UNITY BANK LIMITED 2022 Financial Report UNITY BANK LIMITED 2022 Financial Report
ABN 11 087 650 315
ABN 11 087 650 315
Key assumptions in determining the ECL (Expected Credit Loss)
Covid-19 Pandemic Included within Provisions for Impairment is a portfolio ECL component in recognition for the continued impact of the COVID-19 pandemic on the collective provision as at 30 June 2022. The base case scenario was re-modelled based on the facts and circumstances existing as at 30 June 2022 and forecasts of future economic conditions and supportable information that was available at that date and includes significant management judgement. Based on the information available as at 30 June 2022, the base case scenario was modelled primarily across the Australian region but with a continuing economic impact across the globe. Forward-looking economic assumptions in the model include a fall in GDP and an increase in unemployment to 10% per cent. Credit deterioration in the lending portfolio was modelled assuming an increase in the internal customer risk rating, higher probability of default (PD) estimates and an increase in Loss Given Default (LGD) values.
Measurement of ECL The key inputs into the measurement of the Bank’s ECL include the following variables:
• probability of default (PD) • loss given default (LGD) • exposure at default (EAD); and • discounting. These parameters are generally derived from internal analysis, management judgements and other historical data. They are adjusted to reflect forward-looking information as described below. PD estimates are calculated based on arrears over 90 days and other loans and facilities where the likelihood of future payments is low . The definition of default is consistent with the definition of default used for internal credit risk management and regulatory reporting purposes. Instruments which are 90 days past due are generally considered to be in default. For portfolios in respect of which the Bank has limited historical data, external benchmark information is used to supplement the internally available data. The portfolios for which external benchmark information represents a significant input into measurement of ECL are as follows: • Mortgages by LMI and LVR – APRA scale of residential property in Australia used as a guide for LGD and PD rates LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD percentage applied considers the structure of the loan, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For loans secured by retail property, Loan to Value Ratios (LVR) are a key parameter in determining LGD. LGD estimates are recalibrated for different economic scenarios and, for real estate lending, to reflect possible changes in property prices. EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortization. The EAD of a financial asset is its gross carrying amount. For lending commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations and future expectations. Where appropriate, in calculating the ECL, future cash flows are discounted at the original effective interest rate of the exposure.
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