Page 87 - 86395_CCB - 2024 Annual Report (web)

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The Bank expects bank base rate to reduce during – The two key estimates are:
2025 although the rate of reduction is uncertain. Ž the Probability of Default (PD)
Based on the forecasts and stresses performed,
the Directors are satisfied that the Bank will have Ž and the Loss Given Default (LGD).
sufficient regulatory capital and liquidity for a period All the Bank’s loans and advances are allocated to
of at least 12 months from the date of approval of a stage under IFRS 9. Stage 1 loans are loans which
these Financial Statements‑
are performing as expected with the expected
– Management has already incorporated a credit loss calculation based on a 12‑month
continued period of economic uncertainty probability of default. Loans which have seen a
into the Bank’s business plan. This uncertainty significant increase in Credit Risk since original
includes modelling the impact of the Bank inception, or are over 30 days in arrears, are held
of England’s stressed scenario which tests in Stage 2 with the expected credit loss based on
the resilience of the UK banking system to a lifetime probability of default. Loans which are
deep simultaneous recessions in the UK and considered credit impaired or in default are placed
global economies; in Stage 3 with the expected credit loss calculation
assuming a 100% probability of default and a
– The Bank maintains a strong liquidity position lifetime loss given default applied.
with its Liquidity Coverage Ratio (LCR) around 5
times higher than the regulatory minimum at the For loans in stage 1 and 2 the Bank estimates the
end of 2024. probability of default and the loss given default.
The PD is calculated using both quantitative and
5 Accounting estimates and judgements qualitative data including character, property type
and location. The LGD is calculated using the
The preparation of Financial Statements in expected realisable collateral value and associated
conformity with IFRS requires the use of certain sales costs.
critical accounting estimates. It also requires
Management to exercise its judgement in the The Bank’s 2024 Expected Credit Loss includes
process of applying the Bank’s accounting policies. the benefit of the release of a Post Model
The areas involving a higher degree of judgement Adjustment (PMA) of £611k. The PMA had been
or complexity, or areas where assumptions and applied to reflect risks not fully captured by the
estimates are significant to the Financial Statements, REF IFRS 9 model. Commercial property prices
are disclosed below. For each area of management recorded significant reductions in the final quarter
judgement, along with any others which are of 2022 and Management did not consider these
considered material, Management prepare a to have been fully captured within its model at the
paper for review and approval by the Bank’s Audit time. Commercial property prices have in 2024
Committee at least once a year. remained broadly stable and the accounts drawn
in the above period have been reviewed as part
• Loan loss provisioning
of business‑as‑usual annual review processes.
The Bank’s provisioning methodology uses an These reviews have not highlighted any valuation
expected credit loss basis complying with the concerns and therefore the PMA adjustment has
requirements of IFRS 9. been released.
The Bank has made key judgements and estimates The expected credit losses on loans in stage
in its loan loss provisions. 3 are estimated on an individual basis and all
relevant considerations that have a bearing on
– The key judgements are:
the expected future cash flows across a range of
Ž The Bank uses four unbiased probability scenarios are considered. These considerations
weighted forward looking economic scenarios can be particularly subjective and can include
in its calculation of loan loss provisions being the business prospects for the customer, the
the base case, downside, severe downside, and realisable value of collateral, the reliability of
upside. These scenarios and their application customer information and the likely cost and
in the calculation of loan loss provisions are duration of the work‑out process. The level
described further in Note 30; and of the impairment allowance is the difference
between the value of the discounted expected
Ž Significant Increase in Credit Risk (‘SICR’) – The future cash flows (discounted at the loan’s original
criteria selected to identify a significant increase effective interest rate), and the carrying amount.
in Credit Risk is a key area of judgement within Furthermore, estimates change with time as new
the Bank’s ECL calculation as these criteria information becomes available or as work‑out
determine whether a 12 month or lifetime strategies evolve, resulting in regular updates to
provision is recorded.
the impairment allowance as individual decisions
Ž It has reviewed whether any post model are taken. Changes in these estimates would result
adjustments are required to its expected loss in a change in the allowances and have a direct
model outputs. impact on the impairment charge.