Barclays 2006 Annual Report Download - page 81

Barclays PLC
Annual Report 2006 77
Operating review
1
RT is a statistical estimate of the average loss for the loan portfolio for
a 12-month period, taking into account the portfolio’s size and risk
characteristics under current credit conditions. It is a PIT measure and
therefore requires a point in time PD (PDPIT) as an input. RT provides
insight into the credit quality of the portfolio and assists management
in tracking risk changes as the Group’s stock of credit exposures evolves
in size or risk profile in the course of business.
RT is calculated for both corporate and retail loans as follows:
RT = PDPIT x EAD x LGD.
The RT of each individual loan is aggregated to produce the RT of the
various sub-portfolios in the Group and ultimately for the whole Group.
At this aggregate level, RT is a statistical estimate of the average loss
over a 12-month period that is inherent in the Group’s credit exposures.
Many models are used in the estimation of the components of RT in each
of the Group’s businesses. The majority of the models are internally
developed using Barclays own historical data and other external
information. In some cases we use externally developed models and
rating tools. The appropriateness of these external models for use within
Barclays is validated as part of the model approval process. It is also a
Barclays policy that all existing models are validated annually to ensure
their applicability to the current portfolios and credit conditions.
To interpret RT, the following should be considered:
•RT is calculated using probabilities of default that are relevant to
the current credit conditions for each customer. These figures are
therefore a point-in-time estimate based on current economic and
credit conditions.
• RT is calculated for different purposes and through different
methods to impairment allowances, so RT cannot be used as
a forecast of the total allowances for impairment. It is rather a
statistical estimate that reflects changes in the size and quality
of the loan portfolio. RT does not equate to the Group’s budget
or internal forecast of impairment allowance in the coming year.
• The principal reasons for the difference between impairment and
RT are:
– RT is a forecast estimate of the average loss associated with the
current performing portfolio over a 12-month period, impairment
is the accounting value of incurred loss realised on the whole
portfolio.
– RT covers only the loans at the date of estimation and does not
make allowance for subsequent growth or change in the
composition of the loan book which can affect impairment.
– RT is a statistical estimate of losses arising only in the current
performing loan portfolio and therefore it is not calculated for
non-performing loans in the wholesale portfolio or for retail loans
in arrears.
– Impairment can include significant additional charges, write-backs
and recoveries arising during the year from impaired loans. These
items can materially affect the impairment allowance charge, but
are not included in RT.
– The actual credit impairment charge arising from new defaults in
any one year, from loans that are performing at the start of the year,
vary significantly around the RT value. This can be due to changes
during the year in the economic environment or in the business
conditions in specific sectors or countries and from unpredictable
or unexpected external events. This applies especially in wholesale
portfolios where the default of a small number of large exposures
will significantly increase the period’s impairment allowance but
will not have been included in the RT figure. For retail portfolios,
consisting of a very large number of small exposures, the variation
in the rate of change in new impairment compared to the RT figure
is usually much smaller than for wholesale portfolios.
RT increased £415m to £2,260m (2005: £1,845m).
UK Retail Banking RT increased £45m to £225m (2005: £180m)
reflecting a methodology enhancement to better reflect expected loss
rates in the Local Business portfolio.
The increase in Barclaycard RT was £310m, the total rising to £1,410m
(2005: £1,100m). This reflected the deterioration in credit conditions
in the UK credit card and unsecured loan market as well as loan
balance growth.
International Retail and Commercial Banking – Absa RT increased
£45m, reflecting balance sheet growth, a normalisation of credit
conditions in South Africa and by an asset transfer from Absa Capital.
RT in Barclays Capital fell £15m mainly as a result of assets which were
transferred to International Retail and Commercial Banking – Absa from
Absa Capital.
06
05
Head office
functions
and other
operations(b)
900
600
300
0
1,500
1,200
Risk Tendency by business £m
25
10
180
225
0605 06
05
International
Retail and
Commercial
Banking –
ex Absa
International
Retail and
Commercial
Banking(a)
– Absa
100
145
75
75
06
05
06
05
UK Business
Banking
UK Retail
Banking
250
290
06
05
06
05
Barclays
Wealth
Barclays
Capital(a)
5
10
110
95
06
05
1,100
1,410
Barclaycard
Notes
(a) Of the reduction to Barclays Capital RT, £10m is as a consequence of a transfer of certain assets from Absa Capital to International Retail and Commercial Banking
in the second half of 2006. The 2006 Risk Tendency in International Retail and Commercial Banking – Absa has increased by an equivalent amount.
(b) Head office functions and other operations comprises discontinued businesses in transition.