- Recap on latest guideline on treatment on rescheduled and restructured (R &R) loans. Recall that the latest guideline requires a rescheduled and restructured loan to be classified as a restructured and restructured facility in the centralised Central Credit Reference Information System (CCRIS). We understand that previously, it was not necessary to classify a rescheduled or restructured loan as such in the CCRIS. In addition, a banking institution will be required to classify a loan/financing as impaired when the loan is classified as rescheduled and restructured in CCRIS. Previously, a rescheduled and restructured loan may not be classified as impaired, depending on the credit reassessment of the borrower. This takes effect for any new R & R loan from 1 April 2015.

- Our expectations of changes to credit risk grading. While there are some indications that loan loss provisioning will still depend on the sufficiency of collaterals, we believe that the change in status from performing to non-impaired loan status will likely lead to a change in credit grading for the borrower.

- This may change loan loss provisioning assumptions. This may result in changes to the probability of default (PD), and loss given default (LGD) data for the portfolio. Thus, this is likely to lead to changes to the collective assessment (CA) rate, which is usually based on PD and LGD rolling data for the past five years.

- We expect some increases in loan loss provisioning expense, and consequently credit costs. In a nutshell, we expect the change in CA to eventually lead to higher loan loss provisioning expense and credit costs. To recap, the CA assessment rate determines the loan loss provisioning expense.

- Positive measure that is likely to boost confidence in book value. Although there may be short-term impact to impaired loans, loan loss provision and credit costs, we believe the latest measure is positive for the industry, as it promotes further transparency. More importantly, we believe that it will likely boost confidence in book value, and stronger rerating in the longer term for the industry.

Source: AmeSecurities Research - 29 Apr 2015