RBS 2011 Annual Report Download - page 205

RBS Group 2011 203
xCollectively assessed provisions: provisions on impaired credits
below an agreed threshold are assessed on a portfolio basis to
reflect the homogeneous nature of the assets. The Group segments
impaired credits in its collectively assessed portfolios according to
asset type, such as credit cards, personal loans, mortgages and
smaller homogenous wholesale portfolios, such as business or
commercial banking. A further distinction is made between those
impaired assets in collections and those in recoveries (refer to
Problem debt management on page 139 for a discussion of the
collections and recoveries functions).
The provision is determined based on a quantitative review of the
relevant portfolio, taking account of the level of arrears, the value of
any security, historical and projected cash recovery trends over the
recovery period. The provision also incorporates any adjustments
that may be deemed appropriate given current economic and credit
conditions. Such adjustments may be determined based on: a
review of the current cash collections profile performance against
historical trends; updates to metric inputs - including model
recalibrations; and monitoring of operational processes used in
managing exposures - including the time taken to process non-
performing exposures.
xLatent loss provisions: a separate approach is taken for provisions
held against impairments in the performing portfolio that have been
incurred as a result of events occurring before the balance sheet
date but which have not been identified at the balance sheet date.
The Group’s methodologies to estimate latent loss provisions reflect:
-the probability that the performing customer will default;
-historical loss experience, adjusted, where appropriate, given
current economic and credit conditions; and
- the emergence period, defined as the period between an
impairment event occurring and a loan being identified and
reported as impaired.
Emergence periods are estimated at a portfolio level and reflect the
portfolio product characteristics such as the repayment terms and
the duration of the loss mitigation and recovery processes. They are
based on internal systems and processes within the particular
portfolio and are reviewed regularly.
As with collectively assessed impaired portfolios, the Group
segments its performing portfolio according to asset type.
Provisions and AFS reserves
The Group's consumer portfolios, which consist of high volume, small
value 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. The
Group operates a transparent provisions governance framework, setting
thresholds to trigger enhanced oversight and challenge.
Analyses of provisions are set out on page 204 and 205.
Available-for-sale financial assets are initially recognised at fair value plus
directly related transaction costs and are subsequently measured at fair
value with changes in fair value reported in owners’ equity until disposal,
at which stage the cumulative gain or loss is recognised in profit or loss.
When there is objective evidence that an available-for-sale financial asset
is impaired, any decline in its fair value below original cost is removed
from equity and recognised in profit or loss.
The Group reviews its portfolios of available-for-sale financial assets for
evidence of impairment, which includes: default or delinquency in interest
or principal payments; significant financial difficulty of the issuer or
obligor; and it becoming probable that the issuer will enter bankruptcy or
other financial reorganisation. However, the disappearance of an active
market because an entity’s financial instruments are no longer publicly
traded is not evidence of impairment. Furthermore, a downgrade of an
entity’s credit rating is not, of itself, evidence of impairment, although it
may be evidence of impairment when considered with other available
information. A decline in the fair value of a financial asset below its cost
or amortised cost is not necessarily evidence of impairment. Determining
whether objective evidence of impairment exists requires the exercise of
management judgment. The unrecognised losses on the Group’s
available-for-sale debt securities are concentrated in its portfolios of
mortgage-backed securities. The losses reflect the widening of credit
spreads as a result of the reduced market liquidity in these securities and
the current uncertain macroeconomic outlook in the US and Europe. The
underlying securities remain unimpaired.
Analyses of AFS debt securities and related AFS reserves are set out on
page 206.