Barclays 2012 Annual Report Download - page 325

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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 principal trigger point
for impairment is the missing of a contractual payment which is
evidence that an account is exhibiting serious financial problems, and
where any further deterioration is likely to lead to failure. Details of
other trigger points can be found on page 322. 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 principal trigger point for impairment is
the missing of a contractual payment which is the policy consistently
adopted across all credit cards, unsecured loans, mortgages and most
other retail lending. Details of other trigger points can be found on
page 322. The calculation methodology relies on the historical
experience of pools of similar assets; hence the impairment allowance
is collective. The impairment calculation is typically based on a roll-rate
approach, where the percentage of assets that move from the initial
delinquency to default is 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 is also referred to as collective
impairment. This is to reflect the impairment that is collectively held
against a pool of assets where a loss event has occurred, but has not
yet been captured. Hence, it is referred to as collective impairment
against the pool.
Impairment in the wholesale portfolios is generally calculated by
valuing each impaired asset on a case by case basis, i.e. on an
individual assessment basis. A relatively small amount of wholesale
impairment relates to unidentified or collective impairment; in such
cases impairment is calculated using modelled PD x LGD x EAD
(Exposure at Default) adjusted for an emergence period.
For retail portfolios, the impairment allowance in the retail portfolios is
mainly assessed on a collective basis and is based on the drawn
balances adjusted to take into account the likelihood of the customer
defaulting at a particular point in time (PDpit) and the amount
estimated as not recoverable (LGD). The basic calculation is:
Impairment allowance = Total outstandings x Probability of Default
(PDpit) x Loss Given Default (LGD)
The PDpit increases with the number of contractual payments missed
thus raising the associated impairment requirement.
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. The current policy
also incorporates a High Risk segment which supplements the
unidentified impairment calculation. High Risk segments are those
which can be demonstrated to experience higher levels of loss when
compared to the performing segment. This segmentation allows for
earlier identification of potential loss issues in a portfolio. Unidentified
impairment is also referred to as collective impairment. This is to reflect
the impairment that is collectively held against a pool of assets where a
loss event has occurred, but has not yet been captured. Hence, it is
referred to as collective impairment against the pool.
Emergence and outcome periods
To develop models to calculate the allowance for impairment we need
to first estimate the time horizons of these models. These time horizons
are called the emergence and outcome periods. Emergence period is
the time it takes for an account that is impaired but not yet identified to
move from the performing to the impaired segment. Outcome period is
the time it takes for a retail account to move from the impaired
segment to the default segment.
For wholesale portfolios in Corporate Banking and Investment Bank,
the emergence period is portfolio specific and is based on the
anticipated length of time from the occurrence of a loss event to
identified impairment being incurred. The emergence period in
Corporate Banking is derived from actual case file review. This has also
been benchmarked against the time taken to move between risk grades
in our internal watch lists, from EWL1 or 2 into EWL3 which is the level
of risk that will attract a collective impairment allowance. Both
methodologies produce similar results for the emergence period, which
is currently 3 months. The average life of the Investment Bank portfolio
Product type
Emergence
period
(months)
Outcome
period
(months)
Mortgages 612
Credit cards 1 6
Personal loans, overdrafts & other secured loans 3 6
Business banking arrears managed commercial mortgages 6 12
Business banking arrears managed non-‘commercial mortgages’ 3 6
Business banking EWL managed 3 12
Mortgages under forbearance n/a 24
All unsecured products under forbearance n/a 12
Business banking EWL managed under forbearance n/a 24
barclays.com/annualreport Barclays PLC Annual Report 2012 I 323