Barclays 2006 Annual Report Download - page 88

Barclays PLC
Annual Report 2006
84
Risk management
Allowances for impairment
Writing-off of assets
After an advance has been identified as impaired and is subject to
an impairment allowance, the stage may be reached whereby it is
concluded that there is no realistic prospect of further recovery.
Write-off will occur, when, and to the extent that, the whole or part
of a debt is considered irrecoverable.
The timing and extent of write-offs may involve some element of
subjective judgement. Nevertheless, a write-off will often be prompted
by a specific event, such as the inception of insolvency proceedings or
other formal recovery action, which makes it possible to establish that
some or the entire advance is beyond realistic prospect of recovery. In
any event, the position of impaired loans is reviewed at least quarterly
to ensure that irrecoverable advances are being written off in a prompt
and orderly manner and in compliance with any local regulations.
Such assets are only written off once all the necessary procedures have
been completed and the amount of the loss has been determined.
Subsequent recoveries of amounts previously written off are written
back and hence decrease the amount of the reported loan impairment
charge in the income statement.
Total write-offs of impaired financial assets increased to £2,174m
(2005: £1,587m).
Treatment of interest on impaired loans
IFRSs require that interest on impaired loans be recognised on the net
asset value (gross asset value less impairment allowance) at the rate
used to discount the expected cash flows (i.e. the original effective
interest rate).
Impairment charges for bad and doubtful debts
2006 2005 2004(a)
£m £m £m
UK Banking 461 327 188
Barclaycard 1,493 1,098 761
International Retail and
Commercial Banking 167 32 31
Barclays Capital 42 111 106
Barclays Global Investors –––
Barclays Wealth 22 (1)
Head office and other operations (11) 18
Total impairment charges 2,154 1,571 1,093
Total impairment charges increased 37% (£583m) to £2,154m
(2005: £1,571m).
The chart below shows impairment charges over the last five years.
(See also Table 20 on page 103.)
Impairment charges on loans and advances and other credit provisions
increased 32% (£501m) to £2,068m (2005: £1,567m). Excluding Absa,
the increase was 26% (£395m) and largely reflected the continued
challenging credit environment in UK unsecured retail lending through
2006. The wholesale and corporate sectors remained stable with a low
level of defaults.
The Group impairment charges on loans and advances and other credit
provisions as a percentage of year-end total loans and advances of
£316,561m (2005: £303,451m) increased to 0.65% (2005: 0.52%).
Retail impairment charges on loans and advances and other credit
provisions increased to £1,809m (2005: £1,254m), including £99m
(2005(b): £10m) in respect of Absa. Retail impairment charges on loans
and advances amounted to 1.30% (2005(c): 0.93%) as a percentage of
year-end total loans and advances of £139,350m (2005(c): £134,420m),
including balances in Absa of £20,090m (2005: £20,836m).
In the UK unsecured retail businesses, household discretionary cash
flows remained under pressure leading to deterioration in consumer
credit quality. High debt levels and changing social attitudes to
bankruptcy and debt default contributed to increased impairment
charges. In UK cards and unsecured consumer lending, the flows of
new delinquencies and the levels of arrears balances declined in the
second half of 2006, reflecting more selective customer recruitment
limit management and improved collections.
In UK Home Finance, delinquencies were flat and amounts charged-off
remained low. The weaker external environment led to increased credit
delinquency in Local Business, where there were both higher balances
on caution status and higher flows into delinquency, which both
stabilised towards the year end.
In the wholesale and corporate businesses, impairment charges on
loans and advances and other credit provisions decreased to £259m
(2005: £313m), including £27m (2005(b): £10m) in respect of Absa.
The fall was due mainly to recoveries in Barclays Capital as a result of
the benign wholesale credit environment. This was partially offset by an
increase in UK Business Banking, reflecting higher charges in Medium
Business and growth in lending balances.
02 03 04 05 06
0
500
1,000
1,500
2,000
2,500
Impairment/provisions charges over five years £m
UK GAAP IFRS
2,154
1,571
1,093
1,347
1,484
Notes
(a) Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005.
(b) For 2005, this reflects the period from 27th July until 31st December 2005.
(c) Prior year analysis of loans and advances between retail business and wholesale and corporate business has been reclassified to reflect enhanced methodology
implemented in current year.