How will the IFRS 9 implementation in 2018 affect banks?

The financial impact should be moderate and manageable.

A Fitch Ratings survey of 59 banks in 13 markets expects the introduction of IFRS 9 in 2018 to have no immediate impact on bank ratings, unless it reveals significant under-provisioning. It should strengthen banks’ risk management and improve transparency for external parties, but it will take time to fully assess, Fitch says.

An overwhelming majority of survey respondents indicated higher first-time provisions, although most estimates were less than 20%. About 75% of respondents estimated an initial decline in their common equity Tier 1 (CET1) ratios, but this would be limited to 50bp or less in most cases with regulatory reserve releases providing an offset for some. However, many banks were not ready to disclose specific estimates.

Here’s more from Fitch Ratings:

More clarity is expected after regulators provide guidance on how they are reconciling new IFRS 9 concepts with their regulatory frameworks and Basel initiatives. Capital treatment of additional prudential reserves could be reconsidered in time, while banks’ risk-management capabilities and model sophistication will also increase in time.

This survey reveals that only a few banks will solely rely on external data to model their assumptions, with the majority of banks planning to use their own data or applying a mix of the two. This suggests they will retain more influence over model outcomes. Fitch considers it likely that regulators will become involved in assessing inputs. They may even provide guidance on assumptions, as a handful of respondents indicated in our survey.

Authorities may align their provisioning frameworks with the new accounting regime once IFRS 9 is better understood and credibly implemented by banks. Variation in non-performing loan (NPL) definitions should subside once regulators become comfortable with IFRS 9’s Stage 1-3 concept. Eight of the 17 APAC jurisdictions covered have followed a days past due approach, five derive NPLs by classification according to their own categories and four follow the impaired loan concept.

Most banks are expected to report under IFRS 9 for the first time in 2018. Some will provide a first glimpse into the changes when they release their year-end 2017 results, others will only start disclosing IFRS 9 items during their interim results. Some of the larger banks, in particular, those that source overseas funding, will supplement required accounting disclosure to facilitate comparison with international peers.

Implementation is delayed in Thailand, Indonesia and Mongolia, possibly also Sri Lanka. India is moving towards adopting IFRS 9 by 1 April 2018, but a delay remains possible as the system may prioritise meeting Basel III standards by end-March 2019.