Which APAC banks need to brace for IFRS 9 impact?

Find out which banks may face difficulty amidst a lack of long-run historical data.

Banks in the Asia-Pacific are well-positioned to adopt International Financing Reporting Standards 9 (IFRS 9) or their local equivalent but some countries may face more hurdles than others, according to credit rating agency S&P.

IFRS 9, raises provisioning through the introduction of an “expected credit loss” impairment model as opposed to the previous IAS 39 “incurred loss’ impairment model. Under the new reporting standard, banks are required to recognize a credit loss allowance that represents 12 months of ECL for all performing loans and for significantly underperforming and nonperforming loans, an allowance based on an estimate of lifetime ECL.

For instance, less developed markets like India, China and Thailand may face difficulties in reporting IFRS 9 provisions amidst a lack of long-run historical data, less sophisticated management reporting systems and limited technical expertise.

Position on the credit cycle will also determine the level of impact on banking systems. The impact would be less on Australia and Singapore, for instance, where the credit cycle is more benign, but would be greater for India who’s in the midst of a credit cycle downturn and Thailand where SME loan portfolios are struggling.

Also read: Indian banks are facing another massive credit crunch 

“Conservative prudential regulation that requires additional reserves to be held in the form of a deduction against capital will also soften the impact on bank capital ratios; therefore providing some offset against the increase in ECL provisions,” S&P added. “For example, additional regulatory reserves as a deduction against capital are required in banking systems such as Singapore, Hong Kong, Australia, Korea, and China that may provide some offset.”

Also read: Can Hong Kong meet IFRS 9 requirements on time? 

New reporting standards can even influence the business model of banks over time which is set to rebalance loan portfolios away from high risk cyclical industries like mining exposures in Australia, dairy in New Zealand and shipbuilding in Korea.

In China, the new standards are poised to do something more than just raise provisioning requirements but can also contribute to financial stability as it supports the massive deleveraging policy being undertaken by Beijing to curb its massive debt.

Here's more from S&P:

The implementation of IFRS 9, and subsequent higher credit loss provisions, will negatively affect Asia-Pacific banks' regulatory capital ratios and risk-adjust capital (RAC) ratios.

That said, because of higher regulatory reserving requirements, the impact on regulatory and RAC ratios may be mitigated in many of the jurisdictions where regulatory reserving requirements (treated as a deduction against capital) are more conservative compared with provisioning levels under the "incurred loss" provisioning model. As provisioning levels increase, the regulatory reserving requirement adjustment would decrease, which would lessen the impact of IFRS 9 on CET 1 capital ratios.

We also expect some offsetting impact on regulatory capital ratios for banks that make use of the internal-ratings based (IRB) approach to calculate regulatory capital requirements for credit risk (such as Australia, Singapore, Korea, and Hong Kong). Under the IRB approach, banks are required to compare total accounting provisions to the IRB estimate of expected loss ("regulatory EL") and to deduct from CET1 capital any "shortfall" between total eligible provisions and regulatory EL. Where accounting provisions are less than regulatory EL immediately before implementing ECL accounting and the initial application of ECL accounting merely causes total eligible provisions to rise toward--but not above--the impact of higher accounting provisions on CET1 capital would be offset by a lower deduction from CET1 capital for the "shortfall" of provisions compared to regulatory EL (for example the major banks in Australia). We note that this adjustment will not impact S&P Global Ratings' RAC ratios.

In China, we expect that the regulatory capital impact for Chinese mega banks (Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of Communications) would be limited and more meaningful for smaller players mainly due to the smaller players' proportionally higher exposures to nonloan credit assets like investment receivables.

In India, top tier private banks stand to be less impacted, in our view. However, corporate-sector focused public sector banks with higher special mention accounts would be more impacted.