ALLOWANCE FOR CREDIT LOSSES Allowances for credit losses are maintained in response to identified and expected credit losses in the loan portfolio. The performing loan allowance (Stage 1 and 2), which is our most significant accounting estimate, consists of ECL for losses in the portfolio that are not presently identifiable on an account-by-account basis. The allowance for impaired loans consists of the amounts required to reduce the carrying value of individually identified impaired loans to their estimated realizable value. We establish estimates through detailed analysis of both the overall quality and ultimate marketability of the security held against each impaired account. At October 31, 2021, the total allowance for credit losses of $146 million consisted of $107 million for performing loans and $39 million related to impaired loans (Stage 3). One year ago, the total allowance for credit losses of $164 million consisted of $130 million for performing loans and $34 million related to impaired loans. The change in the allowance for credit losses compared to last year, with the allowance for impaired loans split by loan portfolio, is provided in the following table.
Table 13 - Allowance for Credit Losses ($ thousands)
2021 Opening Balance
Provision for (Recovery of) Credit Losses
2021 Ending Balance
Write-Offs, net of Recoveries (1)
Impaired loan allowance (Stage 3) General commercial loans
$
21,261 10,326
$
23,252
$
(17,432)
$
27,081
Equipment financing and leasing
(5,878)
1,139
5,587 5,224
Commercial mortgages
1,719
29,568
(26,063)
Personal loans and mortgages
829
1,811 1,839
(2,155)
485 920
Real estate project loans
- -
(919)
Oil and gas production loans
1
(1)
-
34,135
50,593
(45,431)
39,297
Performing loan allowance (Stage 1 and 2)
130,278
(23,725)
-
106,553
Total
$
164,413
$
26,868
$
(45,431)
$
145,850
Represented by: Loans
$
141,429
Committed but undrawn credit exposures and letters of credit (2)
4,421
Total
$
145,850
(1) Recoveries in fiscal 2021 totaled $12,669 (2020 – $6,147). (2) The performing allowance for credit losses related to committed but undrawn credit exposures and letters of credit is included in other liabilities on the consolidated balance sheets.
Performing loan allowance The performing loan allowance is estimated based on 12-month expected credit losses for loans in Stage 1, while loans in Stage 2 require the recognition of lifetime expected credit losses. The proportion of performing loans in Stage 2 was 9%, compared to 34% last year. The decline in Stage 2 loans compared to last year was primarily due to an improvement in current and forecast macroeconomic conditions. The relatively short duration of our loan portfolios limits the impact on our performing loan allowance when loans migrate between Stage 1 and Stage 2. Tangible security held and conservative loan-to-value ratios also decrease the overall sensitivity of our allowance for credit losses to changes in forecasted economic conditions. The performing loan allowance of $107 million decreased 18% from the prior year, primarily due to the impact of improving macroeconomic forecasts reflective of the ongoing economic recovery. The macroeconomic forecast in the current year, which is based on an average of the large Canadian banks’ macroeconomic forecasts, reflects a continued economic recovery, with no significant public health restrictions implemented in response to future waves of COVID-19 that would significantly curtail Canadian economic activity. GDP is forecast to continue to trend upwards in 2022, with a strong start to the year supported by high levels of consumer spending, followed by a tapering in the latter half of the year as pent-up consumer demand subsides. The labour market is expected to continue to strengthen, with unemployment rates expected to decline through 2022 to levels relatively consistent with pre-pandemic levels. Housing price growth is expected to cool in 2022, given challenges in affordability in some markets and enhancements to mortgage stress testing criteria. Oil prices are expected to remain relatively stable with current levels through the forecast period. For further details on the economic factors incorporated into the estimation of the performing loan allowance, see Note 7 of the consolidated financial statements for the year ended October 31, 2021. Key economic variables incorporated into our ECL models are inherently prone to volatility on a forward-looking basis. While economic conditions are expected to be less volatile than those experienced during the peak of the COVID-19 pandemic, rising inflation, the impact of more infectious variants of COVID-19 and the impact of the conclusion of government support programs on the Canadian economy could result in negative revisions to expected economic assumptions. Hindsight cannot be used, so while these evolving assumptions may result in future forecasts that differ from those used in the ECL estimation at October 31, 2021, those changes will be reflected in future periods. In estimating the performing loan allowance, we continue to supplement our modeled ECL to reflect expert credit judgments. These expert credit judgments account for the variability in the results provided by the models and consider the lagging impacts of typical credit cycles, where loan defaults occur in periods subsequent to the onset of a decline in macroeconomic conditions. These expert credit judgments also allow us to incorporate the estimated impact of the unprecedented levels of government stimulus and support programs, which cannot be modelled using historical data as they have not occurred in the past. Impaired loan allowance The allowance for impaired loans (Stage 3) was $39 million, compared to $34 million last year. Given the larger average exposure size within our commercial portfolios in comparison to personal loans, our impaired loan allowances and provisions for credit losses may fluctuate as loans become impaired and are subsequently resolved. In determining allowances for impaired loans, we establish estimates through detailed analysis of both the overall quality and ultimate marketability of the security held against each impaired account on a case-by-case basis.
CWB Financial Group 2021 Annual Report | 33
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