Page 110 - CCB_Full-Annual-Report-2021

110 Notes to the Financial Statements 111

The Bank’s lending real estate portfolio is Credit risk – security Expected credit loss recognition During 2021 the Bank’s loan portfolio has continued
geographically diversified across the UK: to perform with limited impact of COVID 19 evident
The Bank enters into loan agreements with IFRS 9 requires a loss allowance to be recognised at in its customers’ repayment behaviour. The Bank’s Contents
customers, and where appropriate takes security. an amount equal to either 12-month ECL, or lifetime
Region 2021 2020 management are however aware that there is
The security profile of the loan’s receivable book is ECL. Lifetime ECLs are the ECLs that result from all typically a time lag between macroeconomics
Contents
East Anglia 2% 1% shown below: possible default events over the expected life of a impacts, the effectiveness of Government support,
financial instrument (in the Bank’s case for customer
East Midlands 15% 18% and business operating model impacts crystallising.
2021 2020 loans and advances this is the same average life The Bank therefore increased the PDs in its
Greater London 4% 3% assumption as used for its effective interest rate
£m % £m % 2021 downside and severe downside scenarios
North East 4% 4% calculation), whereas 12-month ECLs are the to reflect the continued economic uncertainty. Strategic Report
Secured on 901 91 772 92 portion of ECLs that result from default events that These increases are based on management
North West 20% 20% property are possible within the 12-month period after the judgement and impact all stage 1 and stage 2 Real
reporting date, based on the estimated loss curve.
Scotland 7% 6% Secured on 92 9 69 8 Estate provisions. This change in model assumption
other assets replaces the model overlays implemented in 2020.
South East 9% 8% In respect of real estate lending, the Bank
Total 993 100 841 100 recognises loss allowances at an amount equal
South West 5% 5% The Bank’s Asset Finance loan loss provision
to lifetime ECL, except where the credit risk has includes a post model adjustment to reflect the
Wales 7% 8% In addition to security over property, the Bank may not increased significantly since initial recognition immaturity of the CV&S portfolio as well as the
also take additional security in the form of Director and repayments are fully up to date. For these, the
West Midlands 8% 8% concentration of these balances amongst a small
Guarantees and cash deposits. Collateralised amount recognised will be 12-month ECL. number of customers. The CV&S model overlay
Yorkshire/Humberside 19% 19% deposits at the end of 2021 totalled £1.3m is less than 2% of the total loan loss provisions at Corporate Governance Statement
(2020: £1.1m). • Inputs into measurement
Total 100% 100% 31 December 2021.
The inputs into the measurement of ECLs include
Credit risk – allowance for impairment losses
The Bank’s total lending portfolio (by number of the following variables: Other ECL model assumptions
accounts) falls into the following concentration by (see also Note 16) The Bank estimates provisions for credit losses at an
loan size: – Probability of default (PD): A series of individual account level for all financial instruments,
The Bank uses a forward-looking ‘expected credit quantitative and qualitative variables are assessed and for all loans the expected life is based on the
Loan size 2021 2020 loss’ (ECL) model to assess its credit risk. This for each loan and a customer slot calculated. contractual maturity.
requires considerable management judgement over The drivers include customer character, property
0 – £250k 61% 65%
how changes in economic factors affect ECLs, which type and location. The customer slot is converted The Bank has not applied the low credit risk
£251k – £500k 18% 17% are determined on a probability-weighted basis. to a PD using a default curve based on historic exemption permitted under IFRS9.
performance, management judgement and
£501k – £1,000k 11% 9%
As the Bank has to date incurred limited arrears industry benchmarking. Financial assets that are purchased or originated at
£1,001k – £3,000k 8% 7% and losses in its initial nine years of trading, it has – Loss given default (LGD) is the magnitude of the a deep discount that reflects incurred credit losses, Independent Auditor’s Report
had to use significant management judgement in
£3,001k+ 2% 2% likely loss if there is a default. The Bank estimates are considered to be purchased or originated credit-
calibrating the weightings and values. Over time
the LGD parameters based on the history of impaired (“POCI”). This includes the recognition of a
Total 100% 100% as the Bank obtains more performance data, it will recovery rates of claims against defaulted new financial asset following a renegotiation where
continue to develop its models and incorporate this
counter parties and management experience. concessions have been granted for economic
LTV banding performance data into them.
The Bank calculates its real estate LGD using the or contractual reasons relating to the borrower’s
The Bank’s real estate lending balances falls into the The payment status of the Bank’s loans and drivers of the loan to value ratio (LTV). financial difficulty that otherwise would not have
following LTV bandings: been considered. Any changes in lifetime expected
advances are a key driver of the Bank’s provisioning The LGD is calculated at the current point in time credit losses since initial recognition of POCI assets
requirements. The table below provides information and is then adjusted to reflect forward looking
LTV banding 2021 2020 are recognised in the income statement until the
on the payment due status of loans and advances to economic indicators with the calculated loss POCI is derecognised, even if the lifetime expected
0 – 50% 29% 26% customers as at 31 December: discounted by the assumed selling period. The credit losses are less than the amount of expected
LGD does not include any impact of indexation. Financial Statements
51 – 60% 30% 29% credit losses included in the estimated cash flows
£'000 2021 2020 – Expected credit loss (ECL) percentage: on initial recognition.
61 – 70% 38% 42%
Neither past due 952,078 802,726 By taking the appropriate PD and LGD, the
71 – 80% 2% 2% nor impaired Bank can calculate an ECL percentage. As at 31 December 2021, the Bank does not hold
any financial assets that are purchased or originated
81+% 1% 1% Past due but not impaired: – Exposure at default (EAD) represents the credit-impaired (2020: None).
expected exposure in the event of a default.
Total 100% 100% Up to 3 payments missed 11,947 5,533
The Bank will derive the EAD from the current Definition of default
Default – inc. credit impaired 28,575 32,572 exposure to the counterparty and any potential
and IFRS Stage 3 loans changes to the current amount allowed The Bank defines default where the loan is in arrears
under the contract. The Bank does not have a for four or more consecutive payments (i.e. over
Total 992,600 840,831
significant number of undrawn commitments 90 days), the loan is linked to another account in
Less allowances for (14,766) (12,451) linked to existing customer loan agreements and default, the customer has been declared bankrupt, Notes to the Financial Statements
impairment losses any new commitments would not be drawn in or the company has been wound up, or a liquidator/
the event that the Bank considered them likely to administrator appointed. This is aligned to the
Total loans and advances 977,834 828,380 cause a default. regulatory definition of default.
to customers