IFRS 9 transition effect on equity in a post bank recovery environment: the case of Slovenia

Abstract

On January 1, 2018, IFRS 9 became effective in the EU. It introduced the expected credit loss model to allow for timely recognition of credit losses, estimated not only on the actual credit loss experience but also on forward looking information related to current loan portfolio. Although the transition to IFRS 9 should lead to increased impairments and decrease in banks’ equity, this effect is ambiguous in the settings characterised by combined effects of optimistic macroeconomic outlook and strong regulatory intervention related to extensive loan portfolio restructuring. This paper investigates day-one transition effect of IFRS 9 on level of loan impairments and total equity of banks in Slovenia, Eurozone country, which barely averted international bailout in 2013 by extensive state assisted bank restructuring. The comparative analysis is done on banks that transferred deteriorated loan portfolio to the state’s Bank Assets Management Company and all other banks. In line with expectations we find that banks without extensive asset portfolio improvements recognised additional loan impairments on transition to IFRS 9, whereas the opposite effect is observed for banks which performed state-assisted loan portfolio restructuring. Our study provides additional insight on the effect of institutional and regulatory setting on IFRS 9 implementation effects.

Keywords:

• IFRS 9
• bank equity
• impairments
• bank recovery
• case
• Slovenia

JEL CLASSIFICATION CODES:

• G01
• G21
• G38
• M41
• M48

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Unlike most existing studies (e.g. Loew, Schmidt and Thiel, 2019; EY, 2018; European Systemic Risk Board, 2017) our analysis is not focused on regulatory capital but on equity, as defined by IFRS Conceptual Framework for Financial Reporting. Throughout our study the term ‘equity’ is used consistently to avoid confusion with term ‘capital’ used for banks' capital measured according to EU Capital requirements regulation.

2 Any other method does not fulfill the ceteris paribus assumption as it entails adding new variables (economic conditions, size/structure/quality of asset portfolio, etc.) with particular effects on bank equity. Disentangling such composite effect to individual variables would result in less accurate findings.

3 Although IFRS 9 general principle on transition is retrospective application, all Slovenian banks used exception to recognise only differences between previous carrying amount and carrying amount at the beginning of the period in the opening retained earnings and/or other comprehensive income at January 1, 2018.

4 Banka Celje and Abanka merged in 2015.