NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2023 279 OUR SUSTAINABILITY APPROACH HOW WE ARE GOVERNED FINANCIAL STATEMENTS SHAREHOLDERS’ INFORMATION ADDITIONAL INFORMATION 51. FINANCIAL RISK MANAGEMENT (CONT’D.) (a) Credit risk (cont’d.) Impairment assessment (cont’d.) General approach (cont’d.) Key Components of ECL Measurement (cont’d.) The rating mapping exercise involves the process whereby the Group’s and the Bank’s existing Internal Credit Risk Rating (“ICRR”) is being mapped against RAM rating. The Group and the Bank assess the definition of each ICRR rating band and makes reference to the definition of RAM rating band. Overall, both the rating models have the same rating band i.e. AAA, AA, A, BBB, BB, B, C & D with BBB as the lowest investment grade and BB and below as non-investment grade. The detailed rating characteristic for each rating band is similar in which AAA indicates superior or extremely high repayment capability and will be rated ‘D’ upon default. For unrated corporate loans, a default rating of ‘BBB2’ is applied (as per existing computation). Details on mapping of the Group’s and of the Bank’s ICRR to the external ratings are presented in Note 51(a)(i). Loss Given Default (“LGD”) LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the Group and the Bank would expect to receive, taking into account cash flows from any collateral. Exposure at Default (“EAD”) EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities. Simplified approach The Group and the Bank shall adopt two practical expedients for their applicable portfolios as detailed in the table below: Practical Expedient Provision Matrix Applicable portfolio Trade receivables, contract assets and lease receivables, balances due to clients and brokers. Criteria • Contract assets without significant financing component • Trade receivables without a significant financing component Measurement Lifetime ECL Methodology Based on the ‘age’ of receivables i.e. ageing bucket Definition of Lifetime ECL Lifetime ECL are the losses that result from all possible events of default at any point during the expected life of the financial instrument. Measurement of ECL by Simplified Approach For financial instruments that apply the provision matrix, ageing bucket based on definition of default is established and incorporates the forward-looking element.
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