CIM FINANCE. INTEGRATED REPORT 2022 | 137 EXPLANATORY NOTES 30 SEPTEMBER 2022 4. FINANCIAL RISK MANAGEMENT (CONT’D) 4.1 Financial risk factors (Cont’d) (d) Credit risk (Cont’d) Impairment assessment (Cont’d) Probability of Default (Cont’d) There are two levels of PD relevant for ECL calculation: i. 12-month PD – This represents the estimated probability of default occurring within the next 12 months from the reporting date. ii. Lifetime PDs – This represents the estimated probability of a default occurring over the remaining life of the financial instrument andmay be further broken down intomarginal probabilities for smaller time periods within the remaining life. The PD models were derived using logistic regression. As part of the modelling phase, the variables having the most significant predictivedefaultpowerwere identifiedusing the informationvaluestatistics. Variableswereshortlistedbasedontheir significance in predictive default and possible combinations were assessed using multifactor analysis to achieve the best-fit model. The performance of the final models was assessed to test the fit of the estimated PD curves against the historical default rate. Loss Given Default By definition, loss given default refers to the magnitude of the likely loss on a given facility in the event of default. It takes into account the loss of principal, interest foregone andworkout expenses. CIM has derived estimates of LGD for Stage 1 and Stage 2 exposures using the Cured LGD methodology for its credit facilities as adequate historical information was available. The LGDmethodology takes into consideration recoveries through insurance covers and valueof collaterals. Themodelswerederivedusing logistic regressionand yielded to statistically significant estimates. Where historical datawas insufficient formodelling, Basel estimates of loss given default for unsecured exposureswere applied. Exposure at Default The exposure at default (EAD) refers to the gross carrying amount of the financial instruments in the event of obligor default. For Stage 1 exposures, the EAD is derivedbased onpossible default eventswithin 12months. For Stage 2 exposures, the exposure at default is considered for events over the lifetime of the instruments. The EAD framework adopted by the Group considers two separate methods dependent on the underlying financial asset; the current exposure method for deposit with banks, leases, hire purchase and other credit agreements, and loan and advances except for revolving facilities such as factoring debtors and off-balance sheet items where the credit conversion factor approach is used. Under the current exposuremethod, the expected outstanding exposure is derived fromthe expected future cash flows as the best estimate of EAD. The credit conversion factor method takes into account the sumof the actual outstanding exposure and expected drawdown until default as the best estimate of EAD. Forward looking information Forward-looking economic assumptions are incorporated into ECL models. The Group has taken into account GDP growth rate forecasts when deriving the expected credit losses. This variable was significant in themodels that were built. The GDP forecasts are constantly updatedwith new estimates and are sourced from reputed local and international organisations. Credit quality For stage classification, the Group utilises a combination of quantitative and qualitative factors to determine whether the credit risk of a borrower has increased significantly since initial recognition. Exposures are considered to have resulted in a significant increase in credit risk and aremoved to stage 2when: On a quantitative basis, the days past due (dpd) indicator is employed and exposures above 30 dpd are classified under Stage 2. Onaqualitativebasis, accountsshowsignsof deterioratingearlywarning indicators (suchasdefaultoncovenants),macroeconomic factors and external market informationwhere relevant.
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