Banks in the Eurozone are lagging behind their peers in terms of asset quality. In our on-demand webinar, Irakli Pipia, director – senior research analyst from Moody’s Analytics explores how to analyze bank asset quality from three perspectives: balance sheet, income statement and equity, as well as the impact of the new IFRS9 accounting standard*.
Pipia’s presentation generated a wide range of questions which he answers below.
*All of the ratios described by Pipia can be analyzed using Moody’s Analytics BankFocus.
Audience question: If you had to select one asset quality ratio, which one would it be?
Pipia: I would look at impaired loan ratio from the balance sheet, the cost of risk from the income statement, and from the equity perspective, I would look at the unreserved impaired loans as a percentage of equity. But rather than looking at them as individual ratios, look at them as a composite and then draw your conclusions based on analysis of the three ratios together.
Audience question: Can you construct a similar analysis in BankFocus, and can we select alternative asset quality definitions?
Pipia: Yes, you can look at different asset quality definitions as well as construct your own analysis in BankFocus. National formats in the product have a lot of granular data, particularly on overdue loans. Whenever banks publish this data it is normally in the National format. Additionally, there are other asset quality ratios in the Global Detailed format which I did not present today that can be used.
Audience question: When measuring recoveries on impaired loans, if banks write off quickly and recover post-write off, are there limitations in the analysis or data transparency?
Pipia: Yes, there are limitations because not all banks report recoveries in the same way. Some regulators encourage banks to keep non-performing loans on the balance sheet. Others may encourage quicker write downs. Some banks have used special purpose vehicles to clean up the balance sheet in the aftermath of the financial crisis. I would consider impaired loan trends for these institutions on a case-by-case basis.
Audience question: I assume that in your analysis you considered non-performing loans and impaired loans as one thing? However, I understand that one is an accounting term and the other is regulatory term.
Pipia: Correct, in our analysis we used impaired loans as a proxy of non-performing loans.
Audience question: How would you analyze restructured loans and are they just evergreening of non-performing loans or loans that are still economically viable?
Pipia: One can include restructured loans in the “expanded” definition of impaired loans, as we did on slide 8 of the presentation. However, these need to be analyzed on a case-by-case basis after understanding the policies of restructuring applied by banks, given that such restructuring policies can vary significantly among different institutions.
Audience question: After the market-wide implementation of IFRS 9, which markets observed in your presentation will show the highest growth of impaired loans?
Pipia: We will follow up with a research piece in early 2019 on that topic after seeing full IFRS 9-based end-of-the-year results.
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