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IFRS 9 Regulations Cut Banking industry Capital Base by N1trn

The implementation of the new accounting standard saw the accumulated profits and regulatory risk reserve of banks drop while other reserves had to be called upon to cushion the effect of this re-measurement.

IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standard Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairments of financial assets and hedge accounting. It replaced the earlier IFRS for financial instruments, IAS 39, when it became effective in 2018.

The new IFRS 9 is a forward-looking standard that is based on expected loss model aimed at allowing banks to make adequate provision for future losses associated with loans that banks give to their customers, said Gbolahan Ologunro, research analyst CSL Stockbrokers.
“With IAS 39, when a loan goes bad and it crystallises, the bank is forced to book it as non-performing loans in which case they will now have to raise capital to write it off their books,” Ologunro said.

According to BusinessDay analysis, 12 banks adjusted their retained earnings to the tune of N889.33 billion and N202.63 billion in regulatory reserves on the impact of re-measuring financial instruments.

Retained earnings are undistributed earnings that have not been paid to stockholders or transferred to a surplus account. They are part of a bank’s net worth, or capital and surplus. Ecobank, First Bank and GTBank represented 60 percent of total adjustments as N642.39 billion was wiped off their books due to implementing the new accounting standard.

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“IFRS 9 stipulates that you need to be more aggressive with your impairment that you take,” Fola Abimbola, a research analyst at FBNQuest, told BusinessDay. “The CBN said rather than taking impairment from the income statement, they can just take it from their equity position.”
Uchenna Minnis, chief market analyst at Eagle Global Markets, said the IFRS-9 enables lenders estimate their total asset portfolio to reflect their actual strength and plan ahead for possible prospective risks.

Ecobank felt the impact of IFRS 9 the most as the bank had to take a total of N278.50 billion off its accumulated profit of N216.14 billion at the end of the 2017 financial calendar. First Bank took a big hit as it had to take a total of N212.63 billion out of both its retained earnings and credit risk reserves after implementation of the standard was complete. GTB was not left out of the top three write-offs as it had to take out a total of N151.35 billion from its retained earnings and credit reserves.

Minnis said since the previous method of reporting does not really focus on actual strength position of the bank in terms of its risk exposure, “it only make sense that we see such decline in those released numbers”.

Outside the top three write-offs, Union Bank adjusted its capital base downwards to the tune of N132.99 billion coming from its retained earnings and credit risk reserve, followed by Zenith Bank (N108.11 billion), Access Bank (N80.63 billion), UBA (N48.64 billion), Fidelity Bank (N28.39 billion), FCMB (N25.14 billion), Sterling Bank (N10.45 billion), Stanbic Bank (N10.17 billion), Wema Bank (N2.87 billion), and Unity Bank (N2.14 billion).

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According to Gbolahan, with IFRS 9, the standard is that at the point of granting loans to customers, banks have already made adequate provision that take into account foreseeable future losses.

“If the loan goes bad, the bank may not necessarily have to raise capital and for first-time adoption, you will have to take a haircut on shareholders’ fund. That is what happened to some banks that affected that capital,” he said.

The transition to the new standard resulted in lower capital position in view of the shift from Incurred Loss to Expected Credit Loss (ECL) model.

In a move to cushion the effect of the ECL provisions on tier-1 capital, the CBN introduced a four-year transitional arrangement which will require banks to hold static the Adjusted Day One impact of IFRS 9 impairment figures and spread it over a four-year period. Consequently, capital position of banks will improve relative to the figures that were published for the 2018 reporting periods.

On the longer term, Minnis believes it is a more transparent methodology which would further increase business and customer confidence as stakeholders would be working with impactful tangibles.

On the other hand, Abimbola said the profit and loss accounts of the banks might subsequently come under pressure from the aggressive impairment as a result of the new reporting standard.

Source: By Ifeanyi John, Owoeye Olufikayo and Oluwasegun Olakoyenikan

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