In depth
IFRS 9: Expected credit losses PwC 20
Individual assessment
In Region One, Bank ABC assesses each of its mortgage loans on a monthly basis by
means of an automated behavioural scoring process that is based on current and
historical past due statuses, indebtedness, loan-to-value measures (‘LTV measures’),
customer behaviour on other financial instruments with Bank ABC, the loan size and the
time since the origination of the loan. Bank ABC updates LTV measures on a regular
basis through an automated process that re-estimates property values using recent sales.
Historical data indicates a strong correlation between the value of residential property
and default rates for mortgages, which is factored into the behavioural score. Bank ABC
is able to identify significant increases in credit risk since initial recognition on individual
customers before a mortgage becomes past due if there has been deterioration in the
behavioural score.
When the increase in credit risk has been significant, a loss allowance at an amount equal
to lifetime ECL is recognised; otherwise, a loss allowance at an amount equal to 12-
month ECL continues to be recognised. The loss allowance is measured using LTV
measures to estimate the severity of the loss. If Bank ABC is unable to update
behavioural scores, for example, to reflect the expected declines in property prices, it uses
reasonable and supportable information that is available without undue cost or effort to
undertake a portfolio assessment to determine the loans on which there has been a
significant increase in credit risk since initial recognition and recognise lifetime expected
credit losses for those loans.
Portfolio assessment
In Regions Two and Three, Bank ABC does not have an automated scoring capability.
Instead, for credit risk management purposes, Bank ABC tracks the risk of a default
occurring by means of past-due statuses. It recognises a loss allowance at an amount
equal to lifetime ECL for all loans that have a past-due status of more than 30 days past
due. Although Bank ABC uses past-due status information as the only borrower-specific
information, it also considers other reasonable and supportable forward-looking
information that is available without undue cost or effort to assess whether lifetime ECL
should be recognised on loans that are not more than 30 days past due. This is necessary
in order to meet the objective in paragraph 5.5.4 of IFRS 9 of recognising lifetime
expected credit losses for all significant increases in credit risk.
Region Two includes a mining community that is largely dependent on the export of coal
and related products. Bank ABC becomes aware of a significant decline in coal exports
and anticipates the closure of several coal mines. Because of the expected increase in the
unemployment rate, the risk of a default occurring on mortgage loans to borrowers in
these areas who rely on the coal mines is determined to have increased significantly, even
if those customers are not past due at the reporting date. Bank ABC segments its
mortgage portfolio, by the industry within which customers are employed, to identify
customers that rely on coal mining as the dominant source of employment (that is,
‘bottom up’ approach). For such groups of mortgages, Bank ABC recognises a loss
allowance at an amount equal to lifetime ECL while it continues to recognise a loss
allowance at an amount equal to 12-month ECL for all other mortgages in Region Two.
Newly originated loans to borrowers who rely on the coal mines in this community
would, however, have a loss allowance at an amount equal to 12-month ECL, as they
would not have experienced a significant increase in credit risk since initial recognition.
In Region Three, Bank ABC anticipates the risk of a default occurring and thus an
increase in credit risk, as a result of an expected increase in interest rates during the
expected life of the mortgages. Historically, an increase in interest rates has been a lead
indicator of future defaults on mortgages in Region Three, especially when customers do
not have a fixed interest-rate mortgage. Bank ABC determines that the variable interest-
rate portfolio of mortgages in Region Three is homogenous and that, unlike for Region
Two, it is not possible to identify particular sub-portfolios on the basis of shared risk
characteristics that represent customers who are expected to have increased significantly
in credit risk. However, as a result of the homogenous nature of the mortgages in Region