loan risk by setting risk assumption limits by industry and by conglomerate group so as to diversify risks caused by technological and industrial changes. , 5. Impact on the Bank of Changes in the Bank s Image, and Countermeasures To facilitate business marketing, the Bank strives to enhance service quality, simplify operating procedures, and expand authorization; in addition, in 2005 it emphasized Make It Happen with Vitality, Joy, and Hope with the aim of molding an image of vigor and vitality. In 2005 the Bank also introduced the Make a Difference with Creativity, Integration, and Action program calling for quality upgrading and hand-in-hand concerted effort to give outsiders the impression of a bank with a difference that emphasizes a youthful heart, soaring passion, vital energy.
94
6. Expected Benefits and Potential Risks of Mergers and Acquisitions, and Countermeasures On Nov. 18, 2005 the government announced that the BOT would absorb the Central Trust of China through a merger and would remain as the surviving bank, and that after the merger the scope of businesses operated by the , BOT would encompass banking, insurance, securities, trust, procurement, government employees insurance, , military servicemen s insurance, alternative national service insurance, trading, and gold, bringing greater diversification and an extension of product line for marketing through product integration and packaging. This will have the following effects: (1) Expansion of the scale of assets; (2) Extension of service network throughout Taiwan, and increase business channels; (3) Expression of business synergies, and enhance competitiveness; and (4) Heightening of market share. 7. Expected Benefits and Potential Risks of Business Location Expansion The BOT enjoys outstanding credit, a broad and stable market base, a correspondent banking system that covers Taiwan and the world, and a fine management system. The expansion of business locations will not only increase the volume of the deposit, loan, and foreign exchange businesses, but will also offer customers more convenient services and establish a solid operating niche. 8. Risks Arising from the Concentration of Business, and Countermeasures , The Bank s main source of income is interest, and for this reason changes in interest rates have a relatively large , influence on the Bank s income. To reduce the risk caused by interest-rate fluctuations, the Bank will observe changes in interest rates both continuously and closely, and will adjust its interest rates when necessary to improve the structure of its assets and liabilities. 9. Influence and Risks Posed by Changes in Operating Rights The BOT is currently a government-owned bank and the government is its only shareholder, so there have been no changes in operating rights. 10. Court Cases Pending (None) 11. Other Important Risks (None)
VII. Crisis Management Mechanism
In regard to latent or present crises, the Bank adopts a series of pre-event, mid-event, and post-event countermeasures. The crisis management mechanism that has been established by the Bank includes the following: 1. A 2. The BOT Emergency Response Manual. BOT Crisis Reporting Rules.
3. Coordinating with the competent authority in the joint prevention of fraud. 4. Coordinating with the competent authority in the joint prevention of crimes using nominee accounts. 5. Coordinating with the competent authority in the establishment of a warning mechanism. , 6. Establishing a list of individual terrorists and terrorist groups on the Bank s internal global information web. 7. Printing of a list of BOT personnel in charge of coordinating supervision of Anti-Money Laundering. 8. Publicizing and implementing the Act for the Anti-Money Laundering. 9. Establishing an emergency reporting system for headquarters and branches. 10. Strengthening education and training, and enhancing the crisis management capabilities of BOT staff.
VIII. Other Important Matters
(None)
95
doc_979335072.pdf
Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase.
