Fitch: IFRS 9 Poses Implementation Challenges for APAC Banks
IFRS 9 is one of the more significant accounting changes that banks are facing, and will be implemented in 2018 for most major APAC markets. It requires banks to switch to recognising and providing for expected credit losses (ECL) on financial assets, rather than the current practice of providing only when losses are incurred. IFRS 9 will also change the way that banks account for a wide range of financial assets. Fitch expects the adoption of the new standard to lead to greater provisioning and earlier recognition of credit losses, which will have an impact on banks' financial statements and regulatory capital.
Moving to an expected-loss approach will require significant process changes, including greater integration of credit risk management and internal accounting systems. Banks will also need more data on how portfolios perform though the credit cycle, and will need to build complex models of expected losses. The transition is likely to be more operationally manageable in sophisticated banking systems where there is better access to robust data.
It is too early to estimate the full effects of IFRS 9 on provisions, profitability and capital, as banks have been reluctant to disclose much beyond acknowledging that provisioning will need to be raised. For some markets, the change in accounting standards is happening at a time when banks are struggling to meet progressive increases in minimum capital requirements as Basel III is phased in.
In India, for example, it is possible that the local equivalent of IFRS 9 could be delayed. This is due to challenges faced by the banking system in meeting the capital required by end-March 2019 relating to the Basel III standards - currently estimated at around USD90bn. Banking systems that have been characterised by under-reporting of impaired assets also look vulnerable to the potential rise in provisioning. In China, banks are required to make provisions on reported loans at rates higher than in most other jurisdictions, but IFRS 9 could still expose asset-quality problems that Fitch has long highlighted - given the amount of non-loan credit disguised as financial assets.
In contrast, there are some countries in the region where the financial impact of IFRS 9 for banks could be softened by regulatory framework practices. These include Australia, Hong Kong, Korea, Malaysia, the Philippines, Singapore and Taiwan. Banks will still face provisioning pressures in these markets, but their current regulatory frameworks either already involve elements of the expected-loss approach or banks hold reserves that regulators did not allow them to fully release when IAS 39 was introduced. Regulators in most of these countries have also been progressively forcing banks to hold higher reserves, which will provide a buffer against potential losses. Nevertheless, the impact from moving to ECL is likely to vary from bank to bank even in the most prepared systems, reflecting the underlying riskiness of their assets and their own internal system capabilities.
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