Page 197 - ACCESS BANK ANNUAL REPORTS_eBook

Key source of estimation uncertainty

(i) Allowances for credit losses
Loans and advances to banks and customers are accounted for at amortised cost and are evaluated
for impairment on a basis described in accounting policy ( see not 3.9g (i) )

The Bank reviews its loan portfolios to assess impairment at least on a half yearly basis. In determining
whether an impairment loss should be recorded in the income statement, the Bank makes judgements
as to whether there is any observable data indicating an impairment trigger followed by measurable
decrease in the estimated future cash flows from a portfolio of loans before the decrease can be iden-
tified with that portfolio. This evidence may include observable data indicating that there has been an
adverse change in the payment status of borrowers in a bank, or national or local economic conditions
that correlate with defaults on assets in the Bank.

The Bank makes use of estimates based on historical loss experience for assets with credit risk
characteristics and objective evidence of impairment similar to those in the portfolio when scheduling
future cash flows. The methodology and assumptions used for estimating both the amount and timing
of future cash flows are reviewed regularly to reduce any differences between loss estimates and actu-
al loss experience.

The specific component of the total allowances for impairment applies to financial assets evaluated
individually for impairment and is based upon management’s best estimate of the present value of
the cash flows that are expected to be received. In estimating these cash flows, management makes
judgements about a debtor’s financial situation and the net realisable value of any underlying collateral.
Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows
considered recoverable are independently reviewed by the Credit Risk Management Department
(CRMD).

A collective component of the total allowance is established for:
• Groups of homogeneous loans that are not considered individually significant and
• Groups of assets that are individually significant but were not found to be individually impaired

Collective allowance for groups of homogeneous loans is established using statistical modelling of
historical trends of the probability of default, timing of recoveries and the amount of loss incurred,
adjusted for management’s judgement as to whether current economic and credit conditions are such
that the actual losses are likely to be greater or less than suggested by historical modelling. Default
rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure that they remain appropriate.

Collective allowance for group of assets that are individually significant but that were not found to
be individually impaired cover credit losses inherent in portfolios of loans and advances and held to
maturity investment securities with similar credit characteristics when there is objective evidence to
suggest that they contain impaired loans and advances and held to maturity investment securities,
but the individual impaired items cannot yet be identified. In assessing the need for collective loan loss
allowances, management considers factors such as credit quality, portfolio size, concentrations, and
economic factors. In order to estimate the required allowance, assumptions are made to define the
way inherent losses are modelled and to determine the required input parameters, based on historical
experience and current economic conditions. The accuracy of the allowances depends on estimates
of future cash flows for specific counterparty allowances and the model assumptions and parameters
used in determining collective allowances are estimated.

Sensitivity of Exposure at default - Probability of Default (PD) & Loss Given Default (LGD)

Had there been a 20% reduction in expected cashflows from all the significantlly impaired loans and
customers rated ORR 5 facilities were impaired, there would have been an additional impairment of
N14.8bn in the financial statements relating to this. In addition, if the PDs and LGDs were increased
by 2%, impairment charge would have further increased by N716m but if the PDs and LGDs were
decreased by 2%, there would have been a write back of impairment of N637m.

Access BAnk Plc 197
Annual Report & Accounts 2017