Revised impairment method strengthens NIB’s balance sheet

NIB has revised its method for collective impairments. They are in the 2012 income statement in addition to the allowances for specific impairments.

“The credit quality of the Bank’s loan portfolio remains solid. NIB has revised its method for impairments with the aim of further aligning provisioning practices with market standards. This change will give investors additional protection and reflects the Bank’s cautious approach to carrying out its business,” says Jens Hellerup, Head of Funding and Investor Relations.

How do collective impairments work?

NIB regularly evaluates the need for impairments on its weakest exposures. Collective impairments are model-based provisions, made on a portfolio basis, reflecting, among other things, historical loss experience and expectations regarding developments in the macroeconomic environment. Under the IFRS accounting standard, collective impairments aim to reflect the loss events that have occurred with respect to assets in a portfolio, but have not yet been identified on an individual basis. The Bank makes collective impairments based on its internal risk-rating classes. In most cases, the exposures in these risk classes have experienced a negative rating migration due to deterioration in credit quality.

The risk class-based calculations largely rely on historical loss experience. The determination of the level of collective impairments includes management’s assessment of the current economic and credit conditions as well as the macroeconomic outlook.

In the Financial Statement for 2012, NIB records collective impairments of EUR 40 million. In the Bank’s view, this reflects the impact of the predicted economic conditions on the Bank’s loan portfolio.

What is the difference between collective and specific impairments and how are both interrelated?

Specific provisions are made when an individual loan is considered impaired, that is, when there is objective evidence that the loan is partially or wholly uncollectible. In 2012, the Bank made specific provisions of EUR 16 million.

On any exposures in certain internal rating classes, for which specific impairments have not been recorded, NIB will apply the collective impairment method going forward.

The main difference between the two types of impairments is that, for the specific impairments, an event needs to be objectively identified, while for the collective impairments, a more portfolio and model-based approach is applied. However, both records are interrelated, since once a specific impairment is recorded, the record for collective impairments will be reduced.

“With this revised method, NIB’s balance sheet has been further strengthened and we feel that NIB is living up to best practice and will be more resilient to volatility in the future,” says Mr Hellerup.