Barclays 2004 Annual Report Download - page 59

Risk management
Provisions for bad and doubtful debts
57
Barclays PLC Annual Report 2004
Barclays policy is to provide for credit losses when it considers that
recovery is doubtful. Risk managers continuously review the quality
of the exposures and make provisions where necessary, based on
their knowledge of the customer or counterparty, developments in
the industry and country of operation.
The estimation of potential credit losses is inherently uncertain and
depends upon many factors, including general economic conditions,
possible future deterioration in credit quality, structural changes
within industries that alter competitive positions, and other external
factors such as legal and regulatory requirements.
Total provisions are comprised of two components, specific provisions
and general provisions.
Specific Provisions are raised when the Group considers that the
creditworthiness of a borrower has deteriorated such that recovery
of the whole or part of an outstanding advance is in serious doubt.
•Within the retail businesses, where the portfolio comprises large
numbers of homogeneous assets, statistical techniques are used
to raise specific provisions for each product portfolio, based on
delinquency data and historical recovery rates. These provisions
are updated monthly.
•Small business accounts with straightforward loans contracts up
to about £15,000 are similarly treated on a product portfolio basis
using statistical methods.
•For larger and/or more complex accounts, specific provisioning
is done on an individual basis and all relevant considerations that
have a bearing on the expected future cash flows are taken into
account. The considerations include the business prospects of the
customer, the realisable value of collateral, the Group’s position
relative to other claimants, the reliability and comprehensiveness
of customer information and the likely cost and duration of the
work-out process. These provisions are formally reviewed quarterly
and revised as new information becomes available in the course of
each work-out.
Treatment of interest on debts that have specific provisions – If the
collection of interest is doubtful, it is credited to a suspense account
and excluded from the interest income in the profit and loss account.
Although interest continues to be charged to the customer’s account,
the amount suspended is netted against the relevant loan. Loans on
which interest is suspended are not reclassified as accruing interest
until interest and principal payments are up-to-date and future
payments are reasonably assured. If the collection of interest is
considered remote, interest is no longer applied.
Treatment of collateral assets acquired in exchange for advances –
Assets acquired in exchange for advances in order to achieve an
orderly realisation continue to be reported as advances. The assets
acquired are recorded at the carrying value of the original advance
as at the date of the exchange and any impairment is accounted for
as a specific provision.
General Provisions reflect losses that, although not specifically
identified, are known from experience to be present in the lending
portfolio at the balance sheet date. These provisions are adjusted at
least half yearly by an appropriate charge or release.
General provisions are also created with respect to the recoverability
of assets arising from off-balance sheet exposures and country transfer
risk, all prepared in a manner consistent with the general provisioning
methodology.
Write-off occurs when, and to the extent that, the whole or part of
a debt is considered irrecoverable.
See also page 94 (Critical Accounting estimates) and page 126
(Accounting policies: loans and advances) for a description of relevant
terms and policies.
(See also Analysis of results by business on page 106.)
The credit environment both in retail and in corporate and wholesale
businesses was relatively benign in 2004. This led to a lower level of
potential problem and non-performing loans and lower provision
charges.
Overall, the Group provision charge declined 19% to £1,091m
(2003: £1,347m). This resulted from a substantial decrease in the
corporate and wholesale provisions charge, while the retail provisions
charge was steady. As a percentage of average banking loans and
advances, the provisions rate fell to 0.54% (2003: 0.73%).
In the corporate and wholesale businesses, non-performing and
potential problem loans in total fell by 29% to £2,062m from
£2,920m in 2003, reflecting the continuing strong corporate credit
environment. The corporate and wholesale provisions charge declined
to £284m (2003: £543m). The reduction in the provisions charge
included an exceptional recovery of £57m in UK Business Banking.
In retail, non-performing loans and potential problem loans remained
steady at £2,679m (2003: £2,712m). The provisions charge in the
retail businesses was also steady at £807m (2003: £804m). The
provisions charge increased in Barclaycard (the card and unsecured
consumer lending business) due to volume growth and the maturation
of new customer recruitment. The provisions charge included a release
of £40m associated with the UK mortgage business, following a review
of the portfolio and the current loss experience.
2002 2003 2004£m
-200
Transition Businesses
Barclaycard
UK Banking
Barclays Capital
Private Clients
and International
Provisions charge for bad and doubtful debts
1,400
1,500
1,200
1,000
800
600
400
200
0
1,484
1,347
1,091