Assessment of Significant Increases in Credit Risk The determination of whether a loan has experienced a SICR has a significant impact on the estimation of allowance for credit losses as 12-month ECL is recorded for loans in Stage 1 and lifetime ECL is recorded for loans that have migrated to Stage 2. Movement between Stages 1 and 2 is impacted by changes in borrower-specific risk characteristics, which take into account applicable forward-looking information. The main factors considered in assessing whether a loan has experienced a SICR are relative changes in internal risk ratings since initial recognition incorporating forward-looking information, and certain other criteria such as 30 days past due or migration to watchlist status. Forecasting Forward-looking Information Forward-looking information is incorporated into both the assessment of whether a loan has experienced a SICR since its initial recognition and the estimation of ECL. The models used to estimate ECL consider macroeconomic factors that are most closely correlated with credit risk in the relevant portfolios and are calibrated to consider our geographic diversification. The three forward-looking macroeconomic scenarios described below reflect information and facts available to us as at October 31, 2023. The base scenario reflects our best estimate, and the upside and downside scenarios are reasonably possible scenarios that are more optimistic or pessimistic. The base scenario reflects relatively stable economic conditions with slow but positive GDP growth, a minor drop in house prices, and interest rates holding relatively steady. The downside scenario reflects the risk of a contraction to the economy with negative GDP growth and a more significant drop in new house prices. The upside scenario reflects a stronger economy with steady GDP growth, a small increase in new house prices.
The primary macroeconomic variables, for the next year and the remaining forecast period thereafter, used to estimate ECL are as follows:
Downside
Upside
Base
Remaining Forecast Period
Remaining Forecast Period
Remaining Forecast Period
October 31 2024
October 31 2024
October 31 2024
Macroeconomic Variable
GDP growth, year over year
(3) %
1 %
2 %
2 %
1 %
2 %
Unemployment rate
7
7
6
6
6
7
Three-month treasury bill rate
2.98
1.69
5.50
3.24
4.20
2.79
New Housing Price Index, year over year
(3)
2
2
2
-
2
5 Year fixed mortgage interest rate
5
5
7
6
6
5
Oil Exports, year over year
(7)
7
39
14
14
11
The primary macroeconomic variables impacting ECL for personal loan portfolios are GDP, New Housing Price Index, and residential mortgage interest rates. Business portfolios are impacted by all of the variables in the table above, to varying degrees. Increases in unemployment rates and interest rates will generally correlate with higher ECL while increases in annual gross domestic product (GDP) growth, oil exports, and New Housing Price Index will generally result in lower ECL.
We weight each scenario based on our view of the probability of each scenario, and the impact of weighting these scenarios increased our ECL on performing loans by $8 million relative to the base scenario, at October 31, 2023.
Stage 3 Allowance for Credit Losses
For impaired loans in Stage 3, the allowance for credit losses is measured for each loan as the difference between the carrying value of the loan at the time it is classified as impaired and the present value of the cash flows we expect to receive, using the original effective interest rate of the loan. When the amounts and timing of future cash flows cannot be reliably estimated, either the fair value of the security underlying the loan, net of any expected realization costs, or the current market price for the loan may be used to measure the estimated realizable amount. Security can vary by type of loan and may include real property, working capital, guarantees, or other equipment.
CWB Financial Group 2023 Annual Report | 79
Powered by FlippingBook