Barclays 2010 Annual Report Download - page 95

deterioration is likely to lead to failure. Details of other trigger points can
be found on page 198. 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
198. The calculation methodology relies on the historical experience of
pools of similar assets; hence the impairment allowance is collective.
The impairment calculation is 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.
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 (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.
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 adjusted
for an emergence period.
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 71). 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.
Monitoring the loan loss rate (LLR) provides Barclays with one way of
measuring 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).
Loan loss rate (bps) – longer-term trends
bps
81 82
70
83
91
84
111
85
99
86
89
87
202
88
45
89
177
90
147
91
143
92
226
93
174
94
60
95
40
96
24
97
23
98
47
99
56
00
54
01
71
02
84
03
72
04
50
05
52
06
65
07
71
08
95
09
156
10
118
Cycle 1 (1981–1990) Cycle 2 (1991–2000) Cycle 3 (2001–2010)
39
FY Annualised LLRa
TTC Average LLR
30 Year Average LLR
107
85 83
92
Note
a Loan loss rate for the years prior to 2005 does not reflect the application of IAS 32, IAS 39 and IFRS 4.
Barclays PLC Annual Report 2010 www.barclays.com/annualreport10 93
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