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Real-time IFRS 9 Real-time IFRS 9

Ewa Bialkowska

Ewa Bialkowska

Ewa specialises in accounting for the banking and financial services sectors, with over two decades of experience in auditing and delivering accounting advisory services to financial institutions in the UK, continental Europe and other jurisdictions.

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IFRS 9 bank disclosures

First picture starting to emerge

20 February 2018

As the reporting season gathers pace, we are getting the first glimpses of the impact of IFRS 9 adoption by banks. IFRS 9 has been high on the agenda of banks and their regulators for the past few years and everyone is interested to know what the effects will be. We’re keen to analyse it too, so we’ve been looking at the information issued by 25 large European banks over the last few weeks. Some interesting features are beginning to emerge.

Quantitative disclosures

So, what’s the headline so far? Gathering information from Q4 2017 reports, press releases, and some early 2017 annual reports, all but three of the banks we have looked at have disclosed the absolute amount of the impact from IFRS 9 (mostly described as impact on equity) as at 1 January 2018 and the impact on CET1.

In the EU, banks can take advantage of a phase-in period, which means that for regulatory purposes they do not have to take the full capital impact of IFRS 9 adoption on 1 January 2018. The chart below shows the CET1 impact before any transitional relief for the banks in our sample that explicitly disclosed it.

Chart | Expected fully loaded impact of IFRS 9 on CET1 as at 1 January 2018

What can one take from this? A median impact of circa -15 basis points is something that most banks should be able to absorb within their existing buffers. It will be interesting to see what banks say about it when they come to give fuller disclosures in the coming months.

Most disclosures have been short and simple: a high level number and a few explanatory sentences. Just under half of the banks didn’t provide any further analysis. A third identified the new expected credit loss impairment model as the main source of the impact. Two banks disclosed the new classification and measurement (C&M) requirements as the main source, with one stating specifically that it related to classification of its liquidity portfolio.

Qualitative disclosures

A couple of banks have already given more detailed information. One bank in our sample has already issued its 2017 annual financial statements and provided a more detailed description of the way the new requirements on C&M and impairment have been implemented. For example, it explained how certain prepayment options at fair value have resulted in classification of the loans as measured at fair value through profit or loss.

This bank and one other also gave an overview of their methodology for identifying significant increase in credit risk – one of the key and most difficult areas of judgement in the new impairment model that determines whether a loan or another financial instrument should be moved from Stage 1 to Stage 2. Both banks mentioned using probability of default (PD) in the assessment.

One stated that a PD increase of 2.5 times from initial recognition would be viewed as significant, subject to some minimum and maximum levels of deterioration. The other bank differentiated between facilities originated below and above 1% PD and applied two measures: the increase in 12-month PD and the increase in lifetime PD for each type of facility. 

What's in the pipeline?

Over the following weeks more banks are due to publish their results and audited financial statements and it will be interesting to see how they applied both models (i.e. impairment and C&M), and how they applied judgement in the critical areas.

The large Canadian banks, meanwhile, have disclosed that they will publish unaudited supplementary financial information packages that will contain more detail of the impact of adoption of IFRS 9. The timing is expected to coincide with their reporting of Q1 2018 results at around the end of February or beginning of March. Look out for our analysis on the Real-time IFRS 9 home page.

Many European banks also plan to issue unaudited transition packs with more detailed information of the impact of IFRS 9 – we can expect these over the next few months.

It won’t be long before we begin to see clearer and more detailed patterns emerging. We’ll be looking at these and bringing you our ‘as live’ thoughts as the story unfolds – watch this space!

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