Asian banks are far from ready for implementation of the International Financial Reporting Standard 9 ("IFRS9") unless local banking regulators are able to ascertain how impairment will be treated for provisioning and capital purposes, a consultant said.
Despite being just nine months away from the 1 January 2018 implementation date, many Asian banks find themselves stuck with many unresolved issues arising from having to comply with IFRS9. This is partly because some banking regulators in Asia started looking into IFRS9 a bit late, unaware of the sizeable potential impact it may bring, said Simon Topping, head of regulatory practice at KPMG China.
"Some banking regulators [in Asia] were a bit late to start looking at IFRS9. They were asking banks to calculate and submit the numbers and they [now] realised the change for some is quite big; it shows the impact is bigger than what banking regulators had initially anticipated," he said.
Treatment on Provisioning
Various reports have shown that the adoption of IFRS9 will increase the amount of provisioning by 25 percent or in the range of 20 to 30 percent, depending on the banks and the countries in which they operate. Assessments of individual banks have shown that some provisioning figures are as high as 100 percent, according to Topping.
It remains unclear whether Asian regulators will regard the impairment allowance as provisions or whether they will require it to be topped up or calculated in another way, Topping said.
"Unless regulators are clear on those areas, you can't say the issues on IFRS9 are dealt with," he said.
Some banks are using the simpler approaches to calculate the provisioning, but Topping warned that the numbers may change again in a few years' time if they retrospectively adopt the more advanced or sophisticated approach.
Asian regulators have also not indicated how capital will be treated under IFRS9. The Basel Committee on Banking Supervision on 13 January concluded a consultation paper on capital treatment under IFRS9, but has yet to finalise its decision.
IFRS9 requires the impairment figures to be deducted from Core Tier 1 capital which is consistent with the existing treatment on provisions, but there are concerns that Core Tier 1 capital will be substantially reduced if provisions increase.
The Basel paper has proposed to spread out the effects of the provisioning on Core Tier 1 capital over a three-year period rather than over a year. That will have the net effect of slowing down the impact on banks' capital.
"Because the increase in provisions that results from IFRS9 has to be deducted from Core Tier 1 and because that number is higher than expected, what Basel is worried about is that global banks' core capital will fall significantly if the provisions are deducted from Core Tier 1 over a one-year period. If banks' capital falls, it could affect their ability to lend," Topping said.
Asian regulators, including those in Hong Kong and Singapore, will be able to exercise their discretion once the Basel Committee is able to finalise its decision on the capital treatment under IFRS9.
Different Implementation Timelines
Another major challenge is the different implementation dates for banks operating in different Asian jurisdictions. Some banks are following the 1 January 2018 date recommended by the International Accounting Standards Board ("IASB") but others such as those in Indonesia and Thailand have indicated that they would implement IFRS9 a year later.
While some banks have bank-wide IFRS9 programmes, they may carry out implementation according to the timelines set by their home country regulators. The more tricky situation arises when some banks operating in certain jurisdictions may have to implement IFRS9 by 1 January 2018 but may only adopt the new accounting standard in their home country a year later. This could potentially happen to an Indonesian or Thai bank with operations in Singapore which is following the 1 January 2018 timeline.
Expected Credit Loss Model
Banks whose head offices have yet to implement IFRS9 would be required to introduce an expected credit loss ("ECL") model, which they should already be doing, said Seah Li Yun, assurance partner at EY in Singapore. But these banks may find themselves left with only a short period of time to identify gaps or make the necessary adjustments to implement the ECL model locally.
"Even with the head office taking the lead for implementation, it is important for the banks to understand the model and the methodology decided at their head office so as to identify any adjustments required for local implementation," she said.
More Work to be Done
There remains a variety of tasks which Asian banks have yet to carry out to comply with IFRS9, Topping said. For instance, they would need to understand the business impact of the provisioning figures, such as how it will affect the pricing of some products. They would also need to work out how IFRS9 will be integrated into the risk management framework. A more mechanical process of producing the numbers has to be in place as opposed to the use of an excel spreadsheet, a practice which remains in use at many banks to produce the provisioning figures. Banks would also need to concern themselves with how they make disclosure on the methodology they will adopt and the factors that influence their decisions.
While Asian banks are generally considered to be behind European banks in IFRS9 implementation, certain jurisdictions, such as Australia, Malaysia, Singapore and Taiwan, are considered to be leading the pack, according to assessments carried out by KPMG China. The second category includes China, Hong Kong and the Philippines, whereas Indonesia and Thailand are considered to be the slowest in IFRS9 implementation.
Speaking in the context of Singapore, Seah said most banks in Singapore would have begun their IFRS9 gap and impact analysis two years ago, although the stage of development for implementation may differ among banks. The larger Singapore-incorporated banks are likely to be building the expected credit loss model. Most subsidiaries or branches of banks incorporated in other locations are waiting for their head offices to finalise the methodology and approach before deciding the next course of actions.