Page 39 - GTBank Annual Report 2020 eBook
P. 39
improvement in the credit quality of financial
instruments since initial recognition. The ECL EAD – The exposure at default is an
allowance is based on credit losses expected estimate of the exposure at a future
to arise over the life of the asset (life time default date, taking into account
expected credit loss), unless there has been no expected changes in the exposure
significant increase in credit risk since after the reporting date, including
origination. repayments of principal and interest,
whether scheduled by contract or
Measurement of Expected Credit Losses otherwise, expected drawdowns on
The probability of default (PD), exposure at committed facilities, and accrued
default (EAD), and loss given default (LGD) interest from missed payments.
inputs used to estimate expected credit losses
are modelled based on macroeconomic LGD – The loss given default is an
variables that are most closely related with estimate of the loss arising in the case
credit losses in the relevant portfolio. where a default occurs at a given time.
It is based on the difference between
Details of these statistical parameters/inputs the contractual cash flows due and
are as follows: those that the lender would expect to
receive, including from the realization
PD – The probability of default is an of any collateral. It is usually
estimate of the likelihood of default expressed as a percentage of the
over a given time horizon. A default EAD.
may only happen at a certain time over
the remaining estimated life, if the To estimate expected credit loss for off balance
facility has not been previously sheet exposures, credit conversion factor
derecognized and is still in the (CCF) is usually computed. CCF is a modelled
portfolio. assumption which represents the proportion of
any undrawn exposure that is expected to be
12-month PDs – This is the estimated drawn prior to a default event occurring. It is a
probability of default occurring within factor that converts an off-balance sheet
the next 12 months (or over the exposure to its credit exposure equivalent. In
remaining life of the financial modelling CCF, the Bank considers its account
instrument if that is less than 12 monitoring and payment processing policies
months). This is used to calculate 12- including its ability to prevent further drawings
month ECLs. The Bank obtains the during years of increased credit risk. CCF is
constant and relevant coefficients for applied on the off-balance sheet exposures to
the various independent variables and determine the EAD and the ECL impairment
computes the outcome by model for financial assets is applied on the
incorporating forward looking EAD to determine the ECL on the off-balance
macroeconomic variables and sheet exposures.
computing the forward probability of
default. Forward-looking information
Lifetime PDs – This is the estimated The measurement of expected credit losses for
probability of default occurring over the each stage and the assessment of significant
remaining life of the financial increases in credit risk considers information
instrument. This is used to calculate about past events and current conditions as
lifetime ECLs for ‘stage 2’ and ‘stage 3’ well as reasonable and supportable forecasts
exposures. PDs are limited to the of future events and economic conditions. The
maximum year of exposure required estimation and application of forward-looking
by IFRS 9. The Bank obtains 3 years information requires significant judgement.
forecast for the relevant The measurement of expected credit losses for
macroeconomic variables and adopts each stage and the assessment of significant
exponentiation method to compute increases in credit risk considers information
cumulative PD for future time years for about past events and current conditions as
each obligor. Annual Report 2020
Guaranty Trust Bank Gambia Limited www.gtbankgambia.com 37
