NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2023 278 WE ARE KENANGA LEADERSHIP MESSAGE VALUE CREATION MODEL KENANGA INVESTMENT BANK BERHAD ANNUAL REPORT 2023 51. FINANCIAL RISK MANAGEMENT (CONT’D.) (a) Credit risk (cont’d.) Impairment assessment (cont’d.) General approach (cont’d.) Measurement of ECL by General Approach: Stage 1 - For financial instruments in stage 1, the Group and the Bank are required to recognise 12 month ECL. For financial instruments that are deemed as low credit risk, 12 month ECL is recognised. Stage 2 - When a financial instrument transfers to stage 2, the Group and the Bank are required to recognise lifetime ECL. Stage 3 - For financial instruments in stage 3, the Group and the Bank will continue to recognise lifetime ECL but based on specific provision approach. The ECL under general approach can be written in the formula below: ECL = PD x LGD x EAD Key Components of ECL Measurement Probability of Default (“PD”) PD is an estimate of the likelihood of default over a given time horizon. It is estimated as at a point in time. The calculation is based on the internal credit risk rating model, comprising both quantitative and qualitative factors. The estimation is based on current conditions, adjusted to take into account estimates of future conditions that will impact PD. The Bank adopted external PD published by local rating agency i.e. RAM Rating Services Berhad (“RAM”) as proxy, following adequate assessment and analysis on the suitability of data application i.e. rating mapping exercise due to lack of sufficient size and history.
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