KENANGA ANNUAL REPORT 2020

261 ANNUAL REPORT 2020 // KENANGA INVESTMENT BANK BERHAD 50. 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 expected credit loss 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 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. Malaysia Rating Corporate Berhad (MARC) 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. Loss Given Default (LGD) 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 MARC rating for the same counterparty. The Group and the Bank assess the definition of each ICRR rating band and makes reference to the definition of MARC 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 category 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 the Bank’s internal credit risk grades to external ratings are presented in Note 50(a)(i). 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 Bank would expect to receive, taking into account cash flows from any collateral.