Review and Analysis of Financial Results, and Risk Management
88
I. Financial Status
Date Items Total Assets Total Liabilities Total Shareholders' Equities Dec.31, 2005 2,582,354,532 2,405,489,669 176,864,863 Dec. 31, 2004 (restated) 2,507,816,561 2,343,062,046 164,754,515 Unit: NT$1,000 Fluctuation Amount % 74,537,971 3 62,427,623 3 12,110,348 7 Unit: NT$1,000 % Change 6 21 (20) (2) (51) 22 43 (17) (44) 2
II. Operating Results
Year Items Operating revenues Operating costs Operating gross profit Operating expenses Operating income Non-operating revenues and income Non-operating expenses and losses Net income-before tax Income tax expense Cumulative effect of changes in accounting principles Net income-after tax 2005 63,746,176 45,451,694 18,294,482 14,308,216 3,986,266 10,719,269 1,726,957 12,978,578 972,928 2,264,170 14,269,820 2004 (restated) 60,298,601 37,531,935 22,766,666 14,619,019 8,147,647 8,776,634 1,208,244 15,716,037 1,722,335 13,993,702 Increase (Decrease) 3,447,575 7,919,759 (4,472,184) (310,803) (4,161,381) 1,942,635 518,713 (2,737,459) (749,407) 2,264,170 276,118
Reasons for increases or reductions in ratios: , 1. Operating revenues: The reason for the increase in the Bank s operating revenues during this year was mainly an increase in the volume of loans and a steady recovery of interest rate levels, which led to an increase of NT$7,376 million in interest revenues. Also, earnings from bills dealing and long-term investment declined by NT$2,105 million and NT$2,380 million, respectively. 2. Operating expenses: Deposits exhibited a growth trend during the year; because of the steady upturn in interest rates, there were relatively large increases in time deposits and preferential-interest deposits, leading to an increase of NT$7,844 million in interest expenses. , 3. Non-operating revenues and income: The main reason for this year s increase in non-operating revenue compared with the previous year was a reduction of about NT$569 million in profit from the sale of land and fixed assets while miscellaneous revenues increased by NT$2,512 million due to the recovery of allocations of reserves against bad debt. 4. Non-operating expenses and losses: This was caused mainly by the application of statement of Financial Accounting Standards (SFAS) 35 beginning this year, resulting in the recognition of an impairment loss for assets of NT$801 million, along with a reduction of NT$270 million in miscellaneous costs. 5. Cumulative effect of changes in accounting principles: Under the revised SFAS 5, starting this year the listing of profit and loss by invested companies can no longer be deferred for a year. This change added NT$2,264 million to the effect of accumulated changes on accounting principles.
III. Cash Flow
1. Liquidity Analysis for the Past Year (1) Cash Flow Analysis 2005 Net cash inflow (outflow) $ (347,039,646) Unit: NT$1,000 % Change (258)
2004 (97,073,995)
Increase or Decrease (249,965,651)
Net cash outflow in 2005 was NT$249.96 billion more than in the previous year. The main reasons were as follows: Amount
— — — — — — — — — —
Increase in net cash inflow from operating activities Decrease in placement with Central Bank Decrease in investment in bills and securities, net Increase in loans, discounts and bills purchased Decrease in other assets Decrease in deposits of Central Bank Decrease in deposits of banks Decrease in deposits and remittances Increase in payment of cash dividends and bonus for government, net Others
— — — — — — — — — — — — — — — — — — — —
$ 20,430,240 (379,832,242) 36,063,882 120,699,156 (11,499,268) (18,905,124) (19,841,879) (3,542,601) 5,483,236 978,949
$(249,965,651)
(2) Remedy for Estimated Shortage of Liquidity
Not applicable.
89
2. Cash Flow Analysis for the Coming Year Annual Net Cash Balance of Cash Flow from at Beginning Business Activities (a) (b) 211,087,866 (13,460,319) Unit: NT$1,000 Remedy for Estimated Cash Shortage Financial Investment Management Plan Plan -
Annual Cash Outflow (inflow) (c) (174,198,435)
Remaining of Cash (Shortage) (a)+(b)–(c) 371,825,982
(1) Cash Flow Analysis a. Business activities: Due primarily to a net cash outflow of NT$13,460,319,000 produced by business activities. b. Investment activities: Mainly due to a net cash inflow of NT$163,873,236,000 from investment activities produced by the sale of land and buildings. c. Financing activities: Primarily a net cash inflow of NT$10,325,199,000 produced by financing activities as a result of increases in deposits and remittances, interbank deposits, and Central Bank deposits. (2) Remedial action to make up for cash inadequacy, and liquidity analysis: Not applicable.
