Apr. 30 2018 — IFRS 9 Impairment Solution
Customer Experience, April 2018
The new IFRS 9 accounting standards applicable from January 01, 2018 and requiring firms to factor future expected credit losses into their loan provisions posed a challenge for Diamond Bank (UK) Plc (the Bank). The regulatory change necessitated significant investment by the Bank in forward looking analytics.
Diamond Bank (UK) Plc1 , regulated by the Prudential Regulatory Authority and the Financial Conduct Authority, had a balance sheet of £251 million total assets and a net profit of £1,753 million in 2016.2
The UK operation is a wholesale licensed bank focused on the provision of trade finance, export financing to small and medium sized enterprises, corporate banking, wholesale deposits, treasury, and correspondent banking.
Diamond Bank needed to meet the mandated deadline of January 1st 2018, for IFRS 9 but had limited through the cycle internal default and recovery data. It was important for the Bank to meet the regulation well in advance of the deadline and to demonstrate an IFRS 9 compliant model. Recognising that internal model development would be a significant undertaking for the Bank in terms of resources and the need to implement a framework to perform IFRS 9 driven credit assessment calculations based on tested methodology and underlying data, the Bank decided to look externally for a solution that would provide it with a transparent methodology and an approach that was easy to understand and relevant for its balance sheet.
With S&P Global Market Intelligence’s Probability of Default (PD), Loss Given Default (LGD), and IFRS 9 Credit Cycle Projection scorecards, Diamond Bank was able to enhance its credit assessment practices and comply with IFRS 9 standards. Diamond Bank found this solution afforded the most thoroughly-tested credit assessment framework, including the flexibility to automate spreadsheet analysis using the Excel Add-in with access to credit risk benchmarks. In addition, attribute-driven scoring guidelines provided an intuitive structure to score business risk factors. One differentiator Diamond Bank identified was that the Market Intelligence PD and LGD Scorecards already incorporated the required IFRS 9 adjustments, providing consistency between regulatory capital calculation and provisioning, with forward-looking Expected Credit Loss (ECL) estimates. Furthermore, Diamond Bank appreciated that the scorecards undergo a rigorous development and annual maintenance process.
Diamond Bank leveraged decades of subject-matter experience in credit assessment, ratings, sector-specific knowledge, and ongoing research from S&P Global Market Intelligence assisted the bank with meeting regulatory changes on-time and under-budget. Market Intelligence scorecards helped Diamond Bank improve its risk framework for better balance sheet management.
Now, Diamond Bank uses IFRS 9 adjustments to incorporate macro-economic conditions such as changes in GDP and unemployment, combined with market information such as changes in global indices to adjust the Scorecard PD output. These adjustments allow Diamond Bank to produce forward looking point-in-time PD estimates (both one-year and lifetime).
Diamond Bank was able to leverage the broader suite of S&P Global Market Intelligence resources by utilizing scorecards outputs that broadly align to S&P Global Ratings criteria, which are statistically calibrated on S&P Global Market Intelligence proprietary default database, dating back to 1981. This enables Diamond Bank to have a reliable solution trained on real data.
To facilitate the successful adoption of the scorecards we provided training, including in-person workshops to Diamond Bank staff. The focus of the training was to help risk management and financial professionals understand how our scorecards work with the required steps to meet IFRS 9 regulatory requirements. We continue to provide training, support, and maintenance at the product level so that Diamond Bank can continue to fine-tune their scorecards.
Key Benefits Summary:
- Excel template library and customized templates at no extra cost
- Easy access to best-practice data on credit risk benchmarks
- Attribute-driven scoring guidelines to score business risk factors
- Automating key workflows and centralizing data management
- Consistency between regulatory capital calculation and provisioning
- PD and LGD Scorecards incorporated IFRS 9 adjustments with forward-looking Expected Credit Loss (ECL) estimates
Diamond Bank Meets IFRS 9 Challenges With our Scorecard Suite
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