Page 93 - Annual Report 2022

31 Banka Kombëtare Tregtare Annual Report 2022

Banka Kombëtare Tregtare Sh.a.
Notes to the Consolidated Financial Statements for the year ended
31 December 2022 (Amounts in USD, unless otherwise stated)

5. Financial risk management (continued)
(b) Credit Risk (continued)

ii. Expected credit loss measurement
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. This credit quality depends on the extent of credit deterioration since initial recognition and
will spread over three 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
For expected credit loss provisions modelled on a collective basis, a grouping of exposures is performed
on the basis of shared risk characteristics, such that risk exposures within a group are homogeneous.
In performing this grouping, there must be sufficient information for the group to be statistically credible.
Where sufficient information is not available internally, the Group has considered benchmarking
internal/external supplementary data to use 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.