A sudden tightening on IFRA 9 compliance would translate into higher provisions that banks need to factor in. Image Credit: Gulf News Archive

Dubai: A number of UAE banks, especially those with restructured loan exposures to corporates and SMEs, are seeking more - and temporary - relaxations in complying with the IFRS 9 [International Financial Reporting Standards 9].

The adoption of this accounting standard, from January 2018, meant the ECL (Expected Credit Losses) provisions would impact retained earnings, regulatory capital and the provision coverage ratios. In the immediate aftermath of the COVID-19 crisis, banks had a spurt in ECL provisions, which prompted the banking regulator to allow some relaxations on the application of IFRS 9 to ease the impact on banks’ regulatory capital.

In April 2020, the UAE Central Bank introduced a temporary prudential filter for UAE banks on IFRS 9’s ECL provisions to minimize provision requirements at a time banks were hard-pressed for liquidity. The prudential filter aimed to minimize the effect of IFRS 9 provisions on regulatory capital, in view of expected volatility due to the COVID-19 crisis.

Any increase in the provisioning compared to December 31, 2019 were partially added back to regulatory capital. According to the proposed transitional arrangements, the IFRS 9 provisions will be gradually phased-in during a five-year period up to December 31, 2024.

More relaxations

Bankers expect that the gradual phasing out of central bank support schemes will see an increase in ECL provisions and UAE needs to take a ‘nation-specific’ approach to the application of IFRS 9 standards. “Some loan defaults are inevitable as support schemes are withdrawn,” said a top official at a local bank. “Some more relaxations in IFRS 9 would help banks - and customers - in tiding over these default risks.”

Analysts say there is scope for further relaxations to the accounting standards in the UAE in the context of the central bank’s gradual phasing out of liquidity support through the Targeted Economic Support Scheme (TESS).

Lingering risks

Bankers say a number of economic sectors remain severely affected. The events in Ukraine have added another layer of stress, especially on supply sources and, by consequence, on prices. “National discretion must be invoked and some form of softening in its application offered,” said Varouj Nerguizian, Group CEO of Bank of Sharjah.

Rising interest rates are seen adding to impairment risks, “An increase in interest rates would imply a higher debt-service burden for retail and corporate clients,” said Mohammed Damak, Director in Financial Services at S&P Global Ratings. “Depending on the pace and the overall amount of the increase, some clients may experience difficulty and restructure their debt.”

While analysts said relaxations in approach to IFRS 9 will help banks in the immediate future, they fear this will have long-term consequences on their credit standing.

“Introducing transitional arrangements for the accounting of expected credit losses at banks will delay banks’ creation of provisioning buffers to absorb potential future credit losses, a credit negative,” the rating agency Moody’s said in a note.

Transparency checks
In the current fluid economic environment, lending institutions will need to analayse any relaxation in reporting standards to assess whether there has been a change in the contractual terms of a financial instrument.

And whether it leads to a de-recognition of gain or loss, or a re-measurement of its amortized cost; and whether the arrangement indicates a significant increase in credit risk or a credit impairment, or results in a partial write-off of the loan.

Hurt credit ratings

Accounting firms too are concerned that relaxed applications could lead to non-compliance and negative audit notes for bank’s accounts that could have credit rating implications. “In the UAE, our external audit of financial statements is designed to be able to opine that a bank’s accounts present fairly, in all material respects, the financial position as at the reporting date, in accordance with IFRS,” said a partner at an accounting firm.

“Where national discretion or a softening in the application of the standards is applied, it should be carefully considered as non-compliance with IFRS [that] could potentially result in a qualification of the external audit report, if material.”