Banks at risk of higher credit losses due to COVID 19 – PwC report
Auditing firm, PwC is predicting that the COVID 19 pandemic which has affected the global economy might lead to higher credit losses for the banking sector.
This they believe would impact negatively on overall asset quality, capital and liquidity in the sector.
With the economic slowdown, the firm also noted that there was a heightened risk of banks reducing their fees and trading income which would put pressure on their net interest income.
This was contained in its report on COVID 19 and its impact on the Ghanaian banking industry.
It also pointed out that the pandemic may lead to cybersecurity breaches, operational constraints of keeping employees safe and meeting customer expectations, while IT and other support services might also deteriorate due to internal challenges or vendor problems.
Measuring expected credit losses (ECLs)
While the uncertainties arising from COVID-19 are substantial and circumstances are sure to change, the firm said it expected this to preclude banks from estimating their expected credit losses (ECLs).
“Estimating ECLs is challenging, but that does not mean it is impossible to estimate an impact, based on the reasonable and supportable information that is available.”
Identifying significant increases in credit risk (SICR)
The report also noted that a key element in determining ECL was the assessment of whether or not a significant increase in credit risk has occurred, and hence whether a lifetime, rather than 12-month, ECL is required.
“In many cases and in particular in Q1 2020, it is unlikely that banks will have sufficient timely data to update loan-level probabilities of default, which are often a core element of assessing SICR.”
“To help borrowers cope with the financial consequences of COVID-19, many banks and governments have announced various types of relief programmes that involve payment holidays.”
Government relief programmes
Many governments, central banks and other agencies are developing programmes to provide economic support.
“Where this intervention is made through the banking system (e.g. by providing funding or guarantees to banks at potentially advantageous rates or terms), a key accounting consideration is whether an element of the transaction is a government grant,” the report noted.