Abstract
Banks play a critical function in the economy and bank regulation is fundamental to providing a stable banking and financial sector. IFRS 9 is a relatively new accounting standard for financial instruments that was released by the IASB in July 2014 to replace IAS 39. IFRS 9 requires an earlier and more accurate recognition of impairment of loans, based on the forward-looking expected credit loss model, to reflect the true economic value of the loans.
IFRS 9 will have an impact on accounting for loan provisions, decision-making, and processes for collection of forward-looking information, and is expected to have a significant impact on the financial results reported by banks at date of initial application and going forward. This study aimed at analysing the impact of the initial adoption and post application of the ECL model on the regulatory capital and credit risk of the five biggest banks in South Africa. The research sought to determine how adopting the ECL provisioning model has affected the regulatory capital adequacy, specifically the CET1 ratio, and credit risk of the banks.
The objective of the study was achieved through interpretative content analysis of the Annual Financial Statements and IFRS 9 transitional reports of the banks sampled. A mixed methods approach was applied using both quantitative and qualitative information extracted from these reports. The numerical data was used to compute ratios (capital adequacy and credit risk ratios). The statistical analysis of the ratios and numerical discussions of figures presented constitute the quantitative approach. The interpretation of the ratios as well as the analysis of disclosures of financial information constitutes the qualitative approach.
The findings of the study show that all five banks reported a marginal decrease in total equity at date of initial application. The average decrease for all five banks in the CET1 ratio on DIA was 26 basis points, after the phase-in of the SARB Directive 5/2017. A significant decrease in equity and capital ratios was also noted during the COVID-19 pandemic period in 2020 (post-application of IFRS 9). There was a significant increase noted in the total impairment provisions in the balance sheet for all banks on date of initial application. For the four-year period post application of IFRS 9, there was an increase in total impairment provisions during the COVID-19 pandemic period.
This study contributes to research relating specifically to South African banks and it highlights the impact of the ECL model on the regulatory capital and credit risk of the banks selected. The study recommends that for future studies more such reviews be performed for smaller banks in South Africa and further research should monitor the long-term effects of applying the ECL model as this study only reviewed the first four years for the five largest banks in South Africa.