IFRS9 warrants higher loan buffers
Banks gauge up to 25% increase
Financial institutions are expected to set aside more money to cover potential losses from loans to comply with the new International Financial Reporting Standards 9 (IFRS9), due to be implemented in Thailand on Jan 1, 2019.
“Under the new standard, financial institutions are expected to increase their loan-loss provisions in accordance with higher impairment losses due to the forecast of losses in the future,” said Kasiti Ketsuriyonk, director of assurance services at Deloitte Touche Tohmatsu Jaiyos Audit Co Ltd.
He said that the IFRS9 financial reporting standard, which will replace the IAS39 standard, will mainly affect listed companies, commercial banks and other financial institutions.
The major change in the new standard is that the expected credit loss (ECL) impairment model, which requires forecasting the possible loss of credit, in place of the incurred loss model of the IAS39.
“The new standard requires looking into the future, while the current standard you only book the impairment allowance when there is a clear evidence of possible impairment,” he said.
He said that the ECL calculation divides credits into three stages, each with specific calculations.
The first stage, which consists of credits with no significant increase in credit risk, will be calculated based on the 12-month expected credit losses.
The second stage, credit with increases in risk but no evidence of impairment, and the third stage, credit with objective evidence of impairment, will be calculated based on expected lifetime credit losses.
External factors such as economic growth, the employment rate or other factors that could affect the financial status of borrowers will have to be considered in calculating the expected losses.
“The new standard is expected to increase the impairment losses and in turn, increase the loan loss provisions set aside by financial institutions,” said Mr Kasiti.
According to a Deloitte survey conducted on 91 banks from around the world, most banks estimate that loan loss provisions will increase by up to 25% across all asset classes during the transition to IFRS9.
“However, I think this is a more appropriate calculation of risk that will help improve the stability of financial institutions, sparing them from setting aside high additional provisions when loans turn sour,” he added.
Mr Kasiti said that the Bank of Thailand has already prepared for the adoption of the new accounting standard by asking financial institutions to unofficially calculate their financial results based on the IFRS9 standard.
He said that as the model requires forecasts of possible future losses, each financial institution will have a different model to calculate credit risk in accordance with risks associated with each borrower.
“I see no indication from the Bank of Thailand that they want to create a central model for calculating the ECL, so I think they want each bank to create its own according to the risks they’re facing,” said Mr Kasiti.