Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
53. Credit risk measurement
The Group monitors exposures to identify signs of weakness in customer earnings and liquidity as soon as possible. On the basis of customer data,
the Group has developed internally a number of statistical models to predict the probability of customers defaulting on their obligations to the
Group, as defined in the internal rating based approach of the Basel II framework. Customers of the Group are assigned to a rating grade on the
internal rating scale on the basis of the estimated probability of default. Work to validate and improve the Group’s internal rating system started in
2010 and will continue in 2011, with the objective to ensure compliance with the internal rating based approaches, starting with the foundation
approach.
Supplemental to using ratings, the Group uses a second classification for customer groups with loan exposures above ISK 500 million. A simple
means of classification was devised initially, creating three credit risk groups (green, amber and red), which were used from the foundation of the
Bank in 2008 until 2010. Following changes in the structure of the Risk Management Division in 2010 and the implementation of a credit risk early
warning system, the colour classification used in 2010 was the following:
• Green customers are those that are considered performing without difficulties.
• Yellow customers are those that are on Watch list 1, which have temporary difficulties and may need some installments postponed or modification
to terms or loan covenants.
• Orange customers are those that are on Watch list 2. They are still under the supervision of the relevant business unit but are likely to go through
loan restucturing or installments postponed.
• Red customers are those that are under the supervision of the Asset Restructuring division and need restructuring, write-offs or debt-to-equity
conversion. The management of the customer‘s operations will possibly be taken over by the Group. In some cases, collateral or guarantees will be
collected and/or the operations sold.
Customer groups with loan exposure below ISK 500 million will be grouped into green, yellow, orange and red credit risk groups during the year
2011.
The following table presents the classification of loans and advances to customers by credit risk groups:
Carrying amount
Customer groups with loan exposures above ISK 500 million
2010 2009
Green 197,331 199,521
Yellow 21,669 16,399
Orange 23,982 20,008
Red 51,867 113,711
Customer groups with loan exposures below ISK 500 million 298,105 , 317,483 ,
Total 592,954 667,122
External ratings were used where applicable to assist in managing the credit risk exposure of bonds. Otherwise the Group used fair value estimates
based on available information and the Group's own estimates.
The Group measures the credit risk of derivatives by calculating a credit equivalent value for each derivative. The credit equivalent value is the
market value of a contract plus a percentage of the nominal amount of the derivative which depends on the type of derivative. The percentage is
twice that of the 99% Value at Risk (VaR), calculated for each underlying security or currency based on historical volatility, for a holding period of
five days.
54. Loan impairment
Group policy requires that individual financial assets above materiality thresholds be reviewed at least quarterly, and more frequently when
circumstances so demand. Impairment allowances on individually assessed accounts are determined case-by-case by evaluating incurred losses at
the reporting date. Collectively assessed impairment allowances are permitted in the following cases: (i) portfolios of homogenous loans that are
individually below materiality thresholds, and (ii) losses that have been incurred but not yet identified, using the available historical experience along
with experienced judgement and statistical techniques.
Should the expected cash flows be re-examined and the present value of the cash flows (calculated using the effective interest rate) be revised, the
difference is then recognised in profit or loss (as either impairment or net adjustments to loans and advances). Impairment is calculated using the
effective interest rate, before any revision of the expected cash flows. Any adjustments to the carrying amount which result from revising the
expected cash flows are recognised in profit or loss. The impact of financial restructuring of the Group’s customers in 2010 is reflected in loan
impairment, or net adjustments to loans and advances, as the expected cash flow of customers has changed.
The Group measures and estimates the impact of foreign exchange rate changes on the financial strength of each borrower or group of borrowers.
While some customers receive income partially or fully in foreign currency, other customers have very limited or no income in foreign currency.
Customers with limited income in foreign currency will suffer more than others, should the ISK depreciate.
NBI hf. Consolidated Financial Statements 2010 55
All amounts are in ISK million
Allar upphæðir eru í milljónum króna Ársreikningur 2010 155