Komplett Bank annual report 2019

Category according to IFRS 9 Key financial assets Criterion for classification in the category and accounting treatment for such assets The Bank has in Q4 2019 revised its methodology for estimating LGD, by switching from an LGD based on portfolio sales to third parties, to applying expected future cash flows from defaulted loans. These expected cash flows are based on the Bank’s own records to the extent that this is available as well as estimates from third parties with experience from similar portfolios. The Bank has decided to apply expected repayments for 15 years from the time of default. Given the Bank’s relatively short track history and limited experience data, there will be some degree of uncertainty for the cash flow estimates. The present value of the cash flows is computed by discounting these with the exposures’ effective interest rates. The loss is then computed as the difference between the book value of the asset at the time of defaulting and the discounted value of the future expected cash flows. In 2020, the Bank entered into a forward flow agreement for the sale of defaulted consumer loans Norway. The terms of the agreement stipulate that 80%of the remaining balance at 180 days after transfer to the DCA will be sold for a determined amount. The Bank has considered the effects this agreement has on its expected cash flows when calculating delinquencies for Norway as at 31 December 2019. The effects did not have a significant impact on the Bank’s calculation of expected credit losses. The agreement has a duration of 12 months. When calculating the expected credit losses in stage 1 and 2, the Bank is discounting these losses to the balance sheet date, using the effective interest rate as the discount rate. The Bank is estimating the time for when the expected loss is foreseen to take place in order to determine the duration of the discounting. The Bank’s exposure at the time of default is in the model restricted to concern the loans that are not past due. The Bank revokes automatically unutilised credit lines once the loan is past due. For loans not being past due, the Bank is estimating expected credit limit utilisation based on historical data. This applies to all products where the client has the possibility to draw on unutilised credit limits. The Bank is also applying forward looking elements for its credit loss model. The Bank’s overall losses are adjusted by considering a certain set of macro-economic variables. The credit losses are adjusted on a portfolio basis, and are based on the expected development of the economies in the countries in which the Bank is offering loans. The macro-economic variables are not utilised to transfer loans among the various stages. The Bank is applying three sets of indicators fromOECD to the expected credit loss models for the respective countries: 1) the expected development in the unemployment rate, 2) the growth in the gross domestic product and 3) the short-term interest rate level. The Bank applies three scenarios when considering the macro-economic adjustment: a positive outlook, a neutral outlook and a negative outlook. The Bank assigns a probability and weight to these scenarios based on the expectations for the macro- economic situation. There is uncertainty related to the estimates as they are forward-looking. The Bank considers that the Norwegian macro-economic variables are favourable, and has on that basis determined an adjustment of the losses with a factor of 87%. The Finnish variables are also considered as being positive for the Bank’s credit loss levels and are adjusted with a factor 92%. The Bank considers that the Swedish outlook is somewhat weaker, and has as a consequence increased the expected credit losses with a factor of 123%. In 2018, the Bank applied a factor of 95% for all of its products. The Bank has developed and implemented a set of internal control measures that contributes to validate the input data which are used in the impairment model. The Bank will in 2020 work further on implementing validation tools in order to ensure that the estimates and conditions on which the model is based, work as intended. The Bank does not use the simplification rules for loss impairment for which the IFRS 9 framework allows. This means that the Bank does not use the exemption for low credit risk or simplifications linked to 12-month probability of default (PD). Losses on loans in the statement of profit and loss In the statement profit and loss, the itemLosses on loans consists of the book value of realized loan losses, the difference between the book value and the real value of the consideration for the sale (portfolio sale), payments that are received on loans that have previously been impaired and changes to the impairments of loans. The effect of IFRS 9 on capital adequacy As of the date of implementation (1 January 2018), the effect of the transition from IAS 39 to IFRS 9 was an increase in loss impairments of NOK 157.8million. After tax effects, this resulted in a reduction in equity of NOK 118.4million. Komplett Bank has not restated the comparative figures to conform to the IFRS 9 standard. The Bank uses the transition rules published by the EU, which permit the gradual phasing-in of the effects that IFRS 9 will have on the Bank’s capital adequacy. In 2018, 5%of the transitional effect was recognised in line with the transitional rules and a further 10% in 2019. The Bank expects an additional 15%of the transitional effect to be recognised in 2020, while the corresponding figures for subsequent years are expected to be as follows: 20% (2021) and 25% (2022). The transition rules will be fully phased in at the beginning of 2023. 44 Notes to the financial statements