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 Post subject: IFRS 9, Non-Performing Loans and the Irish Property Market
PostPosted: Fri Dec 23, 2016 4:37 pm 

Joined: Apr 27, 2014
Posts: 400
These are some notes on accounting changes that may impact the high-level of non-performing loans in Irish banks.

I have not seen anything written about this topic. But I have not really looked.

As stated earlier viewtopic.php?f=10&t=44532&p=901199#p901199, the very high rate of default for residential mortgages in Ireland may have a disproportionate of the profit and loss accounts of Irish Banks when the provisions of IFRS 9 come into effect.


IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). It

From 1 January 2018, IFRS (International Financial Reporting Standard) 9 Financial Instruments, published by the International Accounting Standards Board (IASB), will replace to replace IAS 39: Financial Instruments: Recognition and Measurement. The IFRS 9 standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. IFRS 9 will have a very significant change in accounting for financial instruments. Its impact will be especially significant for banks.

Impairment in IFRS 9 is based on an expected loss model. IFRS 9 affects the way credit losses are recognised in a bank’s profit and loss (P&L) statement. While impairments are currently based on incurred losses, IFRS 9 introduces an approach based on future expectations, called expected losses (EL).

The main impact on banks is the need to recognise EL for all financial products. Banks will have to update their calculations to reflect changes in the credit quality of their assets. This will increase the number and frequency of impairment quantifications that must be performed and the amount of data that must be processed for such purpose.

Essentially non-performing loans must have an impairment allowance, measured as the present value of all credit losses projected for the instrument over their full lifetime, reported on the bank’s profit and loss statement.

The assumption is that all loans in arrears for 90 days or more must be classified as non-performing but this is what is called a “rebuttable presumption”. It does not state that restructured loans in arrears do not have to be so classified.

Analyses performed by some banks have estimated that the rule changes will result in an increase of at least 25 per cent in total impairment provisions across all asset classes.

The situation with Irish bank may be greater than this because of the profile of non-performing residential property loans.

Banks are also forecasting that IFRS 9 will cause their capital ratios to deteriorate. In general, the expectation is that core tier one capital will decrease around by 05% as a result of moving to IFRS 9.

Again, the situation with Irish bank could be greater.

Irish Banks and Non-Performing Residential Property Loans

These are some extracts from a recent statement to a Dail Committee by the Central Bank Governor Lane.

Overview of Banking System

The Irish banking sector can be partitioned between domestically-focused banks and internationally-focused banks. The domestic sector continues the process of repair and recovery. Sustained progress has been made. Banks operating in Ireland are much better capitalised and have more stable funding models, but there remains more to do. The international banking sector is also continuing to evolve. Having shrunk materially in the aftermath of the crisis, it is starting to expand again and this trend may be reinforced by Brexit.

The aggregate total assets of the domestically-focused banks stood at €274 billion in Q3 2016, down 7 percent on the previous year. This contraction reflects the fact that asset disposals and loan redemptions more than offset increases in new lending.

Non-Performing Loans (NPLs)

Irish banks continue to work out non-performing loans and much progress has been made. Indeed, Irish banks are somewhat ahead of European banks in addressing these issues. In absolute terms, NPLs have declined by just over €48.5bn or 57 percent since their peak in 2013, now representing 17.3 percent of all loans. Although decreasing - due in large part to a range of intensive supervisory actions, progress within institutions, as well as the improving economy - the outstanding numbers remain high both in absolute and relative terms. Retail mortgages are the largest component of total NPLs, accounting for 57 percent, and are falling more slowly than other categories, despite the clear momentum in their reduction. SME/Corporate loans represent 17 percent of NPLs, Commercial Real Estate (CRE) loans amount to 22 percent, and consumer loans account for approximately 3 percent of total NPLs.

Main Challenges

Although the domestically-active banks in Ireland have continued to recover, significant risks remain on the horizon. All have relatively concentrated business models, focused primarily on Ireland and to some extent the UK. This makes them especially vulnerable to any shocks affecting the Irish economy.

Legacy issues also remain material. This is particularly evident with regard to NPLs, but also in the need for significant investment in IT and data infrastructure, where investment has not been sufficient in recent years.

The long-term sustainability of the business models of the banks, and therefore their ability to intermediate effectively, depends on their ability to generate sufficient net income to meet regulatory obligations and support intermediation. To date, there has been a mixed performance: some banks are still contracting, while others are growing slowly in certain areas like consumer lending or fixed-rate mortgages. This is reflected in recurring pre-provision net revenue remaining unsustainably low for some banks. This is driven, in part, by institution-specific challenges; part is also due to aggregate trends as their main customers – households and firms – are in aggregate continuing to pay down debt, which should be welcomed from a financial stability perspective.

In keeping with our supervisory priorities, it remains critical that banks manage risks prudently, price credit risk sustainably, and remuneration and incentive structures are appropriately governed to support a resilient business model going forward.

As I noted earlier, mortgage NPLs constitute the largest share of system-wide NPLs. Since the onset of the crisis, many mortgage holders have had difficulty in repaying their mortgages. While the situation is improving, its resolution is critical, for individual borrowers in distress, banks, and the system as a whole. The Central Bank has worked hard to ensure that the appropriate protections are in place for these borrowers who are in difficulty, and ensure that the banks have the financial and operational capacity to resolve the problems.

