Page 44 - Agib Bank Limited Annual Report 2021

As explained above these figures are generally the lifetime of the loan exposure that are permitted
derived from internally developed statistical models by the current contractual terms, such as
and other historical data and they are adjusted to amortisation profiles, early repayment or
reflect probability-weighted forward-looking overpayment, changes in utilisation of undrawn
information. PD is an estimate of the likelihood of commitments and credit mitigation actions taken
default over a given time horizon. It is estimated as before default.
at a point in time.
The Bank uses EAD models that reflect the
The calculation is based on statistical rating models, characteristics of the portfolios. The Bank measures
and assessed using rating tools tailored to the ECL considering the risk of default over the
various categories of counterparties and exposures. maximum contractual period (including extension
These statistical models are based on market data options) over which the entity is exposed to credit
(where available), as well as internal data risk and not a longer period, even if contact
comprising both quantitative and qualitative factors. extension or renewal is common business practice.
PDs are estimated considering the contractual However, for financial instruments such as credit
maturities of exposures and estimated prepayment cards, revolving credit facilities and overdraft
rates. facilities that include both a loan and an undrawn
commitment component, the Bank’s contractual
The estimation is based on current conditions, ability to demand repayment and cancel the
adjusted to take into account estimates of future undrawn commitment does not limit the Bank’s
conditions that will impact PD. LGD is an estimate of exposure to credit losses to the contractual notice
the loss arising on default. It is based on the period.
difference between the contractual cash flows due
and those that the lender would expect to receive, For such financial instruments the Bank measures
taking into account cash flows from any collateral. ECL over the period that it is exposed to credit risk
and ECL would not be mitigated by credit risk
The LGD models for secured assets consider management actions, even if that period extends
forecasts of future collateral valuation taking into beyond the maximum contractual period. These
account sale discounts, time to realisation of financial instruments do not have a fixed term or
collateral, cross-collateralisation and seniority of repayment structure and have a short contractual
claim, cost of realisation of collateral and cure rates cancellation period.
(i.e. exit from non-performing status). LGD models
for unsecured assets consider time of recovery, However, the Bank does not enforce in the normal
recovery rates and seniority of claims. day-to-day management the contractual right to
cancel these financial instruments. This is because
The calculation is on a discounted cash flow basis, these financial instruments are managed on a
where the cash flows are discounted by the original collective basis and are cancelled only when the
EIR of the loan. EAD is an estimate of the exposure Bank becomes aware of an increase in credit risk at
at a future default date, taking into account expected the facility level. This longer period is estimated
changes in the exposure after the reporting date, taking into account the credit risk management
including repayments of principal and interest, and actions that the Bank expects to take to mitigate
expected drawdowns on committed facilities.
ECL, e.g. reduction in limits or cancellation of the
The Bank’s modelling approach for EAD reflects loan commitment.
expected changes in the balance outstanding over

Credit quality
The Bank monitors credit risk per class of financial instrument. The table below outlines the classes identified, as
well as the financial statement line item and the note that provides an analysis of the items included in the financial
statement line for each

Class of financial instrument Financial statement line
Islamic Finance to banks at amortised cost Islamic Finance to banks Annual Report and IFRS Financial Statements

Other assets Other assets

Commitments and financial guarantee contracts Provisions

Agib Bank Annual Report 2021 www.agib.gm 44