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 291 290 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.) 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 from 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. 51. FINANCIAL RISK MANAGEMENT (CONT’D.) (a) Credit risk (cont’d.) Impairment assessment (cont’d.) Period over which ECL is measured The Group and the Bank measure ECL considering the risk of default over the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if contract extension or renewal is common business practice. However, for financial instruments such as revolving credit facilities that include both a loan and an undrawn commitment component, the Group's and the Bank’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the Group's and the Bank’s exposure to credit losses to the contractual notice period. For such financial instruments, the Bank measures ECL over the period that it is exposed to credit risk and ECL would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. These financial instruments do not have a fixed term or repayment structure and have a short contractual cancellation period. Significant increase in credit risk ("SICR") SICR is defined as a significant change in the estimated default risk over the remaining expected life of the financial instrument. A SICR event triggers the measurement of loss allowance at an amount equal to lifetime ECL instead of the 12-month ECL estimate. The indicators for SICR are established to facilitate the staging assessment (from stage 1 to 2) for portfolios that apply the general approach in the measurement of ECL. An asset moves from 12-month ECL (stage 1) to lifetime ECL (stage 2) when there is a significant deterioration in credit quality after initial recognition. In assessing whether the credit risk of an asset has significantly increased, the Group and the Bank take into account qualitative and quantitative reasonable and supportable forward looking information. An asset classified under stage 2 can potentially be transferred to stage 3 if the credit quality deteriorates further. It is also possible that an asset classified under stage 1 experiences drastic credit deterioration and requires to be directly transferred to stage 3. Accordingly, different stage transfer criteria/triggers are established to satisfy the mentioned staging assessment. The assessment of SICR incorporates forward-looking information and is performed on a quarterly basis at a portfolio level for all the above portfolios. The criteria used to identify SICR are monitored and reviewed periodically for appropriateness by the Group Risk Management. Grouping financial assets measured on a collective basis Asset classes where the Bank calculates ECL on a collective basis include: - Debt instruments at fair value through other comprehensive income - Debt instruments at amortised cost - Loans, advances and financing - Balances due from clients and brokers - Other receivables
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