IV. Influence of Major Capital Expenditures on Financial Operations During the Past Years
1. Utilization of Major Capital Expenditures, and Sources of Funds
Unit: NT$1,000 Actual or Plan Items Projected Sources of Funds Fixed assets - NonConstruction of Information Building plan capital expenditures Buildings and structures Fixed assets - NonConstruction of Nantze Branch Premises plan capital expenditures Buildings and structures Fixed assets - NonConstruction of Tali Branch Premises plan capital expenditures Buildings and structures Fixed assets - NonConstruction of Aanan Branch Premises Total plan capital expenditures Buildings and structures 1,177,819 45,844 2,555 769,055 344,341 Dec. 2007 120,219 718 77,557 41,944 May 2006 118,404 736 57,980 59,688 Oct. 2007 187,706 1,101 81,820 104,785 Dec. 2005 751,490 45,844 551,698 137,924 Actual or Projected Date of Completion Needed Capital 2002 2003 2004 2005 2006 2007 2008 Actual or Projected Funds Utilization
2. Projected Potential Benefit , Potential benefits are expected through enhancement of the Bank s corporate image and service quality, , stabilization of the Bank s business locations, and expansion of the service network; in addition to saving rental costs, via increased rental income through the leasing of excess office space.
90
V. Reinvestment Policy for the Past Year
The Bank actively plans for the disposal of reinvested enterprises that are performing poorly, or for which the , original purpose of investment has been achieved, or which are unrelated to the Bank s business in order to heighten , the overall performance of reinvestment. The Bank s profit on long-term equity investment in 2005 amounted to more than NT$10 billion. To assure the quality of investment and to heighten return on investment, the Bank actively implements sharerelease plans to release the weak and keep the strong, and participates in meetings of the boards of directors and , supervisors of invested enterprises so as to maintain a grasp of their business conditions and protect the Bank s investment interests. The BOT is currently engaged in a merger project with the Central Trust of China, and the merger of some of its reinvested enterprises with the BOT is expected to be completed in the first half of 2007.
, 1. The BOT s Risk Management Organizational Framework and Policy (1) Risk Management Organizational Framework , A Risk Management Committee was set up on Jan. 7, 2005 to reinforce the Bank s risk control capabilities and meet the provisions of the Basel 2 agreement. A Risk Management Center was established on Apr. 8 that year, and a , formal Department of Risk Management was included in the Bank s organizational chart on Sep. 21. Four management sections-credit, market, operational, and general business risk-have been set up within the , department to take charge of the establishment of the Bank s risk control policies and systems, and to carry out identification, assessment, monitoring, and management of risk. The framework of this mechanism is shown below: Board of Directors
VI. Risk Management
President
Risk Management Committee
Vice President
Department of Risk Management
Risk-control Units
Credit Risk Management Section
Market Risk Management Section
Operational Risk Management Section
General Business Risk Management Section
(2) Risk Management Policy a. Self-owned capital has been augmented in accordance with business growth so as to maintain a suitable , ratio of capital adequacy and to strengthen the Bank s financial structure. b. An independent and effective risk management mechanism has been set up, and risk management for different areas of business is being strengthened through appropriate risk management policies, procedures, and system tools. c. All types of risks that are involved in businesses both on the balance sheet and off-book are subject to , control under the BOT s risk management, including credit risk, market risk, operating risk, interest rate risk, liquidity risk, national risk, and legal risk. d. Risk factors for all areas of business have been placed under risk management in accordance with the nature of the business and the principle of risk diversification; while risk indicators and an early-warning mechanism have been established using systematic risk assessment and measurement.
