New IFRS 9 rules could see banks’ loan loss provisioning jump by up to 50% across asset classes

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New IFRS 9 rules could see banks’ loan loss provisioning jump by up to 50% across asset classes

Published: 27 May 2015

  • Majority of banks’ expected credit loss provisions to exceed Basel requirements;
  • Implementation budgets double in size over the last year;        
  • Lack of technical resources required for IFRS 9 projects a concern for banks.

Most global banks estimate new IFRS 9 rules on credit exposures will result in loan loss provisions increasing by up to 50%, according to new research by Deloitte, the business advisory firm. 

Deloitte’s Fifth Global IFRS Banking Survey: Finding your way also showed that 85% of banks anticipate their expected credit loss provisions will exceed those calculated under Basel rules, mostly driven by requirements to provide for lifetime expected losses under ‘stage II’.

Tim Pagett, Deloitte China National Global Financial Services Industry Leader, said: “There will be an interesting interaction between capital requirements and provisions, and a lot of this will depend on how bank supervisors interpret and influence how the rules are implemented. The ongoing efforts of bank auditors and regulators will be critical as they seek to encourage consistent quality upon implementation. This is consistent with our survey findings, with two-fifths of respondents stating that banking supervisors would be most influential in interpreting the new rules, while one-third expect auditors to be key.” 

The availability of technical resource required for IFRS 9 projects is a concern for banks, particularly given the standard’s effective date of 1 January 2018. Three-fifths said they do not have enough technical resource to deliver their IFRS 9 projects, while a quarter of these further doubt there will be sufficient skills available in the market to cover any shortfall. Banks have also indicated that implementation budgets are rising, with total costs doubling in the year since Deloitte’s last survey. 

Pagett commented that, this is a big change for banks and there are a number of implementation challenges. Banks have said there needs to be clarity around acceptable interpretation of the new rules and interaction with capital because of the potential impact on business models and implementation planning. Banks’ internal teams – including finance, credit, risk and IT - will need to work closely together to ensure these projects can get off the ground in time for the implementation deadline given the complexity involved and wider business pressures.

Maria Xuereb, Deloitte China GFSI Audit Partner said, "IFRS 9 represents a big change for banks as it not only affects loan loss provisioning but also classification and measurement of financial instruments and hedge accounting. In Hong Kong banks are currently actively assessing how it will impact their business, systems and operations, as well as their financial results. To ensure a smooth implementation, the involvement and support of stakeholders from the different business and support units, such as credit, risk management, IT and finance, will be critical given the complexity involved and tight implementation deadline."

"On the other hand, major banks in mainland China have a different agenda on IFRS 9. Preliminary analysis conducted by these banks indicates that current level of loan provision is sufficient even under the expected loss model required by IFRS 9. Major banks focus more on finding an efficient solution on the IT side and credit risk modelling and less concern about the potential impact to their financials. The uncertainty on when and how the PRC GAAP will embrace IFRS 9 adds a dimension of uncertainty to this," said Mike Shi, Deloitte China Audit Partner.

About the survey

Deloitte’s research takes into account views from 59 banks from Europe, the Middle East & Africa, Asia Pacific and the Americas (42 of which are IFRS reporters). Responses were received from 17 of the 30 global systemically important financial institutions (G-SIFIs) determined by the Financial Stability Board, including 12 of the 18 G-SIFIs who are IFRS reporters.

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