Banks to start reporting results under IFRS 9

Banks are now required to set aside a minimum loss allowance of 1% on exposures, and excess will be recorded as capital.

Singapore banks are expected to report under International Financial Reporting Standard (IFRS) 9 in Q1 this year, but implications might only be marginal, Fitch Ratings said.

According to a report, IFRS 9 requires more timely recognition of credit losses under the expected credit loss (ECL) model which includes more forward-looking information compared with the previous incurred loss model.

The Monetary Authority of Singapore (MAS) now requires large banks set aside a minimum loss allowance of 1% on unimpaired exposures, with any excess allowances beyond that strictly required under the IFRS 9 ECL model to be taken out of retained earnings and transferred to a newly created nondistributable regulatory loss allowance reserve (RLAR).

Fitch Ratings analyst Wee Siang Ng said, "This differs from the previous approach where banks recognised a minimum 1% collective allowance entirely in P&L, and is similar to the pre-IFRS 9 practice in Hong Kong and Malaysia."

RLAR forms part of shareholders’ equity but will be treated as Tier 2 capital, subject to regulatory caps.

Singapore banks believe their pre-IFRS 9 collective allowances exceed – or are equivalent to – the amount required under SFRS 109.

The excess could come down as UOB and OCBC may follow DBS’s action by releasing some, if not all, of their surpluses ahead of the implementation date on 1 January 2018.

DBS drew $850 million from its collective impairment reserves in 3Q17, significantly reducing the buffers.

"Notwithstanding that, we believe Singapore banks’ loss-absorption buffers remain strong," Ng added.

Here's more from Fitch Ratings:

Under the ECL model, banks lose the smoothing effect of providing for minimum additional collective allowances independent of asset-quality cycles.

The jump from providing for only 12-month expected losses on normal performing portfolios to lifetime expected losses as loans start to deteriorate should increase earnings volatility over the credit cycle, with credit costs falling more in cyclical upswings and rising more in downturns.

The day-one impact on banks’ common equity Tier 1 capital (CET1) depends on whether banks decide at the outset to transfer surplus collective impairment reserves, if any, to retained earnings or RLAR. We expect greater clarity on this front when the 1Q2018 results are released.

The former would have the effect of boosting banks’ CET1 ratios. That said, any impact is likely to be marginal, as we believe banks are more likely to have drawn down the excess collective impairment reserves to some extent.

The latter option would have no impact on the CET1 ratio as the RLAR is deemed as Tier 2 capital, consistent with the previous capital treatment for collective allowances.