RBS 2012 Annual Report Download - page 182

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Business review Risk and balance sheet management continued
Early problem identification and problem debt management: Impairment loss provision methodology continued
Depending on various factors as explained below, the Group uses one of
the following three different methods to assess the amount of provision
required: individual; collective; and latent.
x Individually assessed provisions - Provisions required for individually
significant impaired assets are assessed on a case-by-case basis. If
there is objective evidence that an impairment loss has been
incurred, the amount of the loss is measured as the difference
between the assets carrying amount and the present value of the
estimated future cash flows discounted at the financial asset’s
original effective interest rate. Future cash flows are estimated
through a case-by-case analysis of individually assessed assets.
This assessment takes into account the benefit of any guarantees or
other collateral held. The value and timing of cash flow receipts are
based on available estimates in conjunction with facts available at
that time. Timings and amounts of cash flows are reviewed on
subsequent assessment dates, as new information becomes
available. The asset continues to be assessed on an individual basis
until it is repaid in full, transferred to the performing portfolio or
written-off.
x Collectively 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 176 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.
x Latent 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:
x the probability that the performing customer will default - historical
loss experience, adjusted, where appropriate, to take into account
current economic and credit conditions; and
x 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.
Refer to pages 224 to 241 for analysis of impaired loans, related
provisions and impairments.