Thursday 16, March 2017 by Georgina Enzer

Moody's: IFRS 9 adoption to result in modest capital impact for most banks

Most Moody's-rated banks reporting under International Financial Reporting Standards (IFRS) anticipate a decrease of up to 50 basis points (bps) in their core capital ratios when the new expected credit loss rules under IFRS 9 come into effect next year, according to a survey conducted by the rating agency.

The accounting change, on its own, will not affect Moody's credit assessment of most banks. However, unexpected large capital reductions may cause a reassessment of bank capital adequacy.

"The capital impact on adoption of IFRS 9 for most of our rated banks should be modest, with their capital buffers likely able to absorb the effect; only 13 per cent of responding banks believe that their CET1 ratio could fall by more than 50 basis points," said Upaasna Laungani, CPA, Vice President -- Senior Accounting Analyst at Moody's.

About 39 per cent of banks surveyed expect a decrease of less than 10 bps in their Common Equity Tier 1 (CET1) ratios on adoption, while 48 per cent expect a decrease of 10-50 bps. Reflecting this, the survey revealed that banks do not expect to significantly adjust their business profiles, although many stated that they plan to adjust loan pricing to reflect the upfront reduction in capital.

Regional differences in capital impact were revealed by the survey, with some banks in the Middle East & Africa forecasting that the impact could be over 100 basis points -- a full percentage point -- on their CET1 ratios.

This was the only region, however, in which Moody's heard that the effect could be this large. While more than half of banks in Europe (58 per cent) believe a decrease of 10 to 50 basis points is more likely, more than half of banks in the Asia-Pacific region (53 per cent) and responding banks in Canada and Latin America believe the impact will be less than 10 basis points.

In terms of loan types, banks believe that residential mortgage and consumer loans will see the greatest increase in loan-loss reserves on adoption of IFRS 9. For most other types, though, reserves on the balance sheet will increase by about 10 per cent, according to the survey.

While almost 70 per cent of banks believe provision expenses will be more volatile from period to period under IFRS 9, most banks (62 per cent) believe that the application of the IFRS 9 impairment model will result in better credit risk management.

With the effective date less than a year away, about half of banks are still in the early stages of implementation, with eight per cent of banks yet to start implementation.

Moody's surveyed all of its rated banks that report under IFRS, receiving responses from 185.

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