During the IFRS 9 Implementation & impact assessment phase majority of the banks anticipated a negative impact on their balance sheets and the same was evident in the December 2017 financial disclosures. In our previous blog, based on our analysis of December 2017 bank disclosures, we indicated that the expected transition impact may lead to erosion of approximately 3.56% of the total equity of the banks across KSA, UAE, Qatar and Bahrain. As per the March 2018 financials, the transition impact absorbed by banks on total equity is 4.35% across the same countries. It is observed that the actual transition impact (4.35% of total equity) is higher than the expected impact disclosed by the bank in their December 2017 financials. Banks are not expected to publically disclose the underlying reason for this deviation, however one can infer that the deviation is largely due to modifications in the loss estimation methodology. Being a new
In Qatar, the top two banks constitute 60% of the total equity with an average impact of 3.58% on equity whereas, the 3 banks constituting 11% of total equity have witnessed an average impact of 7.48%. Similar trend is observed in other countries in the sample indicating the transition impact has been more for small banks as compared to the bigger banks. In addition, it is observed that across banks, the range of equity impact is widespread. In case of KSA, the impact on equity reported by banks range from a minimum of 2.26% to 6.99%. In UAE, this range varies from minimum of 0.13% to a maximum of 13.08%. Similar extent of variation is observed for other countries in the sample indicating diverse loss estimation methodologies adopted across banks.
As noted above, the average actual impact on equity (for the sample countries considered for in this study) as per the March 2018 financial statements is higher than what banks disclosed in their December 2017 financials. Specifically, the actual average impact is 4.35% as against 3.56% disclosed in the December 2017 financials. The following graphs shows the average deviation at a country level. Majority of the banks considered for this
It is observed that the impact on profit due to additional provision ranges from about 10% to 20% for the countries considered in this analysis. It remains to be seen as to how this trend unfolds in the near future. Any deteriorating / improving credit portfolio of a bank or worsening / improving of economic conditions may lead to movement of exposures across different IFRS 9 stages resulting in volatile provision and income statements. From an on-going perspective, it will also be interesting to track the frequency with which banks modify & validate their existing loss estimation methodologies and the impact it has on the stakeholders.
- Considering the principle driven nature of guidelines, it remains to be seen if some banks revise their loss estimation methodologies going ahead
- Increased emphasis on reviewing the ECL models and governance to manage model risk.
- Limited qualitative and quantitative disclosures in March 2018 reporting period. Banks haven’t detailed all aspect of IFRS 9 like stage assessment criteria for different portfolios, detailed stage level disclosures, consideration of macro-economic scenarios and mode of computation (system/manual) to name a few.
- The Central Banks may alternatively prescribe minimum set of qualitative and quantitative disclosures which will set the minimum benchmark for ECL models under IFRS 9