Barclays 2008 Annual Report Download - page 101

Fig. 12:Impairment/provisions coverage of PCRLs%
(excluding drawn ABS CDO Super Senior positions)
Fig. 11:Impairment/provisions coverage of CRLs%
(excluding drawn ABS CDO Super Senior positions)
Fig. 9:Impairment/provisions coverage of CRLs%
(including drawn ABS CDO Super Senior positions)
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Business review
Barclays PLC Annual Report 2008 99
Impairment Allowances and Coverage Ratios
In 2008, impairment allowances increased 74% to £6,574m (31st December
2007: £3,772m). Excluding ABS CDO Super Senior positions, allowances
increased by 60% to £5,561m (31st December 2007: £3,482m). Allowances
increased in all businesses as credit conditions deteriorated, but most notably
in Barclays Capital and GRCB’s international portfolios.
Reflecting this 74% rise in impairment allowance compared with the
63% rise in total CRLs, the Group’s CRL coverage ratio rose to 41.9%
(31st December 2007: 39.1%). Coverage ratios for PCRLs rose to 36.2%
(31st December 2007: 33.0%).
The largest driver for these increases was the near four-fold increase
in the impairment held against ABS CDO Super Senior positions as the
LGD of these assets increased.
Allowance coverage ratios of CRLs and PCRLs excluding the drawn
ABS CDO Super Senior positions decreased to 48.0% (31st December
2007: 55.3%) and 39.6% (31st December 2007: 47.7%), respectively.
These movements in coverage ratios reflected:
– An increase in CRLs and PCRLs in the well-secured home loan
portfolios.
– Higher CRLs and PCRLs in the corporate sector, where the recovery
outlook is relatively high.
– Increased early-cycle delinquent balances in the retail unsecured
portfolios, as credit conditions worsened. These earlier-cycle balances,
which tend to attract relatively lower impairment requirements, have
increased as a proportion of the total delinquent balances.
The decrease in the PCRL coverage ratio, excluding the drawn ABS
CDO Super Senior positions, was also driven by the overall increase in
PPLs as a proportion of total PCRLs. Since, by definition, PPLs attract lower
levels of impairment than CRLs, a higher proportion of PPLs in total PCRLs
will tend to lower the overall coverage ratio.
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 is 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 in the corporate portfolios – Barclays
Commercial Bank, Barclays Capital and certain areas within GRCB’s
international portfolios and Barclaycard.
For collective assessment, the trigger point for impairment is the
missing of a contractual payment. 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 experience. Recovery amounts and contractual interest rates are
56.0
56.2
57.0
47.7
39.6
04a05 06 07 08
66.9
66.2
65.6
55.3
48.0
05 06 07 0804a
Fig. 10:Impairment/provisions coverage of PCRLs%
(including drawn ABS CDO Super Senior positions)
56.0
56.2
57.0
33.0
36.2
05 06 07 0804a
66.9
66.2
65.6
39.1
41.9
05 06 07 0804a
Notes
aDoes not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective
from 1st January 2005.