Barclays 2005 Annual Report Download - page 60

Barclays PLC
Annual Report 2005
58
Risk management
Credit risk management
The RT of each individual loan is aggregated to produce the RT of the
various sub-portfolios in the Group and ultimately for the whole Group.
At this aggregate level, RT is a statistical estimate of the loss inherent
in the Group’s credit exposures over the next 12 months.
Many models are used in the estimation of the components of RT
in each of the Group’s businesses. The majority of the models are
internally developed using Barclays own historical data and other
external information. We also use externally developed models and
rating tools. These are validated for use within Barclays before they
are introduced. It is a Barclays policy that all models are validated
annually to ensure their applicability to the current portfolios and
credit conditions.
To interpret RT, the following should be considered:
• RT is calculated using probabilities of default that are relevant to
the current credit conditions for each customer. The RT figures are
therefore a point-in-time estimate based on current economic and
credit conditions.
• RT is calculated for different purposes and on different methods to
impairment allowances, so RT cannot be used as a forecast of the
total allowances for impairment. It is rather a statistical estimate
that reflects changes in the size and quality of the loan portfolio.
RT does not equate to the Group’s budget or internal forecast of
impairment allowance in the coming year.
• The principal reasons for the difference between impairment and
RT are:
– RT is a forecast estimate of the average loss associated with the
current performing portfolio, impairment is the accounting value
of incurred loss realised on the whole portfolio.
– RT covers only the loans at the date of estimation and does not
make allowance for subsequent growth or change in the
composition of the loan book which can affect impairment.
– RT is a statistical estimate of losses arising over the next 12 months
and therefore it is not calculated for non-performing loans in the
wholesale portfolio or for retail loans in recovery.
– Impairment can include significant additional charges, write-backs
and recoveries arising during the year from impaired loans. These
items can materially affect the impairment allowance charge, but
are not included in RT.
– The actual credit impairment charge arising from new defaults in
any one year, from loans that are performing at the start of the
year, vary significantly around the RT value. This can be due to
changes during the year in the economic environment or in the
business conditions in specific sectors or countries and from
unpredictable or unexpected external events. This applies
especially in wholesale portfolios where the default of a small
number of large exposures will significantly increase the period’s
impairment allowance but will not have been included in the RT
figure. For retail portfolios, consisting of a very large number of
small exposures, the variation in the rate of change in new
impairment compared to the RT figure is usually much smaller.
RT increased 32% (£450m) to £1,845m, (2004: £1,395m). The largest
increase occurred in Barclaycard, which rose £240m to £1,100m.
The increase reflects the deteriorating credit conditions in the UK
credit card market. RT increased in UK Business Banking due to the
growth in the loan book and the acquisition of the Iveco business.
International Retail and Commercial Banking RT increased 200% to
£195m, reflecting the inclusion of Absa in the second half of 2005
and growth in the loan portfolio.
UK Banking
375
450
70 85
55
195
65
1,100
860
Barclays
Capital
Wealth
Management
Barclaycard International
Retail and
Commercial
Banking
1,200
1,000
800
600
400
200
020 10
Head office
functions
and other
operations(a)
2005
2004
Risk Tendency by Business £m
Note
(a) Head office functions and other operations comprises discontinued
businesses in transition principally relating to Middle Eastern corporate
banking businesses and airline leasing activities.