IFRS 9 has ‘volatile' impact on Singapore banks' earnings

This is due to the change in calculating expected credit loss (ECL).

The change in approach from providing for only 12-month expected losses on normal performing portfolios to lifetime expected losses as loans start to deteriorate should increase volatility on Singapore banks’ earnings over the credit cycle, Fitch Ratings reports. As earnings become volatile, credit costs fall more in cyclical upswings and rise more in downturns.

Here’s more from Fitch Ratings:

As portfolios start to deteriorate and move to Stage 2 from Stage 1, banks will need to set aside provisions based on expected losses over the lifetime (tenor) of the exposures, compared with provisions on only 12 months’ worth of expected losses on low-credit-risk portfolios.

The effects of such downward migration will become more apparent during a downturn when more portfolios move from Stage 1 to Stage 2, leading to sharper jumps in credit provisioning costs compared with the previous standards. Conversely, the ECL may fall more during a cyclical upswing compared with the previous provisioning approach.

Singapore banks will also lose the smoothing effect of providing for collective allowances based on aggregate portfolio balances through earnings, independent of asset-quality cycles.

Furthermore, the methods to derive the ECL are also more complex and subjective than those under IAS 39. The impact on P&L is dependent on forward-looking estimates, projections or assumptions used.