Fitch: Asia Pacific banks face modest initial IFRS 9 provisioning impact

The initial implementation of IFRS 9 is likely to see higher provisioning at most Asia-Pacific (APAC) banks, but the impact should be moderate and manageable, according to a Fitch Ratings survey of 59 banks in 13 markets.

“The new regime is unlikely to trigger immediate rating changes, unless it reveals significant under-provisioning, which is not our base case,” said Fitch.

The introduction of IFRS 9 - scheduled for 1 January 2018 in most major APAC markets - will, however, have wide-ranging effects on bank processes and loan performance assessments because it requires banks to switch to recognizing and providing for expected credit losses on financial assets, rather than the current common practice of providing only when losses are incurred.

Banks will need to set aside provisions for expected losses over the next 12 months for performing assets, termed "stage 1" under the IFSR 9 framework, and provision for lifetime expected losses in the case of underperforming (stage 2) and non-performing (stage 3) assets, Fitch noted.

An overwhelming majority of survey respondents indicated higher first-time provisions, but most banks estimated that the increase would be less than 20%, said Fitch. Around three-quarters expect an initial decline in their common equity Tier 1 (CET1) ratios, but most project the fall to be no more than 50bp, according to survey results.

The impact on CET1 will be cushioned where banks hold regulatory reserves for loans that are not yet impaired, as these excess reserves could be re-designated to help meet higher provisioning, said the rating firm, adding that regulatory minimum reserves are common in APAC and can be as high as 1.5% of loans or, in China's case, risk-weighted assets (RWA).

Beyond the initial transition, Fitch said it expects provisioning to fall more sharply during cyclical upswings and rise more quickly during downturns.

The importance of unbiased expectations of economic conditions when estimating credit losses could be a challenge to the new standard's credibility, which auditors will have a crucial role in addressing, Fitch added.

The authorities may align their provisioning frameworks with the new accounting regime once IFRS 9 is better understood and credibly implemented by banks, the rating company noted. Variation in non-performing loan definitions may also subside once regulators become comfortable with IFRS 9's stage 1-3 concept, it adds.

Hong Kong, Singapore more well-prepared

Fitch observes varying degrees of readiness among APAC banks, which reflects the significant work needed to adopt the new standards.

“Developed-market banking jurisdictions - like Australia, Hong Kong, Korea and Singapore - and more advanced emerging markets - like Malaysia - appear to be better prepared, as banks in these markets have experience in using models for internal ratings-based RWA calculations, stress testing and internal capital adequacy assessments,” said the rating organization.