Barclays 2011 Annual Report Download - page 91

As a general principle, charge-off marks the point at which it becomes
more economically efficient to treat an account through a recovery
function or debt sale rather than a collections function. Economic
efficiency includes the (discounted) expected amount recovered and
operational and legal costs. Whilst charge-off is considered an irreversible
state, in certain cases, it may be acceptable for mortgage and vehicle
finance accounts to move back from charge-off to performing or
delinquent states. This is only considered acceptable where local
legislation requirements are in place, or where it is deemed that the
customer has a renewed willingness to pay and there is a strong chance
that they will be able to meet their contractual obligations in the
foreseeable future.
For the majority of products, the standard period for charging off accounts
is 180 days past due of contractual obligation. However, in the case of
customer bankruptcy or insolvency, the associated accounts will be
charged off within 60 days. Within UK RBB Local Business, accounts
that are deemed to have a heightened level of risk, or that exhibit some
unsatisfactory features which could affect viability in the short to
medium term, are transferred to a separate ‘caution’ stream. Accounts
on the caution stream are reviewed on at least a quarterly basis, at
which time consideration is given to continuing with the agreed strategy,
returning the customer to a lower risk refer stream, or instigating
recovery/exit action.
F. Identifying potential credit risk loans
In line with disclosure requirements from the SEC in the US, the Group
reports potentially and actually impaired loans as Potential Credit Risk
Loans (PCRLs). PCRLs comprise two categories of loans: Potential Problem
Loans (PPLs) and Credit Risk Loans (CRLs).
PPLs are loans that are currently complying with repayment terms but
where serious doubt exists as to the ability of the borrower to continue
to comply with such terms in the near future. If the credit quality of a loan
on an EWL or WL deteriorates to the highest category (wholesale) or
deteriorates to delinquency cycle 2 (retail), consideration is given to
including it within the PPL category.
Should further evidence of deterioration be observed, a loan may move
to the CRL category. Events that would trigger the transfer of a loan from
the PPL to the CRL category include a missed payment or a breach of
covenant. CRLs comprise three classes of loans:
– ‘Impaired loans’ comprise loans where an individual identified
impairment allowance has been raised and also include loans which
are fully collateralised or where indebtedness has already been written
down to the expected realisable value. This category includes all retail
loans that have been charged off to legal recovery. The impaired loan
category may include loans, which, while impaired, are still performing;
– The category ‘accruing past due 90 days or more’ comprises loans that
are 90 days or more past due with respect to principal or interest. An
impairment allowance will be raised against these loans if the expected
cash flows discounted at the effective interest rate are less than the
carrying value; and
– The category ‘impaired and restructured loans’ comprises loans not
included above where, for economic or legal reasons related to the
debtor’s financial difficulties, a concession has been granted to the
debtor that would not otherwise be considered. Where the concession
results in the expected cash flows discounted at the effective interest
rate being less than the loan’s carrying value, an impairment allowance
will be raised.
G. 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 210. 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 210. 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 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.
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.
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 89
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