Higher loan-loss provisions in store under new standard

Changes in TFRS 9 demand foresight

Loan-loss provisions for the banking industry will increase in line with the new Thai Financial Reporting Standards 9 (TFRS 9), coming into effect from the beginning of 2020.

Under the expected-loss (EL) framework of TFRS 9, banks are required to look forward on addressing credit risk for both the next year and on a lifetime basis, a change from the existing incurred-loss requirement.

The banking sector will have to set aside higher loan-loss provisions next year, said Yuphin Ruangrit, director of financial institutions business and the accounting policy office at the Bank of Thailand’s regulatory policy department.

Under the forward-looking information principle, loan quality is classified by three stages:

Stage 1 refers to performing loans that need a one-year EL for provision.

Stage 2 classifies higher credit risk under the lifetime EL for provision.

Stage 3 classifies non-performing loans (NPLs) to be under the lifetime EL for provision.

Under the EL requirements, banks will realise the need for higher reserves at a faster pace, in line with changes in asset quality, than under the existing incurred-loss requirement.

At the same time, the two financial ratios of banks could incur some changes under TFRS 9.

The range of net interest margin could widen in accordance with changes in interest income, while the number of debtors classified in Stage 2 loan quality could increase from with the existing special mention (SM) classification.

“The average SM level of the banking industry could increase next year as a result of the new regulatory standard, but this does not warrant much concern,” Ms Yuphin said.

SM is defined as a loan payment overdue for more than 30 days, but no more than 90 days.

Despite a higher provision setting under TFRS 9, this will have no impact on the banking sector’s financial status because banks have been preparing for the new regulatory standard since August 2017, Ms Yuphin said.

“Banks have already made their forecasts on customers’ credit risk profiles based on overlay management under the slower pace of economic growth for next year,” she said. “It should be better in case they set aside additional buffers.”

The local banking industry already sets aside a strong buffer for loan-loss reserves, higher than the central bank’s requirement. On average, the loan-loss ratio of the banking sector is 150%, while the lowest ratio is above 110%.

Ms Yuphin said specialised financial institutions and SET-listed companies will also have to comply with the new standard under a consensus of related parties, including government bodies, regulators and the private sector.