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Are GCC banks prepared for the new upcoming accounting standard IFRS9?

Are GCC banks prepared for the new upcoming accounting standard IFRS9?

The new reporting standard will impact banks’ financial statements.

International Financial Reporting Standard 9 (IFRS 9) replaces International Accounting Standard 39 (IAS 39) in the next two years and is expected to have a major impact on banks’ financial statements.

IFRS 9 will cover financial institutions across Europe, Middle East, Asia, Africa, and Oceania. The compliance deadline for all the banks would be January 2018.

What exactly is IFRS9’s mandate and how has it changed from the existing IAS39?

IFRS9 addresses three main aspects – classification of assets, measurement of the losses and hedge accounting. In the recent changes it will align classification and measurement of the losses with the bank’s business model, cash flows and future economic scenarios.

For hedge accounting, IFRS9 mandates newer disclosure requirements to connect accounting with the bank’s risk management activities in greater detail.

The key change in rule is that banks now need to be “forward looking” in estimating their loan losses. Lenders need to develop models that take into account current and future economic scenarios. They can no longer keep loss reserves on an as-is basis or based on some pre-determined percentage.

How much will banks in the Middle East be impacted by this change?

According to Deloitte’s fourth Global IFRS9 survey that covered 54 banks from Europe, Middle East, Africa, Asia Pacific and the Americas, banks will require three years to implement IFRS 9, so will come under pressure with a 2018 effective date.

While 56 per cent of banks surveyed felt that pricing would be affected by accounting change, 70 per cent anticipated that their IFRS 9 expected loss would be higher than current regulatory expected loss.

Regionally, most Gulf Cooperation Council banks have been able to keep a very satisfactory amount of loss reserves, well above their respective Central Bank mandates.

The banks here are well capitalised too. So does that mean that this accounting change will not affect the regional lenders?

In the long run the answer is no. Loss reserving is an ongoing process adding the net amount every month to an existing stock. The idea is to compute the ongoing net loss in an accurate manner. Banks in the Middle East might find the initial impact on their reserve to be less threatening but with time the gaps will close.

In order to assess this, most of the banks in the GCC are engaging with auditors. The engagements cover a complete assessment of the asset books and the possible impact of these changes in classification and loss calculation.

Kuwait, Bahrain and Qatar have completed these assessments and the same is being done in Saudi Arabia, Oman and the United Arab Emirates. The next steps for the banks will be to plug their data and technology gaps in order to make this new calculation method business as usual. In 2016, the region should see a significant amount of efforts and investments to address these challenges.

What are the challenges and what should banks do?

Banks will face data, modelling, reporting and infrastructure challenges in terms of enhancing coordination across their finance, risk, and business units; integrating and reconciling risk and finance information; gathering and maintaining historic data that will be required for the forward looking losses; and mitigating the lack of reliable macroeconomic indicators.

Lenders need to quickly put in place a comprehensive plan to address all of these issues so that they can meet the deadline.

Addressing these challenges effectively will enable boards and senior management to make better-informed decisions, proactively manage provisions and effects on capital plans, make forward-looking strategic decisions for risk mitigation and help in understanding the evolving nature of risk in the banking business.

In the end, a thoughtful, repeatable, consistent capital planning and impairment analysis should lead to a more sound, lower-risk banking system with more efficient banks and better allocation of capital in the GCC region.

Sayantan Banerjee is practice head of Risk Management at SAS Middle East, Africa, and Turkey

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