KENANGA INVESTMENT BANK BERHAD INTEGRATED ANNUAL REPORT 2024 WE ARE KENANGA OUR SUSTAINABILITY APPROACH LEADERSHIP STATEMENT HOW WE ARE GOVERNED SHAREHOLDERS’ INFORMATION NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2024 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2024 FINANCIAL STATEMENTS ADDITIONAL INFORMATION OUR VALUE CREATION APPROACH 289 288 51. FINANCIAL RISK MANAGEMENT (CONT’D.) (a) Credit risk (cont’d.) Impairment assessment (cont’d.) General approach - Stage 1 covers financial instruments that have not deteriorated significantly in credit quality since initial recognition or (where the optional low credit risk simplification is applied) that have low credit risk. - Stage 2 covers financial instruments that have deteriorated significantly in credit quality since initial recognition (unless the low credit risk simplification has been applied and is relevant) but that do not have objective evidence of a credit loss event. - Stage 3 covers financial instruments that have objective evidence of impairment at the reporting date. Low Credit Risk The Group and the Bank shall adopt practical expedients for its applicable portfolios as detailed in the table below: Practical Expedient Low Credit Risk Applicable portfolio Government and quasi-government bonds, commercial paper, interbank deposit placement/lending. Criteria • the financial instrument has a low risk of default; • the borrower has a strong capacity to meet its contractual cash flow obligations in the near term; and • adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfill its contractual cash flow obligations. Measurement 12-month ECL Methodology PD x LGD x EAD formula Definition of 12-month ECL 12-month ECL are a portion of the lifetime ECLs that represent the ECLs that resulting from probable default events on a financial instrument occurring in the next 12 months. They are weighted by the probability of such a default occurring. 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. 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).
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