Page 177 - RFHL ANNUAL REPORT 2025 ONLINE_NEW

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

22.2.2 Impairment assessment
Financial asset provisions are reviewed quarterly in accordance with established guidelines and recommended
provisions arising out of this review are submitted to the Board for approval. Non-performing debts recommended
for write-off are also reviewed annually and action taken in accordance with prescribed guidelines. The Group’s
impairment assessment and measurement approach is set out below.

22.2.3 Default and recovery
The Group generally considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL
calculations in cases when the borrower becomes 90 days past due on its contractual payments.

As a part of a qualitative assessment of whether a customer is in default, the Group also considers a variety of
instances that may indicate unlikeliness to pay. When such events occur, the Group carefully considers whether
the event should result in treating the customer as defaulted and therefore assessed as Stage 3 for ECL calculations
or whether Stage 2 is appropriate.

It is the Group’s policy to consider a financial instrument as ‘recovered’ and therefore re-classified out of Stage
3 when none of the default criteria have been present for at least six consecutive months. The decision whether
to classify an asset as Stage 2 or Stage 1 once recovered depends on the updated credit grade, at the time of
recovery.

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.