Siam Commercial Bank (SCB) has been setting aside extra buffers against bad loans since the third quarter of 2017 to comply with International Financial Reporting Standard (IFRS) Version 9, which requires lenders to have larger reserves and earlier recognition of credit losses.
The bank's loan-loss provision totalled 7.5 billion baht during the July-to-September quarter of 2017, compared with its previous quarterly reserves of 5 billion, said Kittiya Todhanakasem, chief financial officer and senior executive vice-president. The additional provision of 2.5 billion baht is required under IFRS9.
The country's second-largest lender by assets had anticipated setting aside the same amount of loan-loss reserves in the final quarter of 2017 as in the previous quarter, she said.
IFRS9, which is due to take effect from Jan 1, 2019, will replace IAS39.
The new standard requires banks to switch to recognising and providing for expected credit losses on financial assets, rather than the current practice of giving only when losses are incurred, pushing provisions up across the industry.
SCB's loan-loss assessment for 2017 is still based on the IAS39 standard, but the bank has also put aside extra reserves in preparation for IFRS9, she said.
In line with IAS39, loan classification consists of performing loans, special mention loans and non-performing loans (NPLs). The provision requirement for performing loans is 1% of total lending and 2% for special mention loans, while reserves to cover the entire loan is required for NPLs.
For IFRS9, lending will be classified into Stage 1 (performing loans), Stage 2 (underperforming loans) and Stage 3 (NPLs). Performing loans are those which have not had a significant increase in credit risk since initial recognition, underperforming loans are those which have had a significant increase, and NPLs are those which have objective evidence of impairment at the reporting date.
The provision for Stage 1 is based on a 12-month expected credit loss, while Stage 2 and Stage 3 are based on the total estimated loss.
IFRS9 also covers income assessment. For interest income, an effective interest rate calculation is needed, compared with the contractual rate calculation under IAS39. For front-end fee income, an amortisation calculation is needed under IFRS9, compared with an upfront calculation under IAS39.
SCB is not alone in taking on larger loan-loss provisions. Krungthai Bank recently warned that the adoption of IFRS9 will require the bank to record larger provisions to cover credit losses.
"With effective interest rate calculation under IFRS9, it may impact [banks' revenue recognition from] the existing step-up rate offerings for mortgages, with such loan products no longer being on offer. It could also take a toll on the pricing of loan products under an effective rate calculation," said Mrs Kittiya.
But the bank cannot forecast the exact loan-loss provision required by the new accounting model. Krungthai Bank needs to wait for clear regulations from the Bank of Thailand, which will take into account the impact on the overall banking industry, each financial institution and each business segment, she said.
Big data analytics is the key technology to supporting crucial assessment under IFRS9, said Mrs Kittiya.
SCB shares closed last Friday on the Stock Exchange of Thailand at 150 baht, up two satang, in trade worth 873.5 million baht.
