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RBS Group • Annual Report and Accounts 2006
Operating and financial review
Impairment loss provision methodology
Provisions for impairment losses are assessed under three
categories as described below:
Individually assessed provisions are the provisions required for
individually significant impaired assets which are assessed on
a case by case basis, taking into account the financial condition
of the counterparty and any guarantor. This incorporates
an estimate of the discounted value of any recoveries and
realisation of security or collateral. The asset continues to
be assessed on an individual basis until it is repaid in full,
transferred to the performing portfolio or written-off.
Collectively assessed provisions are provisions on impaired
credits below an agreed threshold which are assessed on a
portfolio basis, to reflect the homogeneous nature of the
assets, such as credit cards or personal loans. The provision is
determined from a quantitative review of the relevant portfolio,
taking account of the level of arrears, security and average
loss experience over the recovery period.
Latent loss provisions are provisions held against the estimated
impairment in the performing portfolio which have yet to be
identified as at the balance sheet date. To assess the latent
loss within the portfolios, the Group has developed
methodologies to estimate the time that an asset can remain
impaired within a performing portfolio before it is identified and
reported as such.
Provision analysis
The Group’s consumer portfolios, which consist of small value,
high volume credits, have highly efficient largely automated
processes for identifying problem credits and very short
timescales, typically three months, before resolution or
adoption of various recovery methods.
Corporate portfolios consist of higher value, lower volume
credits, which tend to be structured to meet individual
customer requirements. Provisions are assessed on a case by
case basis by experienced specialists, with input from
professional valuers and accountants as appropriate. The
Group operates a clear provisions governance framework
which sets thresholds whereby suitable oversight and
challenge is undertaken. These opinions and levels of
provision are overseen by each division’s Provision Committee,
with representation from Group Risk Management. In addition,
significant cases are presented to, and challenged by, the
Group Problem Exposure Review Forum.
Early and active management of problem exposures ensures
that credit losses are minimised. Specialised units are used for
different customer types to ensure that the appropriate risk
mitigation is taken in a timely manner.
Portfolio provisions are reassessed regularly as part of the
Group’s ongoing monitoring process.
2006 2005 2004
Loan impairment charge £m £m £m
Latent loss provisions charge 87 14
Collectively assessed provisions charge 1,573 1,399
Individually assessed provisions charge 217 290
Specific provision charge 1,386
General provision charge 16
Total charge to income statement 1,877 1,703 1,402
Charge as a % of customer loans and advances – gross(1) 0.46% 0.46% 0.47%
Note:
(1) Gross of provisions and excluding reverse repurchase agreements.
Provisions for loan impairment charged to the income statement in 2006 were £1,877 million, up £174 million (10%) from 2005.
As a percentage of customer lending, the impairment charge remained flat at 0.46%.
The adoption of IAS 39 at the beginning of 2005 resulted in changes to the methodology used to identify impaired assets and to
calculate required provisions.