Barclays 2009 Annual Report Download - page 100

98 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Risk management
Credit risk management
continued
strong chance that they will be able to meet their contractual obligations
in the foreseeable future.
For the majority of products, the standard period for charging off
accounts is 180 days past due of contractual obligation. However, in the
case of customer bankruptcy or insolvency, the associated accounts will
be charged off within 60 days.
Within UKRB Local Business, accounts that are deemed to have a
heightened level of risk, or that exhibit some unsatisfactory features which
could affect viability in the short to medium term, are transferred to a
separate ‘caution’ stream. Accounts on the caution stream are reviewed on
at least a quarterly basis, at which time consideration is given to continuing
with the agreed strategy, returning the customer to a lower risk refer stream,
or instigating recovery/exit action.
Identifying potential credit risk loans
In line with disclosure requirements from the Securities Exchange
Commission (SEC) in the US, the Group reports potentially and actually
impaired loans as Potential Credit Risk Loans (PCRLs). PCRLs comprise two
categories of loans: Potential Problem Loans (PPLs) and Credit Risk Loans
(CRLs).
PPLs are loans that are currently complying with repayment terms but
where serious doubt exists as to the ability of the borrower to continue to
comply with such terms in the near future. If the credit quality of a loan on
an early warning or watch list deteriorates to the highest category
(wholesale) or deteriorates to delinquency cycle 2 (retail), consideration is
given to including it within the PPL category.
Should further evidence of deterioration be observed, a loan may move
to the CRL category. Events that would trigger the transfer of a loan from the
PPL to the CRL category include a missed payment or a breach of covenant.
CRLs comprise three classes of loans:
– ‘Impaired loans’ comprise loans where individual identified impairment
allowance has been raised and also include loans which are fully
collateralised or where indebtedness has already been written down to the
expected realisable value. The impaired loan category may include loans,
which, while impaired, are still performing.
– The category ‘accruing past due 90 days or more’ comprises loans that
are 90 days or more past due with respect to principal or interest. An
impairment allowance will be raised against these loans if the expected
cash flows discounted at the effective interest rate are less than the
carrying value.
– The category ‘impaired and restructured loans’ comprises loans not
included above where, for economic or legal reasons related to the debtor’s
financial difficulties, a concession has been granted to the debtor that
would not otherwise be considered. Where the concession results in the
expected cash flows discounted at the effective interest rate being less
than the loan’s carrying value, an impairment allowance will be raised.
Allowances for impairment and other credit provisions
Barclays establishes, through charges against profit, impairment allowances
and other credit provisions for the incurred loss inherent in the lending book.
Under IFRS, impairment allowances are recognised where there is
objective evidence of impairment as a result of one or more loss events that
have occurred after initial recognition, and where these events have had an
impact on the estimated future cash flows of the financial asset or portfolio
of financial assets. Impairment of loans and receivables is measured as the
difference between the carrying amount and the present value of estimated
future cash flows discounted at the financial asset’s original effective interest
rate. If the carrying amount is less than the discounted cash flows, then no
further allowance is necessary.
Impairment allowances are measured individually for assets that are
individually significant, and collectively where a portfolio comprises
homogenous assets and where appropriate statistical techniques are
available.
In terms of individual assessment, the trigger point for impairment is
formal classification of an account as exhibiting serious financial problems
and where any further deterioration is likely to lead to failure. Two key inputs
to the cash flow calculation are the valuation of all security and collateral,
as well as the timing of all asset realisations, after allowing for all attendant
costs. This method applies mainly in the corporate portfolios.
For collective assessment, the trigger point for impairment is the
missing of a contractual payment. While the impairment allowance is
calculated per individual account, the calculation methodology relies on
the historical experience of pools of similar assets; hence the impairment
allowance is collective. The impairment calculation is based on a roll-rate
approach, where the percentage of assets that move from the initial
delinquency to default are derived from statistical probabilities based on
historical experience. Recovery amounts and contractual interest rates are
calculated using a weighted average for the relevant portfolio. This method
applies mainly to the Group’s retail portfolios and is consistent with Barclays
policy of raising an allowance as soon as impairment is identified.
Unidentified impairment allowances are also raised to cover losses
which are judged to be incurred but not yet specifically identified in
customer exposures at the balance sheet date, and which, therefore,
have not been specifically reported.
The incurred but not yet reported calculation is based on the asset’s
probability of moving from the performing portfolio to being specifically
identified as impaired within the given emergence period and then on to
default within a specified period. This is calculated on the present value
of estimated future cash flows discounted at the financial asset’s original
effective interest rate.
The emergence periods vary across businesses and are based on actual
experience and are reviewed on an annual basis. This methodology ensures
that the Group captures the loss incurred at the correct balance sheet date.
These impairment allowances are reviewed and adjusted at least
Fig. 5: Loan loss rate (bps) – longer-term trends
bps
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
09
08
39
70
91
111
99 89
202
226
177
147 143
174
60
40 24
23
47 56 54
84
98
72
50 52 65 71
95
156
45
107
85 83
92
— FY Annualised LLR
— TTC Average LLR
— 29 Year Average LLR
Cycle 3 (2001–2009)Cycle 2 (1991–2000)Cycle 1 (1981–1990)
Note
Loan loss rate for the years prior to 2005 does not reflect the application of IAS 32, IAS 39 and IFRS 4.