Loan portfolios, IFRS-9 and the effects of the coronavirus – 2024-04-20 19:42:20

/ world today news/ Questions are often asked about how the coronavirus has affected credit portfolios. Well, based on the accumulated data, you can draw conclusions

So recently, when, after the understandable pause caused by the more or less successful implementation of the Ninth International Financial Reporting Standard (IFRS-9) by all market participants, we resumed our workshop on the effective implementation of the requirements of this Standard, these questions were raised repeatedly.

In general, accounting for the economic consequences of the coronavirus in provisions calculated in accordance with IFRS-9 is not an easy topic. Auditors insist on developing or recalibrating credit risk assessment models to reflect the alleged increased credit risk.

The problem is that the development of these models is not an initiative of individual enthusiasts, but a bureaucratic process of collecting and analyzing data (which must meet certain requirements; usually the same auditors use the Basel-3 document bcbs239). Therefore, there should be formal grounds for revising the models that are more significant than the auditors’ requirements. Data arrives with a delay (and this is normal). In the current situation, the question of a “reasonable, verifiable, probability-weighted” method of assessing credit risk degenerates into complex negotiations to create sufficient reserves, and this at a time when capital is already under pressure. For the effective passage of these negotiations, it is very important to understand how credit portfolios actually behave during a crisis.

Retail credit data available from any bank or similar institution provides a solid basis for negotiating positions and identifies areas of credit portfolio management in crisis that need attention and improvement.

In accordance with the regulatory requirements of IFRS-9 and general economic considerations, the behavior of loans is a combination of the following effects:

• Natural aging of loans (behavior through the cycle);

• Macroeconomics (factor M);

• Initial credit quality (Q factor);

• Early repayment (Factor P);

• Aggravation of delays due to macroeconomics and debt collection work (MM factor).

All of these factors, except the first, have been affected by the COVID-19 epidemic. A schematic representation of their development before and during 2020 is shown in the tables.

Here is a brief description of this crisis applied to quality retail loan portfolios:

• In the spring – in June 2020, the additional (to natural) frequency of loan delays increased sharply;

• At the same time, the frequency of deepening delinquencies is also increasing: if borrowers start them, it is more difficult for them to return to loan servicing

• The decrease in the volume of additional early repayment of loans does not reject the usual seasonal trends;

• From July 2020, when the measures to isolate the population were limited, the additional frequencies of deepening arrears immediately fell, although they remained positive, but early repayment increased sharply: borrowers began to accumulate savings and get rid of loans;

• Banks should pay special attention to the revision of credit risk acceptance models: the high volatility of the impact of the quality of new issues on the added frequency of payment delays (Q factor) is an alarming signal and is observed in many real loan portfolios.

The last thing to mention: although all presented tables are schematic and do not reflect the real situation of our company’s clients, to a greater or lesser extent the described effects are manifested in real portfolios.

Translation: V. Sergeev