Page 97 - Annual Report 2023

ANNUAL REPORT 2023 28
Notes to the Consolidated Financial Statements for the year ended 31 December 2023
(amounts in USD, unless otherwise stated)

ii. Expected credit loss measurement
Under IFRS 9’s impairment framework, banks are required to recognize ECLs at all times, considering past events, current conditions
and forward-looking information, and to update the amount of ECLs recognized at each reporting date to reflect changes in an asset’s
credit risk. This is a more forward-looking approach and results in a timelier recognition of credit losses.

The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies
with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets
entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between
counterparties. The Group measures credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default
(LGD).
The guiding principle of the expected credit loss model is to reflect the general pattern of deterioration or improvement in the credit
quality of financial instruments. Based on the change of credit risk since initial recognition, assets are classified into 3 stages:
“Stage 1” comprises of assets that have not suffered any significant deterioration of credit quality since initial recognition;
“Stage 2” comprises of assets that have suffered significant deterioration since initial recognition;
“Stage 3” concerns all assets where a default has occurred.

Under this general approach, the ECL for an asset is calculated over different time horizons according to the stage it was assigned to:
ECL over one year for assets in stage 1;
ECL over remaining lifetime for assets in stage 2 and stage 3.
The stage assignment is done according to the following rules:
Impairment: if the counterparty for the considered asset has defaulted, the asset is assigned to “Stage 3”. An asset is considered as
having defaulted if any repayment (principal or interest) is overdue for more than 90 days or if the counterparty is in a proven situation
of default (bankruptcy).
Rating D (lower than C): Assets with this rating are currently considered to be in “Stage 3”.
Qualitative factors: IFRS 9 has advised to take in account qualitative factors such as watch lists or financial analysis by experts. Similar
to the previous case, there is also a second time threshold. In case the repayment of an asset is overdue for more than 30 days and
less than 90 days, it is assigned to “Stage 2”.
Relative Threshold: if the counterparty has suffered significant deterioration in credit risk, that is if its credit quality since initial recognition
has dropped more than a specific pre-defined relative threshold, then it is assigned to “Stage 2”.
All assets that are not in the previous cases are assigned to “Stage 1”.

Grouping of instruments for losses measured on a collective basis
In order to model expected losses on a collective basis, a grouping of exposures is performed on the basis of shared risk characteristics,
such as credit rating, product type, remaining maturity, etc.
The subsequent ECL calculation is based on historical performance data for the relevant group. Where sufficient internal historical data
is not available, the Group has used benchmarking internal/external supplementary data for modelling purposes.

The Bank has three main portfolios, which are:
- Loan portfolio
This category includes wholesale and individual/retail accounts loans.
- Treasury portfolio
This category includes bonds, treasury bills and equity accounts.
- Project and Structured Finance
This category includes letters of credit and bank guarantees.