301 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2025 06 / FINANCIAL STATEMENTS 01 02 03 04 05 07 08 09 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 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 has 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. through a rating mapping exercise due to the lack of sufficient size and history of internal data. The rating mapping exercise involves the process whereby the Group’s and the Bank’s existing Internal Credit Risk Rating (“ICRR”) is mapped against the RAM rating. The Group and the Bank assess the definition of each ICRR rating band and make reference to the definition of the 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 is rated ‘D’ upon default. For unrated corporate loans, a default rating of ‘BBB2’ is applied (as per existing computation). Details on mapping between the Group’s and the Bank’s ICRR and the external ratings are presented in Note 51(a)(i).
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