91
2. Methods of Risk Measurement and Control, and Quantitative Information (1) General Qualitative Disclosure a. Credit Risk Management A system of graded delegation of authority is used in loan cases and the disposition of bad loans, and the review of loan cases is carried out strictly in accordance with the limits of authorization so as to assure the quality of loan assets. , Loans to the BOT s responsible person, BOT employees, persons having material interests with the Bank, single persons, single persons with material interest, and single conglomerates are controlled in accordance with stipulated quotas. The Bank has established rules for credit risk management of loans to enterprise groups and ratios for loan risk exposure to different industries, and it controls credit quotas for trading partners, issuers, and guarantors in accordance with their external credit ratings. After loans are extended, they are reviewed during the loan period in accordance with their review ratings. For important loans, follow-up evaluation is carried out and reserves against bad loans are allocated for loan assets at the end of every month in order to reinforce the Bank s operating system. b. Market Risk Management To control risk, each trading unit carries out a daily assessment of forex trading for trading objectives in accordance with market prices. Authorization quotas, types of dealing, investment objectives, investment and loss quotas are set for the management of different kinds of securities, forex positions and derivatives in order to control market risk effectively. In the management of New Taiwan Dollar funds, advance assessment is made of long-term interest-rate trends; and, before the start of business each day, central interest rates as well as trading amounts of short-term notes of different maturities are set for that day. In addition, add-or-subtract authorization limits are set for personnel at different levels. c. Operating Risk Management To lower operating risk, the Bank has established rules and operating manuals for its different businesses to serve as a basis for undertaking those businesses. Rules have also been established for online operations, information and Internet security management, internal auditing and investigation, the outsourcing of data processing, and the commissioning of operations. Follow-up monitoring is also carried out in order to facilitate legal conformance and control operating risk. Trading standards have been established in recent years to cope with the increasing internationalization , and complexity of trading in financial derivatives, and the Bank s different units are charged with assuring protection against operating risk by signing ISDA contracts with trading partners in accordance with international practice. d. Banking Book Interest-rate and Liquidity Risk Management The Bank has set up an Assets and Liabilities Management Committee to maintain stable operations, reinforce assets and liabilities management, and strengthen the structure of assets and liabilities. Under the leadership of the president, this committee is responsible for the management and analysis of bankwide liquidity positions, the analysis of interest-rate risk, and the review of the deposit and loan structure. In addition, an Assets and Liabilities Management Information System has been established in order to list interest-rate-sensitive assets and liabilities in accordance with their natures, and, on a regular basis, to analyze assets and liabilities maturity gaps and changes in maturity structure. This analysis provides a basis for the management of interest-rate risk and the setting of prices. Moreover, the appropriate allocation and utilization of funds, and the adjustment of the capital structure, are carried out in accordance with the capital situation with the aim of reducing liquidity risk and enhancing earnings.
92
(2) Credit Risk a. On-Balance Sheet Items - Credit Risk and Risk-Weighted Assets Dec. 31, 2005 Items Loans to or guaranteed by the central government or central bank, loans to or guaranteed by the central governments or central banks of OECD countries, and local-currency-valued loans to or guaranteed by the central governments or central banks of non-OECD countries Loans to or guaranteed by government agencies (excepting central government agencies) of Taiwan, and loans secured by bonds of government agencies of Taiwan (excluding those of central government agencies) Loans not valued in local currencies to the central governments and central banks of non-OECD countries, loans to international cooperation institutions, loans to or guaranteed by non-central government agencies of OECD countries, loans to or guaranteed by domestic banks, loans to or guaranteed by banks of OECD countries, loans with maturity within one year to or guaranteed by banks of non-OECD countries, loans guaranteed by the credit guarantee fund Loans secured by residential real estate Loans with maturity of one year or more to or guaranteed by banks of nonOECD countries, loans not valued in local currencies to central governments and central banks of non-OECD countries, holdings of non-equity capital instruments of other banks, loans and other assets not listed above Total b. Off-Balance Sheet Items-Credit Risk and Risk-Weighted Assets Dec. 31, 2005 Items General off-balance sheet transaction Derivatives Bonds sold under agreements to repurchase Bonds investment under agreements to resale Total Risk Weight