In terms of the progress, we published a report last week which gives an overview of recent developments and the wider issues involved. The latest data show there were 738,506 primary dwelling house (PDH) mortgage accounts in Ireland. Of these, 56,350 are in greater than 90 days past due; and of these in turn, 34,551 are greater than two years past due. Mortgage arrears have now fallen for 13 successive quarters and by 44 percent from peak, with over 121,000 mortgage accounts restructured, and 88 percent meeting the terms of their restructured arrangement.

As discussed at this Committee two weeks ago, the scale of mortgage distress means that mortgage lending is inherently riskier in Ireland than other euro area member states. Aside from default, due to the economic and social policy choices that have been made, the ability to effect loan security is more challenging, and loss given default in Ireland is higher than in many other Eurozone countries. Longer recovery times are also associated with lower availability of credit, and higher interest rates.

So, if you look at the details on NPLs quoted, you get a view along the following lines:

NPLs reduced by €48.50 or 57% which means the outstanding NPLs across all banks is of the order of €36.59 billion

The NPL breakdown is:

Loan Type                                  Proportion      Billions
Retail mortgages                                   57%        €20.86
SME/Corporate loans                                17%         €6.22
Commercial Real Estate (CRE) loans                 22%         €8.05
Consumer loans                                      3%         €1.10

If you look at the detailed breakdown of mortgage arrears contained in ... 0data.xlsx the details on mortgage NPLs are (with the amounts in billions):

                      All Arrears      90+ Days
PDH                         €14.67        €11.34
BTL                          €6.87         €5.95
Total                       €21.54        €17.28

The difference between the two sets of numbers can be accounted for by the difference in the effective dates of the two sets of data.

It is more interesting to note that the Central Bank appears to be classifying all mortgages in any sort of arrears as non-performing rather than just those overdue for more than 90 days:

• €20.86 billion in mortgage arrears from the Central Bank Governor’s statement

• €21.54 billion in mortgage arrears from the Central Bank’s September 2016 arrears statistics

• €17.28 billion in mortgage arrears more than 90 days from the Central Bank’s September 2016 arrears statistics

From 2018, Irish banks will either have to report realistic lifetime expected losses on these loans or have addressed them in the interim. This can take the form of:

• Packaging and disposing of all mortgages in arrears

• Aggressively dealing with arrears through repossessions


The statistics produced by the Central Bank ... 0data.xlsx show that

• 6,634 primary residences have been repossessed since September 2009 of which of which 1,343 (50.83%0 were repossessed after legal proceedings and 1,299 (49.17%) were voluntarily surrendered

• 2,642 BTL residential properties have been repossessed since September 2012 of which 2,222 (33.49%) were repossessed after legal proceedings and 4,412 (66.51%) were voluntarily surrendered

That is just 9,276 repossessions.

There are 56,350 primary residences and 21,435 BTLs in arrears for more than 90 days. That is 77,785, over eight times the number of repossessions in the last seven years.

Restructured Mortgages

The statistics produced by the Central Bank ... 0data.xlsx contain details on restructured mortgages.

From these numbers, it is possible to identify the number of mortgages that are in arrears but that have not been restructured.

                                                        PDH           BTL         Total
Total Mortgage Arrears Cases Outstanding              79,562        26,041       105,603
Total Outstanding Classified As Restructured         121,140        26,151       147,291
Restructured Not In Arrears                           94,609        20,019       114,628
In Arrears Restructured                               26,531         6,132        32,663
In Arrears Not Restructured                           53,031        19,909        72,940

A larger number of mortgages that are not in arrears have been restructured. But nearly twice the number of mortgages that are in arrears are not restructured than the number that are in arrears and are restructured.

Does this represent the hard core of strategic defaulters?

Some Questions

Will Irish Banks look to dispose of these non-performing loans in advance of IFRS 9 becoming operational in January 2018?

Doing nothing could have a substantial impact on the financial status.

Does anyone have any insight into what actions, if any, Irish banks are considering in relation to this?

Does anyone know if the ECB is pressuring Irish banks into disposing of these loans in advance of IFRS 9 going live to reduce the impact on the banks’ balance sheets, capital requirements and profits?

Will 2017 be the year of large-scale repossessions of or deals on non-performing loans?

 Post subject: Re: IFRS 9, Non-Performing Loans and the Irish Property Mark
PostPosted: Fri Dec 23, 2016 9:14 pm 
Of Systemic Importance

Joined: Nov 4, 2011
Posts: 5115
Location: SthDub
I'd wager ithat it'll be deals. This is Ireland after all

 Post subject: Re: IFRS 9, Non-Performing Loans and the Irish Property Mark
PostPosted: Fri Dec 23, 2016 10:34 pm 
Under CAB Investigation

Joined: Apr 9, 2014
Posts: 1657
When comes to banking deals, the Irish could learn a few lessons from the Germans.

The severity of IFRS 9 for individual banks will be determined by what the EBA considers a realistic basis - remember none of the German banks would have passed the recent stress test exercise if Irish rather than the German stresses were applied (and that is without considering the special side deal for DB) :)

 Post subject: Re: IFRS 9, Non-Performing Loans and the Irish Property Mark
PostPosted: Sat Dec 24, 2016 1:03 am 
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Joined: May 3, 2007
Posts: 11886
You can also move non (or low performing) mortgages to an SPV for working out, at least between now and this time next year.

You can't after 31/12/17.... I would think.

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