Faculty of Commerce, Law and Management (ETDs)

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    The implementation and practical issues of loan loss provisioning under IFRS 9 in South Africa
    (University of the Witwatersrand, Johannesburg, 2024) Muroyiwa, Deysel Tichakunda; Brahmbhatt, Yogesh
    Purpose: The study conducts a thematic evaluation of IFRS 9 by focusing on the assessment of credit risk and loan loss provisioning. The aim of the study is to investigate the post- implementation and practical issues that are currently being faced when accounting for ECLs under IFRS 9. This study makes a valuable theoretical contribution by providing primary evidence on the operationalisation issues of loan loss provisioning under IFRS 9. More specifically, this investigation could be beneficial for standard setters, regulators as well as banks, and other financial entities. Research methodology: The study employs a qualitative research approach and semi- structured interviews were conducted as the primary means of data collection. Using both purposive and convenience sampling techniques, a total of ten participants were selected to take part in the study. The data gathered during the interview process was transcribed, analysed, and interpreted using thematic data analysis. Four themes emerged from the data analysis procedure, which are: i) Transitional process; ii) Impact of the transitional process; iii) Governance, processes and controls, and; iv) IFRS 9 impairment modelling judgements. These themes were analysed using verbatim extracts obtained from the interviews. Findings: The study elaborated on two main recent evolutions of financial instrument systems, namely IAS 39 and IFRS 9. Under IAS 39, the research highlighted that there is no recognition of expected losses stemming from future events. Financial institutions were required to deal with losses only after the occurrence of a negative event, already affecting credit quality. The recently introduced IFRS 9, which came into force in January 2018, marked a paradigm shift from incurred loss to expected loss but differed at the moment at which expected losses are recognized as it demanded to account for the expected losses in the next 12 months as long as the asset did not show a significant increase in risk, thereby triggering the recognition of the ECL for the remaining lifetime. The importance of applying reasonable judgement guided by and within conceptual or standard-level boundaries was also discussed in the study. It was also argued that IFRS 9 places great responsibility on the judgement of prudential supervisors mostly because of their role in ensuring the accurate use and implementation of IFRS 9. Their role mostly involves a thorough assessment of banks to determine whether appropriate credit risk management practices are implemented, assessing whether the calculation and measurement of loan loss provisioning are adequate, evaluating whether adequate policies are in place for the early identification of problem assets, and ensuring whether there is consistency in the application of the new accounting standard across institutions. With regards to the issue of preparedness in the transition to IFRS 9, the respondents outlined many activities such as workshops, presentations, and training by various experts in the accounting, statistical, economic, and actuarial fields to better prepare users of IFRS 9. Although numerous benefits come with the implementation and transition from IAS 39 to IFRS 9, entities also faced huge challenges. This was unanimously revealed by all the participants as they were in complete agreement that the implementation of IFRS 9 was far more complex than that of IAS 39. These challenges include issues in data and modelling, systems infrastructure, governance and control, cost, and vagueness. Following the challenges been faced, the study also revealed the importance of governance and controls through which financial institutions have to strike the right balance between building a sustainable revenue proposition and ensuring regulatory compliance. The study also revealed 3 key judgement areas of IFRS 9 that have been applied in the impairment of ECLs. Because financial institutions were given latitude to make different judgements when modelling IFRS impairment provisions, the researcher identified that there is alignment and divergences in the identified judgements areas. These judgement areas include the applicable definitions of default, the determining factors in SICR and the structure of forward looking macroeconomic variables. There are also divergences and inconsistencies present in the application of certain key judgement areas in IFRS 9 impairment modelling that was highlighted by some of the participants Originality Value: Studies that pertain to the post-implementation and practical issues of loan loss provisioning under IFRS 9 in South Africa are by no means exhaustive and very limited in number. This study, therefore, contributes to the limited body of interpretive, non-positivist financial reporting research being performed in South Africa.
