18 May 2018
Most large European banks have now issued their first quarter financial updates (to 31 March) – the 14 large European banks we’ve looked at have provided first quarter disclosures with varying levels of granularity. We’ve continued to analyse all of the information these banks have published to date on IFRS 9 to build further insights into the impact of the new standard.
What have banks reported so far?
When we looked at Canadian banks’ first quarter reporting – which happened earlier as their quarter end was on 31 January – most of their IFRS 9 updates followed a similar format. However, in Europe, the information published was of varying length and content, reflecting national differences and also the level of detail in their previous disclosures. A number of banks referred to transition reports and/or 2017 annual financial statements for more detailed explanations of the impact of adopting IFRS 9.
Earlier this year, six UK banks issued their transition reports, which were detailed and informative. Since then, two more transition reports have been published – by a German and an Italian bank. These offered more information in critical areas of judgement for impairment, and compared impairment categories for financial assets between IAS 39 and IFRS 9.
So, what more have we learned about IFRS 9 from all of these sources? Although we’ve based our analysis only on a small selection of institutions that disclosed sufficient detail, we can see two additional areas where the picture is starting to develop.
To what extent are banks using forward-looking information when assessing for SICR?
As discussed in our last blog, IFRS 9’s expected credit loss (ECL) impairment model requires financial assets to be allocated to Stage 2 when there has been a significant increase in credit risk (SICR). There is a rebuttable presumption that a financial asset’s credit risk has increased significantly once it becomes 30 days past due.
However, IFRS 9 also explains that delinquency is a lagging indicator and a SICR typically occurs before an asset is past due. Identifying SICR on a timely basis requires entities to use other, more forward-looking information and IFRS 9 discourages sole reliance on past-due data. To get some insights into the extent to which banks are actually doing this, we looked at information disclosed by 10 European and Canadian banks to see what proportion of financial assets in Stage 2 are more than 30 days past due.
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The bar chart above shows the proportions of Stage 2 retail and wholesale loans that are more than 30 days past due (simple averages for the 10 banks). Perhaps unsurprisingly, the proportion is higher for retail, reflecting the fact that there is less detailed credit information available for retail customers. We also found that the range for retail is much higher (between 3% and 23%) than for wholesale (between 1% and 11%).
Overall, it’s encouraging to see that a significant majority of loans have been transferred to Stage 2 before reaching 30 days past due status.
What provisions are being made against non-credit impaired assets?
A major impact of the IFRS 9 ECL model is that banks are required to make provisions against assets that are not credit-impaired – i.e. those classified into Stages 1 and 2 (subject to any adjustment for provisions for losses incurred but not reported (IBNR)). We looked at ECL coverage ratios – i.e. the ratio of ECL provisions to the gross carrying amount of the exposures they relate to – per type of exposure for seven banks (five of which are the same as in the analysis above).
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The largest provisioning percentage is held against credit cards. The smallest is against retail mortgage lending. The percentages jump by at least a factor of 10 for each category between Stage 1 and Stage 2.
Canadian banks will soon be issuing their half-year reports and it will be interesting to see if they provide additional detail. We’ll keep a close eye on what they publish and report back with any notable findings.