Loan impairment provisions

12 Months Ended

Dec. 31, 2022

Loan impairment provisions

Loan impairment provisions

15 Loan impairment provisions

Loan exposure and impairment metrics

There is a risk that customers and counterparties fail to meet their contractual obligation to settle outstanding amounts, known as expected credit losses (ECL). The calculation of ECL considers historic, current and forward-looking information to determine the amount we do not expect to recover. ECL is recognised on current and potential exposures, and contingent liabilities.

For accounting policy information see Accounting policies note 2.3. Further disclosures on credit risk and information on ECL methodology are shown from page 176 of Exhibit 15.2.

The table below summarises loans and credit impairment measures within the scope of IFRS 9 Expected credit losses framework.

	2022	2021
	£m	£m
Loans - amortised cost and FVOCI
Stage 1	325,224	330,824
Stage 2	46,833	33,981
Stage 3	5,096	5,022
Of which: individual	1,121	1,215
Of which: collective	3,975	3,807
	377,153	369,827
ECL provisions (1)
- Stage 1	632	302
- Stage 2	1,043	1,478
- Stage 3	1,759	2,026
Of which: individual	287	363
Of which: collective	1,472	1,663
	3,434	3,806
ECL provision coverage (2)
- Stage 1 (%)	0.19	0.09
- Stage 2 (%)	2.23	4.35
- Stage 3 (%)	34.52	40.34
	0.91	1.03
Continuing operations
Impairment (releases)/losses
ECL (release)/charge (3,4)	337	(1,173)
Stage 1	(290)	(1,317)
Stage 2	393	(164)
Stage 3	234	308
Of which: individual	54	20
Of which: collective	180	288
Amounts written off	482	876
Of which: individual	168	455
Of which: collective	314	421

(1) Includes loans to customers and banks.

(2) Includes £3 million (2021 - £5 million) related to assets classified as FVOCI and £0.1 billion (2021 - £0.1 billion related to off-balance sheet exposures.

(3) ECL provisions coverage is calculated as total ECL provisions divided by loans – amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions.

(4) Includes a £3 million charge (2021 - £3 million release) related to other financial assets, of which nil (2021 - £2 million release) related to assets classified as FVOCI; and £5 million release (2021 - £34 million release) related to contingent liabilities.

(5) The table shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £143.3 billion (2021 - £176.3 billion) and debt securities of £29.9 billion (2021 – £44.9 billion).

15 Loan impairment provisions continued

Credit risk enhancement and mitigation

For information on Credit risk enhancement and mitigation held as security, refer to Risk and capital management – Credit risk enhancement and mitigation section.

Critical accounting policy: Loan impairment provisions

Accounting policies note 2.3 sets out how the expected loss approach is applied. At 31 December 2022, customer loan impairment provisions amounted to £3,434 million (2021 - £3,806 million). A loan is impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes, changes in the credit rating of a borrower, the failure to make payments in accordance with the loan agreement, significant reduction in the value of any security, breach of limits or covenants, and observable data about relevant macroeconomic measures.

The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original effective interest rate.

The measurement of credit impairment under the IFRS expected loss model depends on management's assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. For further information and sensitivity analysis, refer to Risk and capital management - Measurement uncertainty and ECL sensitivity analysis section.

IFRS 9 ECL model design principles

Refer to Credit risk – IFRS 9 ECL model design principles section for further details.

Approach for multiple economic scenarios (MES)

The base scenario plays a greater part in the calculation of ECL than the approach to MES. Refer to Credit risk - Economic loss drivers - Probability weightings of scenarios section for further details.