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IFRS 9 transition to result in higher impairments

Expected credit losses to be about 15 per cent in 12 to 24 months

Dubai: The adoption of International Financial Reporting Standards (IFRS 9) by GCC banks from January 1, 2018 had resulted in a muted impact on financial statements, however, the transition of some accounts from Stage 1 to Stage 2 and Stage 3 are likely to result in some spike in impairments, according to Standard & Poor’s.

Effective for annual periods beginning on or after January 1, 2018, IFRS 9 set out how banks should classify and measure financial assets and financial liabilities. Its scope includes the recognition of impairment. In the standard that preceded IFRS 9, the “incurred loss” framework required banks to recognise credit losses only when evidence of a loss was apparent.

Under IFRS 9’s expected credit loss (ECL) impairment framework, banks are required to recognise ECLs at all times, taking into account past events, current conditions and forecast information, and to update the amount of ECLs recognised at each reporting date to reflect changes in an asset’s credit risk. It is a more forward-looking approach than its predecessor and will result in more timely recognition of credit losses and a likely increase in NPLs.

In the first year since the adoption of IFRS 9, most GCC banks reported an improvement in the quantum of loan impairments. “We attribute such movement to the transition to IFRS 9, where the opening impact is charged to the bank’s equity and not to its income statement. Despite that transition and the fact that banks had to take the hit upfront, most of the banks decided to maintain a stable charge in their income statement,” said Senior Director & Global Head of Islamic Finance, Financial Services Research, S&P Global Ratings.


Bank’s IFRS 9 disclosures reveal its Stage 2 loans. According to S&P, on average, Stage 2 loans comprised 10.6 per cent of total loans for rated banks. The rating agency expects smaller banks to experience greater deterioration in asset quality as large banks typically have conservative risk management practices and are selective in their lending. Write-offs increased almost everywhere because banks wanted the ratio of Stage 3 loans after the transition to IFRS 9 to be similar to the ratio of NPLs under previous standards (IAS 39) before it. The biggestincrease was in Qatar and the UAE because of high write-offs at a few banks

“We expect the total amount of loans at either Stage 2 or Stage 3 to remain stable at around 15 per cent of total loans over the next 12-24 months. However, we could see more loans migrating to Stage 3 from Stage 2 and banks pursuing more-aggressive write-off practices,” said Damak.

Stages of loan loss recognition

Under the ECL framework impairment of loans are recognised under three stages.

Stage 1: When a loan is originated or purchased, ECLs resulting from default events that are possible within the next 12 months are recognised (12-month ECL) and a loss allowance is established. On subsequent reporting dates, 12-month ECL also applies to existing loans with no significant increase in credit risk since their initial recognition.

Stage 2: If a loan’s credit risk has increased significantly since initial recognition and is not considered low, lifetime ECLs are recognised. The calculation of interest revenue is the same as for Stage 1.

Stage 3: If the loan’s credit risk increases to the point where it is considered credit-impaired, interest revenue is calculated based on the loan’s amortised cost (that is, the gross carrying amount less the loss allowance). Lifetime ECLs are recognised, as in Stage 2. Twelve-month versus lifetime expected credit losses ECLs reflect management’s expectations of shortfalls in the collection of contractual cash flows.