Barclays 2011 Annual Report Download - page 92

Risk management
Credit risk continued
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 quarterly by an appropriate charge or
release of the stock of impairment allowances based on statistical analysis
and management judgement. Where appropriate, the accuracy of this
analysis is periodically assessed against actual losses (see modelling of
risk on page 73). As one of the controls to ensure that adequate
impairment allowances are held, movements in impairment allowances to
individual names with total impairment of more than £10m are presented
to the Credit Committee for agreement.
The loan loss rate (LLR) provides Barclays with one way of monitoring
the trends in the quality of the loan portfolio at the Group, business and
product levels. At Barclays, the LLR represents the annualised impairment
charges on loans and advances to customers and banks and other credit
provisions as a percentage of the total, period-end loans and advances to
customers and banks, gross of impairment allowances.
The impairment allowance is the aggregate of the identified and
unidentified impairment balances. Impairment allowance coverage,
or the coverage ratio, is reported at two levels:
– Credit risk loans coverage ratio (impairment allowances as a percentage
of CRL balances); and
– Potential credit risk loans coverage ratio (impairment allowances as
a percentage of total CRL and PPL balances).
Appropriate coverage ratios will vary according to the type of product
but can be broadly bracketed under three categories: secured retail home
loans; credit cards, unsecured and other personal lending products; and
corporate facilities. Analysis and experience has indicated that, in general,
the severity rates for these types of products are typically within the
following ranges:
– Secured retail Home loans: 5%-20%;
– Credit cards, unsecured and other personal lending products:
65%-75%; and
– Corporate facilities: 30%-50%.
CRL coverage ratios would therefore be expected to be at or around these
levels over a defined period of time. In principle, a number of factors may
affect the Group’s coverage ratios, including:
– The mix of products within total CRL balances. Coverage ratios will
tend to be lower when there is a high proportion of secured retail and
corporate balances within total CRLs. This is due to the fact that the
recovery outlook on these types of exposures is typically higher than
retail unsecured products with the result that they will have lower
impairment requirements;
– The stage in the economic cycle. Coverage ratios will tend to be lower
in the earlier stages of deterioration in credit conditions. At this stage,
retail delinquent balances will be predominantly in the early delinquency
cycles and corporate names will have only recently moved to CRL
categories. As such balances attract a lower impairment requirement,
the CRL coverage ratio will be lower;
– The balance of PPLs to CRLs. The impairment requirements for PPLs
are lower than for CRLs, so the greater the proportion of PPLs, the lower
the PCRL coverage ratio; and
– Write off policies. The speed with which defaulted assets are written
off will affect coverage ratios. The more quickly assets are written off,
the lower the ratios will be, since stock with 100% coverage will tend to
roll out of PCRL categories more quickly.
Note
a Loan loss rate for the years prior to 2005 does not reflect the application of IAS 32, IAS 39 and IFRS 4.
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Cycle 1 (1982–1991) Cycle 2 (1992–2001) Cycle 3 (2002–2011)
FY Annualised LLRa
30 Year Average LLR
TTC Average LLR
117 78 84
93
Loan loss rate (bps) – longer term trends
90 Barclays PLC Annual Report 2011 www.barclays.com/annualreport