RBS 2013 Annual Report Download - page 253
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Business review Risk and balance sheet management
251
Impact of forbearance on provisioning
Wholesale
Forbearance may result in the value of the outstanding debt exceeding
the present value of the estimated future cash flows. This may result in
the recognition of an impairment loss or a write-off.
Provisions for forborne wholesale loans are assessed in accordance with
the Group’s normal provisioning policies (refer to Group impairment loss
provisioning on page 250). The customer’s financial position and
prospects as well as the likely effect of the forbearance, including any
concessions granted, are considered in order to establish whether an
impairment provision is required. Individual impairment assessments for
wholesale loans are reassessed in the light of any revisions to the loan's
terms.
All wholesale customers are assigned a PD and related facilities an LGD.
These are re-assessed prior to finalising any forbearance arrangement in
light of the loan’s amended terms and any revised grading incorporated in
the calculation of the impairment loss provisions for the Group’s
wholesale exposures.
For performing counterparties, credit metrics are an integral part of the
latent provision methodology and therefore the impact of covenant
concessions will be reflected in the latent provision. For non-performing
loans, covenant concessions will be considered in the overall provision
adequacy for these loans.
In the case of non-performing loans that are forborne, the loan
impairment provision assessment almost invariably takes place prior to
forbearance being granted. The quantum of the loan impairment
provision may change once the terms of the forbearance are known,
resulting in an additional provision charge or a release of the provision in
the period the forbearance is granted.
The transfer of wholesale loans subject to forbearance from impaired to
performing status follows assessment by relationship managers in GRG.
When no further losses are anticipated and the customer is expected to
meet the loan’s revised terms, any provision is written-off and the balance
of the loan returned to performing status.
Retail
Provisions are assessed in accordance with the Group’s provisioning
policies (refer to Group impairment loss provisioning on page 250).
Impairment provisions in respect of loans subject to forbearance are
evaluated as follows:
In UK Retail performing loans are subject to a latent loss provision but
form a separate risk pool for 24 months. The higher of the observed
default rates and PDs are used in the latent provisioning calculations for
these loans to ensure that appropriate provision is held. Furthermore, for
these portfolios the latent provision incorporates extended emergence
periods. Once such loans are no longer separately identified, the use of
account level PDs refreshed monthly in the latent provision methodology
captures the underlying credit risk without a material time lag.
There is no reassessment of the PD at the time forbearance is granted
but the loan will be the subject to the latent provisioning methodology
described above. Non-performing loans are subject to a collectively
assessed provision methodology.
In Ulster Bank performing loans are subject to a latent loss provision but
form a separate risk pool for the period of forbearance. The performance
of forbearance arrangements is analysed and breakage (a single missed
payment) rates computed. The higher of the breakage rate and the
modelled PD for this separate risk pool is used when calculating the
latent provision. Furthermore, for this portfolio the latent provision
incorporates an extended emergence period. Once such loans are no
longer separately identified, the use of account level PDs refreshed
monthly in the latent provision methodology captures the underlying
credit risk without a material time lag. There is no reassessment of the
PD at the time forbearance is granted but the loan will be the subject to
the latent provisioning methodology described above. Non-performing
loans are subject to a collectively assessed provision methodology.
However, loans not 90 days past due that are subject to forbearance
arrangements involving a reduction in contractually required cash flows
i.e. the forgiveness of interest and where arrears have not been
capitalised are classified as non-performing. They form a separate risk
pool for the period of forbearance and the related loan loss provision is
computed using Ulster Bank’s latent loss provision methodology.
Non-performing loans are grouped into homogeneous portfolios sharing
similar credit characteristics according to the asset type. Further
characteristics such as LTVs, arrears status and default vintage are also
considered when assessing recoverable amount and calculating the
related provision requirement. While non-performing forbearance retail
loans do not form a separate risk pool, the LGD models used to calculate
the collective impairment provision are affected by agreements made
under forbearance arrangements.
In RBS Citizens, retail loans subject to forbearance are segmented from
the rest of the non-forborne population and assessed individually for
impairment loss throughout their lives until the loans are repaid or fully
written off. The amount of recorded impairment depends on whether the
loan is collateral dependent. If the loans are considered collateral
dependent, the excess of the loan’s carrying amount over the fair value of
the collateral is the impairment amount. If the loan is not deemed
collateral dependent, the excess of the loans’ carrying amount over the
present value of expected future cash flows is the impairment amount.
Any confirmed losses are charged off immediately.
Write-offs
The Group normally writes-off loans when it has exhausted all its
collection strategies and has no realistic chance of recovering the money
it is owed. Refer to pages 382 and 383 for further information on the
Group’s write-off policies and practices.