BIMB Integrated Annual Report 2017

CORPORATE GOVERNANCE OVERVIEW STATEMENT As at December 2017, the Group’s allowance for impairment was more than adequate. However, the implementation of MFRS 9, which came into effect from 1 January 2018 is expected to have an adverse impact on the entire banking industry and the Group is no exception. The impact on Bank Islam’s Total Capital Ratio is 30 basis points due to Day One adjustment of MFRS 9. To maintain the existing strong capital ratios, Bank Islam issued the third tranche of the subordinated Sukuk Murabahah amounting to RM300 million on 13 November 2017. Malaysian Financial Reporting Standards 9 MFRS 9 had replaced the guidance in MFRS 139. The Standard requires changes in the way impairment allowances are computed. Impairment allowances are to be computed in anticipation of future losses rather than the previous practice of recognising impairment only when the financing has been classified as impaired. This means impairment allowances have to be provided even for new financing as well as undrawn facilities. In preparation for the MFRS 9 implementation, the AEC has been briefed on the proposed approach to be adopted and methodology to be applied in the implementation. Bank Islam and Syarikat Takaful Malaysia Berhad (“ Takaful Malaysia ”) have appointed the same external consultants to assist in the implementation of MFRS 9. As part of its oversight role over the implementation of MFRS 9, AEC has reviewed the progress update reports as well as the financial impact reported to BNM. Collective Impairment Allowances As at end December 2017, the Group’s collective impairment allowances made up 78% (2016: 81%) of the total allowances for impairment. In computing the BHB Group’s collective impairment allowances, there is in place a process to appropriately group the lending exposures based on similar risk characteristics. The basis of grouping lending exposures into portfolios with similar credit risk characteristics include asset type, industry, geographical location, collateral type, past-due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparty’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. A multi-dimensional vintage analysis is done on each of the asset portfolios and the historical loss experience is adjusted based on current observable data to reflect the effects of current conditions. Also removed are the effects of conditions in the historical period that do not currently exist. Impairment allowances are provided based on the revised loss experience. Individual Impairment Allowances Significant financing, that is, total financing outstanding of RM1 million or more are assessed individually. A financing asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment. For individually assessed financing, objective evidence of impairment exists if the borrower has significant financial difficulty, if there is a breach of contract, if it becomes probable that the borrower will enter bankruptcy or other financial reorganisation or if there is consecutive downgrade of two notches for external ratings. If any such objective evidence exists, then the impairment loss of the financing asset is estimated. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective profit rate. In estimating the future cash flows, judgements are made about the realisable value of the collateral pledged and the borrower’s financial position. The BHB Group also proactively monitors and identifies financing that show signs of stress and could potentially become impaired. The account management officers engage with such customers to advise, restructure and reschedule these accounts based on economic viability. The estimated future cash flows of these accounts are also reassessed and any shortfalls in impairment allowances are immediately provided for. As at December 2017, the Group’s collective impairment provision of 1.2% was in line with BNM requirement. The Group also has sufficient financing loss buffers with financing loss reserves at 160.0% against industry average of 82.9%, reflecting its prudent provisioning practices. In addition, the Group’s impaired financing ratio as at end of 2017 was at 0.93% against the banking industry’s gross impaired ratio of 1.53%. 118 BIMB HOLDINGS BERHAD Integrated Annual Report 2017