ALLOWANCE FOR CREDIT LOSSES Allowances for credit losses are maintained in response to identified and expected credit losses (ECL) in the loan portfolio. The performing loan allowance (Stage 1 and 2), which is our most significant accounting estimate, consists of expected credit losses 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, 2022, the total allowance for credit losses of $167 million consisted of $120 million for performing loans and $47 million related to impaired loans (Stage 3). One year ago, the total allowance for credit losses of $146 million consisted of $107 million for performing loans and $39 million related to impaired loans. The change in the allowance for credit losses compared to last year, with the allowance for impaired loans split by loan portfolio, is provided in the following table.
Table 13 - Allowance for Credit Losses ($ thousands)
2022 Opening Balance
Provision for (Recovery of) Credit Losses
2022 Ending Balance
Write-Offs, net of Recoveries (1)
Impaired loan allowance (Stage 3) General commercial loans
$
27,081
$
16,161
$
(10,773)
$
32,469
Equipment financing and leasing
5,587 5,224
3,302
(2,101)
6,788 6,734
Commercial mortgages
12,932
(11,422)
Personal loans and mortgages
485 920
302
(647)
140 560
Real estate project loans
(477)
117
Oil and gas production loans
-
(69)
69
-
39,297
32,151 13,884
(24,757)
46,691
Performing loan allowance (Stage 1 and 2)
106,553
-
120,437
Total
$
145,850
$
46,035
$
(24,757)
$
167,128
Represented by: Loans
$
161,818
Committed but undrawn credit exposures and letters of credit (2)
5,310
Total
$
167,128
(1) Recoveries in fiscal 2022 totaled $5,858 (2021 – $12,669). (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 20%, compared to 9% last year. The increase in Stage 2 loans primarily reflects a deterioration in the forward- looking macroeconomic forecast, due to an anticipated decline in housing prices, significantly higher mortgage interest rates and higher expected unemployment rates, rather than a deterioration of borrower-specific credit quality. The performing loan allowance of $120 million increased 13% from the prior year, primarily due to a deterioration in the forward-looking macroeconomic forecast, associated with anticipated lower GDP growth, worsening housing prices and higher unemployment rates. The macroeconomic forecast in the current year, which is based on an average of the large Canadian banks’ macroeconomic forecasts, reflects a slowdown in the economic recovery and the potential for recessionary conditions to arise. GDP growth in 2023, while expected to remain positive, is forecast to moderate as the impact of elevated inflation and commodity prices, supply chain pressures and the full year impact of rapid increases in interest rates will likely negatively affect business and consumer spending and subsequently limit the potential for expanded economic growth. The labour market is also expected to cool, with unemployment rates expected to increase through 2023. A moderate to sharp decline in housing price growth is expected in 2023, and reflects the impact of the rapid increase in policy interest rates in 2022. 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 6 of the audited consolidated financial statements for the year ended October 31, 2022. Key economic variables incorporated into our ECL models are inherently prone to volatility on a forward-looking basis. Measures to curtail inflation, global geopolitical uncertainty 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, 2022, 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. Impaired loan allowance The allowance for impaired loans (Stage 3) was $47 million, compared to $39 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 2022 Annual Report | 31
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