Notes
Note
The Group has implemented the new requirements related to the def-
inition of default in January 2022 in order to align the existing defi-
nition of default to the new requirements outlined in the Guidelines
and the RTS.
The fair value of mortgage loans is based on the fair value of the un-
derlying issued mortgage bonds adjusted for changes in the fair
value of the credit risk on the borrowers. The IFRS 13 estimate of
the fair value of the expected credit losses is calculated on the basis
of the IFRS 9 model for calculating impairment of losses on loans at
amortised cost: expected credit losses, including the classification of
loans between stages 1, 2 and 3:
The newly definition of default is used in the measurement of ex-
pected credit losses and the assessment to determine movements be-
tween stages. The definition of default is also used for internal credit
risk management and capital adequacy purposes. According to the
revised definition of default, exposures that are considered default
are also considered Stage 3 exposures. This is applicable for expo-
sures that are default due to either the 90 days past due default trig-
ger or the unlikeliness to pay default triggers.
Stage 1: If the credit risk has not increased significantly, the impair-
ment equals the expected credit losses resulting from default events
that are possible within the next 12 months, see however below on
the collective assessment of the need for further adjustments.
Stage 2: If the credit risk has increased significantly, the loan is
transferred to stage 2 and an impairment equal to the lifetime ex-
pected credit losses is recognised. A significant credit risk increase
is considered to occur when the following increase in the probability
of default (PD) is observed:
The newly implemented definition of default has been incorporated
in post-model adjustments for 2021.
The expected credit loss is calculated for all individual loans as a
function of the probability of default (PD), the exposure at default
(EaD) and the loss given default (LGD).
•
For loans originated below 1% in PD: An increase in the
loan’s 12-month PD of at least 0.5 of a percentage point since
origination and a doubling of the loan’s lifetime PD since
origination
The lifetime expected credit losses cover the expected remaining
lifetime of the loan. For most loans, the expected lifetime is limited
to the remaining contractual maturity and adjusted for expected pre-
payment. For exposures with weak credit quality, the likelihood of
prepayment is not included.
•
•
For loans originated above 1% in PD: An increase in the
loan’s 12-month PD of 2 percentage points since origination
or a doubling of the loan’s lifetime PD since origination
Further, loans that are more than 30 days past due are moved
from stage 1 to stage 2. Finally, customers subject to forbear-
ance measures are placed in stage 2, if the Group, in the most
likely outcome, expects no loss or the customers are in the 2-
year probation period for performing forborne exposures.
The forward-looking elements of the calculation reflect the current
unbiased expectations of the management. The process consists of
the creation of macroeconomic scenarios (base case, upside and
downside), including an assessment of the probability for each sce-
nario, by the Danske Bank Group’s independent macroeconomic re-
search unit, the review and sign-off of the scenarios (throughout the
organisation) and a process for adjusting scenarios given new infor-
mation during the quarter. Management’s approval of scenarios can
include adjustments to the scenarios, probability weighting and man-
agement overlays to cover the outlook for particular high-risk port-
folios, which are not provided by the Group’s macroeconomists. The
approved scenarios are used to calculate the impairment levels.
Technically, the forward-looking information is used directly in the
PDs through an estimate of general changes to the PDs and the
LGDs in the expected credit loss calculation. However, for signifi-
cant exposures in stage 3, an individual assessment of the scenarios,
changes to expected credit losses and the related probabilities are
performed by senior credit officers.
Stage 3: If the loan is in default or otherwise credit impaired, it is
transferred to stage 3. A facility becomes credit-impaired when one
or more events that have a detrimental impact on the estimated fu-
ture cash flows have occurred. This includes observable data about
(a) significant financial difficulty of the borrower; (b) a breach of
contract, such as a default or past due event; (c) the borrower, for
reasons relating to the borrower’s financial difficulty, is granted a
concession; (d) it is probable that the borrower will enter into bank-
ruptcy. Credit-impaired facilities are placed in Realkredit Dan-
mark’s rating category 10 or 11. For customers in rating category
10, the stage 3 classification only applies to customers where a loss
is expected in the most likely scenario. For rating category 11, all
exposures are classified as stage 3. The Realkredit Danmark Group
uses the option to continue to recognise interest income on mortgage
loans measured at fair value on the basis of the contractual interest
rates.
In addition, a collective assessment determines the need for further
adjustments to reflect other components in the fair value measure-
ment, such as an assessment of an investor’s risk premium, compen-
sation for administrative costs related to the loans and the possibility
of increasing the credit margin if the credit risk increases. This as-
sessment also takes into consideration the fact that initial recogni-
tion of 12-month expected credit losses is not in accordance with
fair value, and the fact that the expected credit losses during the life-
time of the asset should be included in the assessment even if the
credit risk has not increased significantly.
To support a more harmonised approach regarding the application of
the definition of default, the European Banking Authority (EBA) has
issued the following products that guides the application of the defi-
nition of default: the Guidelines on the application of the definition
of default, EBA/GL/2016/07 and the Regulatory Technical Stand-
ards (RTS) on the materiality threshold for credit obligations past
due, EBA/RTS/2016/06.
Realkredit Danmark Annual Report 2021 33