Unit:NT$1,000 Risk-Weighted Assets 0
0%
10%
23,491,190
20%
37,500,085
50% 100%
102,737,944 713,354,406 877,083,625 Unit:NT$1,000
Risk-Weighted Assets 125,055,821 1,558,463 623,112 1,371,720 128,609,116
c. Classes of Securities Issued, Total Amount Issued, Amount in Circulation, and Repurchase of Assets Entrusted or Transferred by the Originators up to Quarter Prior to Publication of the Annual Report None (3) Market Risk Capital Accrual and Amount of Risk Assets by Using Standard Method Dec. 31, 2005 Unit:NT$1,000 Risk Category Accrued Capital Risk-Weighted Assets (Accrued Capital 12.5) Interest rate risk 4,021,242 50,265,525 Equity security risk 793,032 9,912,900 Foreign exchange risk 462,878 5,785,969 Commodity risk 0 0 Adoption of simplified method for options 34,230 427,875 Total 5,311,382 66,392,269 (4) Market Risk Capital Accrual by Using Internal Models None (5) Liquidity Risk The Bank uses two methods to manage liquidity risk: total amount management, and flow management. , Total amount management is carried out according to the Central Bank s Liquidity Reserve Checking Guidelines for Financial Institutions, and liquidity reserves are allocated in reference to fluctuations in the , Bank s flow of funds. The implementation of flow management depends on the time and place of in- and outflow of funds and is divided into real-time management and medium- and long-term management. When the flow of funds reaches a set limit, business units are required to submit a report immediately so as to maintain a grasp of the status of capital and provide for the adoption of advance countermeasures. Mediumand long-term management calls for the compilation of a New Taiwan Dollar Cash Flow Gap Analysis Table, in which 1-10 day and 11-30 day gaps are calculated, each week. In addition, a monthly analytic report on the , Bank s New Taiwan Dollar funds liquidity risk and interest-rate risk is compiled and submitted to the Assets and Liabilities Management Committee and to the Board of managing Directors.
93
a.New Taiwan Dollars Maturity Date Structure Dec. 31, 2005 Unit:NT$ million Amounts by Time Remaining before Maturity 181days1-30 days 31-90 days 91-180 days Over one year one year
Total
Major inflows of 2,341,932 575,434 259,594 251,993 176,957 1,077,954 matured funds Major outflows of 2,605,984 263,077 287,571 242,517 509,223 1,303,596 matured funds Period gap (264,052) 312,357 (27,977) 9,476 (332,266) (225,642) Note:The table includes only New Taiwan Dollar Amounts held in head office and the domestic and overseas branches, excluding foreign currencies. b.Foreign Currencies Maturity Date Structure Dec. 31, 2005 Unit:US$1,000 Amounts by Time Remaining before Maturity 1-30 days 31-90 days 91-180 days 181days- Over one year Total one year Assets 12,330,828 4,860,677 1,295,289 1,367,278 1,221,218 3,586,366 Liabilities 12,319,924 6,332,838 1,632,258 1,447,787 1,030,584 1,876,457 Gap 10,904 (1,472,161) (336,969) (80,509) 190,634 1,709,909 Accumulated Gap 10,904 (1,472,161) (1,809,130) (1,889,639) (1,699,005) 10,904 Note:The table includes only foreign currencies: US dollar, HK dollar, Japanese Yen, Euro (equivalent to US dollar) held in head office and the domestic and overseas branches. , 3. Impact of Changes in Major Domestic and Overseas Policies and Laws on the Bank s Financial Operations, and Countermeasures The Bank will remain attentive to the influence of major government financial and economic policies, and will provide appropriate responses in a timely fashion so as to lower the impact on its financial operations. , 4. Impact of Technological and Industrial Changes on the Bank s Financial Operations, and Countermeasures (1) Impact of Technological Changes, and Countermeasures The rapid advancement and widespread adoption of information technology throughout the world have gradually accustomed customers to use different trading channels to carry out funds-flow services. The Bank continuously uses the Internet, ATMs, and other electronic channels to provide a diversified, convenient, and safe service system that can attract new customers and keep old ones. The Bank has also established and integrated management and decision-making resource information