IFRS 9 has been effective since 1 January. With some of the world's major listed banks now issuing their financial reports, we are interested in how they have implemented the new requirements.

IFRS 9 was always going to have a material—some said significant—impact on banks' financial statements and business processes, both quantitatively and qualitatively. Indeed, it completely changed how impairment losses were measured, necessitating new expert judgement. In this article we'll look the first news of its real effects.

From a quantitative perspective

In 2017, the European Banking Authority (EBA) predicted that IFRS 9 would have a negative impact on the Common Equity Tier 1 (CET 1) of 45 bps.

After analysing the financial accounts of 30 banks who have already issued their IFRS 9 statements, we found CET 1 down by about 21 bps in total (taking into account, additionally, some European banks that reported an average negative impact of 27 bps).

This impact is less severe than anticipated, which is good news. For most banks, the costs have been absorbed by their existing buffers. So far, disclosures have mostly related to the transitional approach and impact areas, as well as shareholder fund implications.

As the year-end of most Canadian banks is in October, they have been pioneers in IFRS 9. After looking closely at their Q1 reports, we have found the following disclosures published:

  • how accounting policies have changed upon IFRS 9 adoption
  • how the opening IFRS 9 numbers reconcile with the closing IAS 39 balance sheet—showing separately how assets and liabilities moved between different measurement categories and how measurements changed
  • how the opening IFRS 9 ECL allowances reconcile with the closing IAS 39 loss allowances, in total and per class of financial instrument
  • how designation options have been used: upon adopting IFRS 9, designations have been included of debt instruments as at FVTPL and equity securities at FVOCI

Additionally, some UK banks have issued transition packs alongside their financial reports, including lots of qualitative and quantitative information. We have prepared a summary of what could be included in such a pack.

One point of interest is a loan analysis done by categorising loans into one of three stages, so as to determine both the amount of expected credit loss (ECL) and the interest income to be recognised. This is the basis for measuring impairment under the new requirements.

We have also analysed the loan portfolios included by seven banks (four from Canada and three from the United Kingdom) in their IFRS 9 disclosures. The following charts shows our results (please note that for credit cards and consumer loans only five of the seven banks disclosed the information, and that the amounts are not weighted by the size of exposures):

As you can see, the ECL staging as well as the ECL allowances depend highly on loan type. On average, 45% of the total loss allowance resulted from stage 3 loans.

From a qualitative perspective

As mentioned above, the new impairment model requires new levels of management judgement, because—as everyone knows—the longer the prediction period, the more uncertainty there is.

But the question follows: given the significant increase in banks' credit risk, what should the assessment be based on?

In a sample of 14 banks, we found varying approaches for assessing retail and wholesale portfolios. Five banks used different mixes of macro-economic variables in their ECL models, as shown below:

Other banks disclosed the information for all portfolios in aggregate, while three banks did not disclose any information in this area.

Furthermore, all 14 banks will continue with IAS 39 hedge accounting; the IFRS 9 amendment on prepayment features with negative compensation will be applied early by four banks; and five banks will present the interest component resulting from items measured at FVTPL in the interest income.

We understand also that some Luxembourg-based banks have adopted IFRS 9 for hedge accounting purposes, on account of the flexibility offered by the new standard to meet the hedge effectiveness requirement and to rebalance the hedge.

What's next?

The disclosure requirements for the new ECL model under IFRS 7 seem extensive and challenging, as do those under the IFRS 9 hedge accounting model. It is still unclear how banks are preparing for these requirements, given the data challenges that are sure to come with them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.