Page 133 - RFHL ANNUAL REPORT 2025 ONLINE_NEW

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2 Material accounting policies (continued)
2.6 Summary of material accounting policies (continued)
g Impairment of financial assets (continued)
ii The calculation of ECLs (continued)

Stage 2
When a financial asset has shown a significant increase in credit risk since origination, the Group records an
allowance for the LTECLs. The mechanics are similar to those explained above, but PDs and LGDs are estimated
over the lifetime of the instrument. The LGDs are derived as explained under Stage 3 for loans and other financial
assets and using Global Credit Loss tables for traded investments and modified with management overlays when
not traded.

Stage 3
For financial assets considered credit-impaired (as defined in Note 22.2), the Group recognises the LTECLs for these
loans, investments and other financial assets. The method is similar to that for Stage 2 assets, with the PD set at 100
percent.

POCI
POCI assets are financial assets that are credit impaired on initial recognition. The Group only recognises the
cumulative changes in LTECLs since initial recognition, based on a probability-weighting discounted by the credit-
adjusted EIR.

In most instances, LGDs are determined on an individual loan or investment basis, including discounting the
expected cash flows at the original EIR. Stage 3 LGDs are grouped by similar types to provide percentage averages
to be applied for Stage 1 and Stage 2 loans.

In limited circumstances within the Group, where portfolios were small and the products homogenous with
minimal history of defaults, a simplified ECL approach was applied using historical loss rates and staged based on
the sovereign rating of the residence of the loan.

iii Credit cards, overdrafts and other revolving facilities
The Group’s product offering includes a variety of corporate and retail overdraft and credit cards facilities, in which
the Group has the right to cancel and/or reduce the facilities. The Group limits its exposure on these revolving
facilities to the outstanding balance for non-performing facilities. For Stage 1 and Stage 2 facilities, the Group
calculates ECL on a percentage utilisation of the credit card and overdraft limit based on the Group’s expectations
of the customer behaviour, its likelihood of default and the Group’s future risk mitigation procedures, which could
include reducing or cancelling the facilities.

The ongoing assessment of whether a significant increase in credit risk has occurred for revolving facilities is similar
to other lending products. This is based on shifts in the customer’s internal credit grade, as explained in Note 22.2.4,
but emphasis is also given to qualitative factors such as changes in usage and repayment patterns.

The interest rate used to discount the ECLs for credit cards is based on the interest rate that is expected to be
charged over the expected period of exposure to the facilities. This estimation takes into account that many
facilities are repaid in full each month and are consequently charged no interest.