Page 157 - RFHL ANNUAL REPORT 2024_ONLINE

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22. Risk management (continued)
22.2 Credit risk (continued)

22.2.4 The Group’s internal rating and PD estimation process
Commercial and corporate lending and mortgages
The Group has an independent internal credit risk department. Risk ratings were selected as cohorts for PD
analyses. A vintage approach was applied looking at the movements of ratings over a period of time. Historical
PDs were developed and using statistical correlation between macroeconomic trends and historical default
rates, management applied overlays based on expectations. As previously mentioned, LGD percentage estimates
were developed based on historical loss trends for non-performing loans which are assessed on an individual
level including estimating the present value of future cash flows. EAD equals the loan balance outstanding plus
accrued interest.

Retail lending and mortgages
Product types were selected as the cohorts for PD analyses for retail lending and retail mortgages. A vintage
approach was applied looking at the number of defaults by segment over a period of time. Historical PDs were
developed and using correlation between macroeconomic trends, management applied overlays based on
expectations. LGD percentage estimates were developed based on historical loss trends for non-performing
loans which are assessed on both an individual and collective level. EAD equals the loan balance outstanding
plus accrued interest.

Overdrafts and credit cards
Many corporate customers are extended overdraft facilities and the PDs developed for the corporate portfolio
were therefore applied. LGDs for the corporate portfolio were also utilised for overdrafts. EADs were developed
based on historical trends in utilisation of overdraft limits. ECL percentages for the retail portfolio were utilised for
retail overdrafts. PDs for the credit card portfolio were developed using default percentages over a period of time.
EADs were developed based on historical trends in utilisation of credit card limits and LGD percentage estimates
were developed based on historical loss trends for a sample of credit card non-performing facilities.

Management judgmentally applied overlays as required as there was no noted correlation between
macroeconomic trends and historical default rates.

Investment securities and investment interest receivable
PDs and LGDs for traded instruments were based on the global credit ratings assigned to the instrument or
the country for sovereign exposures. PDs and LGDs for non-traded instruments were based on one notch below
the credit rating of the sovereign in which the instrument is issued or, on company ratings where they existed.
Management applied judgmental overlays on local debt instruments. EAD equals the amortised security balance
plus accrued interest.

Treasury Bills, Statutory deposits with Central Banks and Due from banks
Treasury Bills, Statutory deposits with Central Banks and Due from banks are short-term funds placed with
Central Banks and correspondent banks and the Group therefore considers the risk of default to be very low.
These facilities are highly liquid and without restriction and based on management’s review of the underlying
instruments the ECL on these instruments were determined to be zero. For the Government of Barbados, PDs
and LGDs were developed based on countries in the region who have defaulted in the past.

Financial guarantees, letters of credit and undrawn loan commitments
The Group issues financial guarantees, letters of credit and undrawn loan commitments.