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About this Chairman's Corporate Consolidated Financial Company Financial
Report Foreword Management Report Appendices Governance Statements Statements
Key audit matter
Three-stage expected credit loss impairment model
In connection with the implementation of IFRS 9 as
from 1 January 2018, Rabobank implemented a three-
stage expected credit loss impairment model as
follows:
Recognition of allowances measured at an
amount equal to 12-month expected credit
losses (stage 1);
Recognition of allowances measured at an
amount equal to the lifetime expected credit
losses for loans and advances for which credit
risk has significantly increased since initial
recognition, but that are not credit-impaired
(stage 2); and
Financial assets that are credit-impaired
(stage 3).
Rabobank determines loan impairments in stage 1 and
2 on a modelled basis whereas the loan impairments in
stage 3 are determined on either a modelled basis or on
a specific loan-by-loan basis.
Modelled loan impairments
For the modelled loan impairments Rabobank utilises
point in time probability of default (PD), loss given
default (LGD) and exposure at default (EAD) models
for the majority of the loan portfolio. Three global
macroeconomic scenarios (consisting of a baseline, a
baseline minus and a baseline plus scenario) are
incorporated into these models and probability
weighted in order to determine the expected credit
losses. In case of data quality issues, or when
unexpected external developments are not sufficiently
covered by the outcome of the impairment models,
adjustments maybe made (so called: top level
adjustments).
Individually credit-impaired loans
For credit-impaired loans that are assessed on an
individual basis, the impairment allowance is based on
the weighted average of the net present value of
expected future cash flows (including forward looking
information and the valuation of underlying collateral)
in three different scenarios: a sustainable cure, an
optimizing and a liquidation scenario.
Judgements and estimation uncertainty
The judgements and estimation uncertainty in the
impairment allowance of loans and advances is
primarily linked to the following aspects:
Significant increase in credit risk: judgement is
required to transfer assets from stage 1
to stage 2;
Our audit work and observations
The valuation of future cash flows and existence
and valuation of collateral, based on the
appropriate use of key parameters for the specific
impairment allowance;
The methodology and controls applied in
measuring and determining significant increase
in credit risk;
The governance over development, validation,
calibration and implementation of the PD, EAD
and LGD impairment models;
The review and approval process that
management has in place for the outputs of the
impairment models, and the top level
adjustments that are applied to model outputs;
and
The completeness and accuracy of the transfer of
data from underlying source systems to the
expected loss calculations.
The majority of these controls were designed and
operated effectively. For certain controls, specifically
around the loan quality classification process in the
small and medium size business loans domain, remedial
control activities and impact assessments were
performed by management. Based on the testing of
controls and additional testing of remedial actions, we
determined that it was appropriate to place reliance on
the above controls for the purpose of our audit.
Assessment of model based impairment allowances
In our audit (using our internal model experts), we
evaluated the reasonableness of model methodology,
assessed model validation reports prepared by
Rabobank's model validation department, evaluated the
macro economic scenarios using our internal economic
department, performed recalculation of the loan loss
provision for a sample of loans and performed
backtesting procedures on key model parameters per
1 January 2018 and 31 December 2018. Also we tested
input data and data lineage in respect of the critical data
elements and challenged management that they
provided us with reasonable explanations and evidence
supporting the key model parameters (including the
significant increase in credit risk, PD, LGD and EAD).
Based on the above we assessed the methodology and
inputs to be in line with market and industry practice.
Finally, we evaluated the top level adjustments per
1 January 2018 and 31 December 2018 by obtaining
evidence that these adjustments were necessary to
balance underlying model and data limitations and we
found the provided supporting evidence to be
reasonable.
Coöperatieve Rabobank UA. - EH44X5NCPJUJ-1288894667-935
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