systems so as to provide management with effective and timely decision-making data and achieve the goals of controlling risk, upgrading operating performance, allocating capital reasonably, and generating profits. (2) Impact of Industrial Changes, and Countermeasures The Bank holds key industry status and prospects seminars annually, purchases industrial, economic, and specialized databanks, and has established a databank for inter-industry comparison and analysis of the financial conditions of companies listed on the stock and over-the-counter markets. In addition to these resources, employees , can use the Bank s global information network to maintain grasp of the latest industrial changes, enhance the quality , of credit investigation and loans, and lower the Bank s business risks. At the same time, the Bank is strengthening its management of loan risk by setting risk assumption limits by industry and by conglomerate group so as to diversify risks caused by technological and industrial changes. , 5. Impact on the Bank of Changes in the Bank s Image, and Countermeasures To facilitate business marketing, the Bank strives to enhance service quality, simplify operating procedures, and expand authorization; in addition, in 2005 it emphasized Make It Happen with Vitality, Joy, and Hope with the aim of molding an image of vigor and vitality. In 2005 the Bank also introduced the Make a Difference with Creativity, Integration, and Action program calling for quality upgrading and hand-in-hand concerted effort to give outsiders the impression of a bank with a difference that emphasizes a youthful heart, soaring passion, vital energy.
94
6. Expected Benefits and Potential Risks of Mergers and Acquisitions, and Countermeasures On Nov. 18, 2005 the government announced that the BOT would absorb the Central Trust of China through a merger and would remain as the surviving bank, and that after the merger the scope of businesses operated by the , BOT would encompass banking, insurance, securities, trust, procurement, government employees insurance, , military servicemen s insurance, alternative national service insurance, trading, and gold, bringing greater diversification and an extension of product line for marketing through product integration and packaging. This will have the following effects: (1) Expansion of the scale of assets; (2) Extension of service network throughout Taiwan, and increase business channels; (3) Expression of business synergies, and enhance competitiveness; and (4) Heightening of market share. 7. Expected Benefits and Potential Risks of Business Location Expansion The BOT enjoys outstanding credit, a broad and stable market base, a correspondent banking system that covers Taiwan and the world, and a fine management system. The expansion of business locations will not only increase the volume of the deposit, loan, and foreign exchange businesses, but will also offer customers more convenient services and establish a solid operating niche. 8. Risks Arising from the Concentration of Business, and Countermeasures , The Bank s main source of income is interest, and for this reason changes in interest rates have a relatively large , influence on the Bank s income. To reduce the risk caused by interest-rate fluctuations, the Bank will observe changes in interest rates both continuously and closely, and will adjust its interest rates when necessary to improve the structure of its assets and liabilities. 9. Influence and Risks Posed by Changes in Operating Rights The BOT is currently a government-owned bank and the government is its only shareholder, so there have been no changes in operating rights. 10. Court Cases Pending (None) 11. Other Important Risks (None)
VII. Crisis Management Mechanism
In regard to latent or present crises, the Bank adopts a series of pre-event, mid-event, and post-event countermeasures. The crisis management mechanism that has been established by the Bank includes the following: 1. A 2. The BOT Emergency Response Manual. BOT Crisis Reporting Rules.
3. Coordinating with the competent authority in the joint prevention of fraud. 4. Coordinating with the competent authority in the joint prevention of crimes using nominee accounts. 5. Coordinating with the competent authority in the establishment of a warning mechanism. , 6. Establishing a list of individual terrorists and terrorist groups on the Bank s internal global information web. 7. Printing of a list of BOT personnel in charge of coordinating supervision of Anti-Money Laundering. 8. Publicizing and implementing the Act for the Anti-Money Laundering. 9. Establishing an emergency reporting system for headquarters and branches. 10. Strengthening education and training, and enhancing the crisis management capabilities of BOT staff.
VIII. Other Important Matters
(None)
95
doc_979335072.pdf