Page 115 - CCB_Full-Annual-Report-2021

114 Notes to the Financial Statements 115

Under IFRS 9 customers may move from a stage When the terms of a financial asset are modified, and Forbearance analysis
1 provision exposure to a stage 2 exposure as a the modification does not result in derecognition, the The table below shows the value of forbearance arrangements agreed by the Bank.
result of a significant increase in credit risk. To determination of whether the asset’s credit risk has Contents
determine whether the credit risk on a particular increased significantly reflects comparisons of: 31 December 2021 No. of loans No. of customers Value of loans (in
Contents
financial instrument has increased significantly since (in concession concession period)
initial recognition the Bank reviews each account – the remaining lifetime PD at the reporting date based In concession Completed period)
annually, or more regularly, should the customer’s on the modified terms; with concession* £’000
payment record show any deterioration.
– the remaining lifetime PD estimated based on data on Asset Finance – 15 – –
initial recognition and the original contractual terms.
As a backstop, and as required by IFRS 9, the Real Estate 9 10 6 12,151 Strategic Report
Bank will presumptively consider that a significant Should modification result in a derecognition event, the
increase in credit risk occurs no later than when an Bank would make an assessment as to whether the new Total 9 25 6 12,151
asset is more than 30 days past due. financial asset is credit impaired at initial recognition.
* Excludes 2 customers who completed their forbearance concession and within 2 years subsequently been classified as a stage 3 loan.
For an account to be ‘cured’ i.e. evidence a Forbearance can be temporary or permanent depending Forward-looking information
significant reduction in credit risk, and return from on the circumstances, progress on rehabilitation, and the
stage 2 to stage 1, the customer would need to detail of the concession agreed. Determining expected credit losses under IFRS 9 requires the incorporation of forward-looking macroeconomic
demonstrate a good track record of payments. information that is reasonable and supportable. To capture the effect of changes to the economic environment,
Additional forbearance support for customers impacted the calculation of expected credit losses incorporates forward-looking information, and assumptions linked to
Movement from stage 3 to stage 2 will only occur by COVID-19 economic variables that impact losses in each portfolio.
when the borrower satisfies all the criteria in the The economic conditions resulting from COVID-19 have Corporate Governance Statement
table above. The introduction of macroeconomic information introduces additional volatility to provisions. To calculate forward
been unprecedented in terms of the financial support
required by customers who found themselves in financial looking provisions, the Bank sources data from industry leading companies such as Experian and Moody’s as well
All staging classifications are subject to difficulty. The Bank has worked with its customers to as using its own internal knowledge and industry publications such as the Bank of England Annual Cyclical Scenario
management review and can be overridden subject support them through this period with partial and full (ACS). Management exercises judgement in estimating the future economic conditions which are incorporated into
to appropriate approval at the Bank’s Provision or payment holidays provided where appropriate. Customers provisions through the modelling of multiple scenarios.
Credit Committees.
have typically been given payment holidays for an initial
3-month period, which have then been reassessed where For the Bank’s provision calculation four different projected economic scenarios are considered to cover a range of
Forbearance possible outcomes, reflecting upside and downside scenarios relative to the baseline forecast economic conditions.
further payment breaks have been requested.
The Bank can implement forbearance agreements The economic scenarios are generated to capture a range of possible economic outcomes to facilitate the calculation
for the servicing and management of customers During the payment holiday period, customers interest of unbiased and expected credit losses. The economic variables modelled have been identified as those that have the
who are in financial difficulty and require some form has continued to accrue, with the revised outstanding most significant impact on the Bank’s financial statements, and their impact on provisions can be directly assessed.
of concession to be granted, even if this concession balance in the case of Asset Finance agreements being
entails a loss for the Bank. A concession may be repaid over an extended repayment term, reflecting the The Bank’s economic scenarios, and the probability weightings assigned to each scenario, are produced by Finance Independent Auditor’s Report
either a modification of the previous terms and length of the payment holiday, or in the case of Real and reviewed and challenged by the Bank’s ALCO and Provisions Committees and approved by Audit committee.
conditions of an agreement, which the borrower is Estate Loans where the loan term is up to 25 years, The current Ukraine crisis and increased economic uncertainty has not changed the Bank’s assumptions or
considered unable to comply with due to financial typically spread over the remaining term leading to scenarios. The Bank’s scenarios, their weightings, and individual forecasts are set out in the tables below:
difficulties, or a total or partial refinancing of an slightly higher monthly instalments.
agreement that would not have been granted had Scenario description:
the borrower not been in financial difficulties. As at the end of 2021, the Bank did not have any
customers in forbearance solely as a result of Covid19.
The Bank may modify the contractual terms of Details of the Bank’s forborne accounts are set out below. Scenario Real Estate Description Asset Finance Description
a loan for several reasons, including to reflect 1. Base Case The Bank’s base case scenario forecasts The Bank uses Moody’s Impairment Studio S0
changing market conditions, or where forbearance Forbearance – curing moderate growth in property prices over the scenario as its base case. The forecast predicts a
(i.e. a renegotiation of the terms of a loan) is granted Loans are classified as forborne at the time a customer in next 5 years. pickup in GDP growth, with unemployment and Financial Statements
at the request of a borrower. This modification may financial difficulty is granted a concession. the equity market remaining relatively stable.
have an impact on the IFRS 9 impairment provision
stage to which the asset is allocated. 2. Downside The Bank’s downside case is a simple average This scenario is modelled to assume the
The customer will remain treated and recorded as of its severe downside and base case scenarios pandemic persists, which hinders recovery,
forborne until the following exit conditions are met: leading to higher unemployment rates, and a
An existing loan whose terms have been modified
may require derecognition, and the renegotiated – When all due payments, as per the amended delay in reaching pre-pandemic GDP levels.
loan recognised as a new loan at fair value, with any contractual terms, have been made in a timely 3. Severe A key input to the Bank’s severe downside This scenario uses the downside case but
adjustments taken through the income statement. manner over a continuous repayment period (loan is Downside scenario is the Bank of England’s annual cyclical predicts a much worse outcome. The U.K. is
Derecognition is assessed using the same ’10 considered as performing); scenario published in January 2021. This is projected to experience further lockdowns
percent’ test applied to financial liabilities. Where a considered to be a severe yet plausible scenario. as a result of a new variant of COVID. In this
modification does not result in derecognition, the – A minimum two-year probation period has passed scenario, the pandemic leads to the economy
gross carrying amount of the asset is recalculated from the date the forborne exposure was considered experiencing a deep and protracted recession. Notes to the Financial Statements
as the present value of the modified cash flows, as performing;
discounted at the financial assets original effective – None of the customer’s exposures are more than 30 4. Upside The Bank’s upside scenario generally assumes no In this scenario the U.K. economy experiences
interest rate. Any subsequent modification gain or days past due at the end of the probation period. change to the current position in the short term. growth following recovery from the pandemic,
loss is then recognised in the profit or loss amount. Over the medium-term however, upside forecasts GDP is assumed to exceed the levels outlined
are assumed to be either no change or a change in the base scenario as a result of increased
at least in line with the Bank’s base case. business and public investment spending.