RBS 2007 Annual Report Download - page 80

RBS Group • Annual Report and Accounts 2007
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Business review continued
Business 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, low 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 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. 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.
The following table shows an analysis of the loan
impairment charge.
Including
ABN AMRO
net of
Including minority Excluding
ABN AMRO interest ABN AMRO
2007 2007 2007 2006 2005
Loan impairment charge £m £m £m £m £m
Latent loss provisions charge 88 25 2 87 14
Collectively assessed provisions charge 1,744 1,669 1,644 1,573 1,399
Individually assessed provisions charge 274 244 198 217 290
Total charge to income statement 2,106 1,938 1,844 1,877 1,703
Charge as a % of customer loans and advances – gross (1) 0.30% 0.34% 0.39% 0.46% 0.46%
Note:
(1) Gross of provisions and excluding reverse repurchase agreements.
Provisions for loan impairment charged to the income statement in 2007 were £2,106 million. Excluding ABN AMRO minority interest,
the charge was £1,938 million, up £61 million (3%) from 2006 and as a percentage of customer lending, the impairment charge was
0.34% (2006 – 0.46%).