Page 154 - Capricorn IAR 2020

GLOSSARY OF TERMS ANNUAL FINANCIAL GLOSSARY OF TERMS STATEMENTS
NOTES TO THE CONSOLIDATED AND SEPARATE ANNUAL FINANCIAL STATEMENTS (continued)
for the year ended 30 June 2020
3. FINANCIAL RISK MANAGEMENT (continued)
3.2 Credit risk (continued)
3.2.1 Credit risk measurement (continued)
(b) Financial assets measured at amortised cost
Assets in this category mainly relate to investments in financial instruments that have an external credit rating. Implied probability of defaults have been benchmarked against published estimates by external credit rating agencies. LGD’s were benchmarked against Basel best practice. The implied PD’s and LGD’s are used to calculate expected credit losses for these assets.
Credit risk grading
The Group uses internal credit risk gradings that reflect its assessment of the probability of default of individual counterparties. The Group uses internal rating models tailored to the various categories of counterparty. Borrower and loan specific information collected at the time of is fed into the rating model. This is supplemented with external data such as credit bureau scoring information on individual borrowers.
The credit grades are calibrated such that the risk of default increases exponentially at each risk grade. The following are additional considerations for each type of portfolio held by the Group:
Retail
After the date of initial recognition, for retail business, the payment behavior of the borrower is monitored on a periodic basis to develop a behavioural score. Any other known information about the borrower which impacts their creditworthiness – such as unemployment and previous delinquency history – is also incorporated into the behavioural score. This score is mapped to a PD.
Corporate
For wholesale business, the rating is determined at the borrower level. A relationship manager will incorporate any updated or new information/credit assessments into the credit systems on an ongoing basis. In addition, the relationship manager will also update information about the creditworthiness of the borrower every year from sources such as public financial statements. This will determine the updated internal credit rating and PD.
The Group’s rating method comprises 9 rating levels for instruments not in default (CG1 to CG9). The rating methods are subject to an annual validation and recalibration so that they reflect the latest projections in the light of all actually observed defaults.
Rating Meaning
CG1 Virtually no risk
CG2 Low risk
CG3 Moderate risk
CG4 Acceptable risk
CG5 Borderline
CG6 Special Mention
Implied PD
2%
2%
4%
6%
8%
22%
CG7 Substandard 69%
CG8 Doubtful 85%
CG9 Loss 95%
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