Barclays 2013 Annual Report Download - page 398

Risk management
Credit risk management continued
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.
As one of the controls to ensure that adequate impairment allowances
are held, movements in impairment to individual names with a total
impairment allowance of £25m or more are presented to the Group’s
most senior Credit Committee for agreement, and of £10m-£25m to
the Group Credit Risk Director for his agreement.
Individually assessed impairment
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 above. 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 wholesale portfolios.
Collectively assessed impairment
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 above.
The calculation methodology relies on the historical experience of
pools of similar assets; hence the impairment allowance is collective.
The impairment calculation is typically 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 are calculated using a weighted average
for the relevant portfolio. This method applies mainly to the retail
portfolios and is consistent with Barclays’ policy of raising an allowance
as soon as impairment is identified. Unidentified impairment is also
included in collective impairment.
Impairment for losses incurred but not specifically identified
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, termed as the outcome period. This is calculated on the present
value of estimated future cash flows discounted at the financial asset’s
effective interest rate. The emergence and outcome periods vary across
products.
Wholesale portfolios
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 Probability of Default
(PD) x Loss Given Default (LGD) x Exposure at Default (EAD) adjusted
for an emergence period.
Retail portfolios
For retail portfolios, the impairment allowance 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.
In retail, the current policy also incorporates a High Risk segment
which is included in the unidentified impairment calculation. High Risk
segments are those which can be demonstrated to experience higher
risk characteristics when compared to the rest of the performing
segment. This segmentation allows for earlier identification of potential
loss in a portfolio. Unidentified impairment is also referred to as
collective impairment. This is to reflect the impairment that is
collectively held against a pool of assets where a loss event has
occurred, but has not yet been captured.
Sensitivity of the impairment to key assumptions
Wholesale portfolios
Impairment in the wholesale portfolios is generally calculated by
valuing each impaired asset on a case by case basis, and is not
therefore primarily model-driven. As such, the key assumptions that
would have the most impact on impairment provisions in the wholesale
portfolios are the valuations placed upon security and collateral held
and the timing of asset realisations.
When calculating impairment, estimated future cashflows are
discounted at the financial asset’s original effective interest rate. At
present in wholesale portfolios the impact of discounting is relatively
small in itself but would rise with reference rates. In addition, to the
extent that a rise in interest rates impacted upon economic growth
and/or serviceability of wholesale clients and customers, this would be
expected to feed through in future impairment numbers.
In 2013, key judgements were made on a number of identified cases
within Investment Bank, Corporate Banking and Wealth and Investment
Management. No material changes were made to the unidentified
impairment in 2013.
Retail portfolios
For retail portfolios, impairment is calculated, predominantly using
models. The models are developed using historical data and include
explicit and implicit assumptions such as debt sale estimates, house
price valuations and the distribution of accounts. Model monitoring
and validation are undertaken regularly, at least annually, to ensure that
models are fit for purpose. Further to this, Barclays accounts for the
impact of changes in the economic environment and lags resulting
from the design of the models to ensure overall impairment adequacy.
See Management adjustments to models for impairment (page 159)
for more information on key management judgements in 2013. See
Stress testing (page 388) for further information.
Emergence and outcome periods
To develop models to calculate the allowance for impairment it is first
necessary to estimate the time horizons of these models. These time
horizons are called the emergence and outcome periods. Emergence
period is the time it takes for an account that is likely to be impaired
but not yet identified as such, to move from the performing to the
impaired segment. Outcome period is the time it takes for a retail
account to move from the impaired segment to the default segment.
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396 Barclays PLC Annual Report 2013