Implementation of IFRS-9 going to make loans expensive

Dubai: The implementation International Financial Reporting Standards 9 (IFRS 9) from January 2018 is a game changer for banks across the world and will impact UAE banks too, said Abdul Aziz Al Ghurair, Chairman of The UAE Banks Federation.

The new regulation strongly affects the way credit losses are recognised in the profit and loss (P&L) statement. While impairments are currently based on ‘incurred losses’, IFRS 9 introduces an approach based on future expectations, namely expected losses (EL) based on risk ratings.

The main impact on banks is the need to recognise expected losses for all financial products, and at individual and grouped-asset levels. Banks will have to update their calculation at each reporting date to reflect changes in the credit quality of their assets. This will significantly increase the number and frequency of impairment quantifications that must be undertaken and the amount of data that must be processed for such purpose.

The ripple effect of IFRS 9 will be felt across organisations. Higher provisioning will force banks to review their capital requirements. Product mixes and business models will also need to be evaluated.

“IFRS 9 brings a fundamental change in the way provisions are made. This will impact the cost of provisions and ultimately profitability of banks, cost and availability of funds for customers. This calls for change in the way risks are assessed and priced,” said Al Ghurair.

The impact of provisioning under IFRS 9 may not be crippling for the UAE banks in terms of additional capital requirements as banks are already used to booking general provisions when they extend new loans. These general provisions will act as a cushion against the need for additional provisioning under IFRS 9.

Going forward, Al Ghurair said two factors will impact liquidity of banks. First is the expected interest rate hike by the US, which is expected drive the cost of funds. Additionally, the implementation of Basel III and the Liquidity Capital Ratio (LCR) rules associated with it will have an impact on over all liquidity.

The new net stable funding ratio and the new capital adequacy ratio are also going to hit banks hard as banks will now require to stabilise the funding maturities and increase the capital adequacy ratio from 12.5 per cent to 16 per cent by 2019.

“All these new regulations together are going to make the cost of doing business in banking very expensive and to that extent apply pressure on bank profits,” he said.