Banks may face higher credit cost under IFRS-9.

KARACHI -- The method that banks use for calculating their expected credit cost will change under the revised set of accounting standards that may lead to a higher expAense for commercial lenders in the medium term.

Speaking to Dawn on Thursday, JS Global Capital Ltd Head of Research Amreen Soorani said banks will start reporting their loss expectations on investments and loans under the new accounting requirements of the International Financial Reporting Standards (IFRS)-9 from the first quarter of 2023.

In non-technical terms, the credit cost represents the increase or decrease in the stock of a bank's non-performing loans (NPLs) as a percentage of its loan book.

For example, the credit cost of a bank would be two per cent (200 basis points) if NPLs increased from Rs10 to Rs12 on a yearly basis for total loans of Rs100.

Rising NPLs reduce a bank's interest income and lowers its profitability. 'In our base-case estimates (for bank earnings), we've incorporated a higher credit cost this year,' said Ms Soorani.

Under the current accounting practices, a bank takes provisions on its bad loans. But the new accounting standards require every bank to come up with probabilities for its entire loan book.

'In the most likely case, banks' credit cost will go up. But nothing can be said for sure until we see the next quarterly accounts,' she said. With the implementation of IFRS-9 from this year, banks will classify their loss expectations under different categories. They'll assign a probability to compute the expected credit loss (ECL) based on 'forward-looking scenarios'.

Each bank will be required to build and use statistical models for the Probability of Default (PD), Loss Given Default (LGD) and Exposure At Default...