Foregoing SLFRS 9 saves banks’ bottomlines
Amajor trend seen in the recently released corporate results is that banks are taking larger impairments into the books. This is as a result of the banks taking a prudent measure on higher provisioning to prepare for the SLFRS 9 standard implementation in financial year 2018, as well as taking into account the rising Non Performing Loans (NPLs) caused by weak economic conditions experienced last year.
SLFRS 9 on “Financial Instruments” is applicable for financial periods beginning on or after 1st January 2018. This standard replaces LKAS 39 – “Financial Instruments: Recognition and Measurement”. However, CA Sri Lanka has granted an option to prepare interim financial statements continuing the application of LKAS 39 during the financial year commencing on or after 1st January 2018, through “Statement of Alternative Treatment ( SoAT) on the Figures in the Interim Financial Statements.”
SLFRS 9 gives a new set of guidelines on how the impairment costs for financial liabilities should be recognised. Given the changes proposed in the standard, it’s certain that the impairment cost of the banks will increase structurally going forward when the standard is implemented, according to analysts.
Therefore, what the banks did this quarter was take on more impairment into the books to prepare for the SLFRS 9 implementation. Some say that is being prudent. For the banks and finance companies, the impairments are a cost item – basically, similar to writing off bad debt.
“Underlying results were good, so they were able to do this,” one analyst noted.
Accordingly, these financial statements have been prepared by applying LKAS 39 in accordance with the said option granted.
If SLFRS 9 was applied to the financial statements as at 31st March 2016, it would have reduced the Hatton National Bank's (HNB) net assets by approximately 3 per cent to 5 per cent and the Total Capital Adequacy ratio approximately by 50 to 60 basis points, HNB said in its recent results. “With the transition from LKAS 39 incurred loss method to SLFRS 9 expected credit loss method, it is expected that the overall cumulative impairment provision will increase by approximately 35 per cent to 45 per cent.”
HNB said with its migration to SLFRS 9 on financial instruments which became effective 1st January 2018, it is in the process of quantifying the additional provisions required in respect of impairment charges for the three months ended 31st March 2018.
“Looking ahead, we think the banks can continue to perform well on the top line, but can face some headwinds on the impairments which may moderate the profit growth which was seen in 1Q CY18,” another analyst said.
Commercial Bank said with its migration to SLFRS 9 on financial instruments, it is in the process of quantifying the additional provisions required in respect of impairment charges for the three months ended 31st March 2018. “Based on the assessments undertaken to date, which are yet to be audited, the total estimated additional loan loss provision as at December 31, 2017 on adoption of SLFRS 9 is expected to be in the range of 25 per cent to 35 per cent compared to the total impairment provision determined as per LKAS 39,” it said.