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    The impact of credit risk on the financial performance of commercial banks in Lesotho
    (University of the Witwatersrand, Johannesburg, 2024) Ramphoko, Lepapa Gerard; Mudavanhu, Blessing
    Commercial banks play a crucial role in economic development by allocating financial resources from surplus to deficit units, thereby creating value through credit extension. Therefore, the financial performance of commercial banks across the globe is of utmost importance to all the stakeholders. This study therefore determines the impact of credit risk on the financial performance of commercial banks in Lesotho. The measurement of the study variables includes the use of Return on Equity (ROE) for bank’s financial performance and Capital to Risk-Weighted Assets Ratio (CRWAR), Asset Quality Ratio (AQR), Loan Loss Provision Ratio (LLPR), and Loans and Advances Ratio (LAR) for credit risk assessment. The study adopts a quantitative research design to analyze panel data collected from the audited financial statements of four commercial banks in Lesotho spanning for 2012-2021 using the panel least squares regression model. The results from the fixed effects estimation technique revealed an inverse relationship between the two credit risk measures: CRWAR and LAR with bank performance (ROE), emphasizing the importance of prudent credit risk management practices. Conversely, LLPR had a positive relationship with bank performance (ROE), highlighting the role of adequate loan loss provisions in enhancing bank profitability. Based on these findings, recommendations are proposed for the effective management of credit risk in commercial banks in Lesotho. First, emphasis is placed on improving LLPR to enhance ROE, emphasizing the need for prudent credit risk assessment, portfolio diversification, and effective collateral policies. Lastly, attention is drawn to liquidity management, considering the observed negative impact of LAR on ROE. Banks are urged to prioritize liquidity risk management, maintaining adequate liquidity buffers, and implementing strategies to address liquidity shortfalls.
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    Financial Risk in Cross-Border Mergers and Acquisitions for Southern African Development Community Banks
    (University of the Witwatersrand, Johannesburg, 2024) Makhura, Sedise; Totowa, Jacques
    This study investigates the effect of cross-border mergers and acquisitions on financial risk and bank performance in the Southern African Development (SADC) region, where economic uncertainties are prevalent. Focusing on credit, market, and liquidity risks, the analysis draws on data across 14 bank cross-border mergers and acquisitions between 2002 and 2018. The fixed effects model used in this study revealed statistically significant relationships between performance, measured as the principal component variable of return on equity (ROE) and return on earning assets (ROEA); and specific financial risk factors, particularly non- performing loans to total loans as the credit risk proxy and net loans to total assets as the liquidity risk proxy. Firm size also demonstrated a significant relationship to performance. Although the aggregate financial risk variable did not present any statistically significant impact on performance, liquidity risk emerged as the decisive factor in determining bank performance. An increased loan-to-asset ratio was associated with deteriorated bank performance, highlighting the importance of managing liquidity risk effectively. These findings suggest that banks in the SADC region involved in cross-border mergers should reassess their risk management strategies and prioritise liquidity and credit risk management to improve performance and ensure operational sustainability in the SADC region.
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    Determinants of credit risk on residential mortgage loans in South Africa
    (University of the Witwatersrand, Johannesburg, 2020) Mbulana, Alikho; Mthanti, Thanti
    Residential mortgages are an important asset class for banks as these assets provide the majority of bank’s income. By the nature of issuing loans to customers, this asset class also presents the greatest risk to the banks and as a result, banks need to constantly evaluate and review credit risk in order to ensure dynamic response strategies that curb losses and achieve sustainable profits. This study aims to investigate factors influencing credit risk on residential mortgage loans in South Africa. A regression analysis was conducted to capture the influence of both macroeconomic and bank specific factors on loans that have been in arrears for less than 89 days and on loans that have been in default for more than 90 days; using monthly data from an undisclosed bank over a period of eight years, 2010 to 2018. The results show that Housing Price Index, Unemployment, Household Disposable Income, Bank’s Capitalization and Operational Efficiency are the only significant determinants for non-performing residential mortgage loans that are less than 89 days. Credit Quality, Inflation, Unemployment, Household Disposable Income, Bank’s Capitalization, Operational Efficiency and are the main determinants of the non-performing residential mortgage loans greater than 90 days
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    The impact of climate change on investment risk and credit risk
    (University of the Witwatersrand, Johannesburg, 2023) Bell, Francesca; Van Vuuren, Gary
    ESG (Environmental, Social, and Governance) factors have evolved from being a minor consid- eration in the 2000s to a major factor for many companies in 2023. Many companies are now assigned ESG grades, which are closely examined by investors. While it would be ideal for re- sponsible firms to be rewarded and culprits to be penalised, this is not always the case in a profit- driven world. Investors are likely to always prioritise profitability, so some compromise is neces- sary. Recent efforts to balance corporate responsibility with portfolio performance are promising. Using Lagrangian calculus, portfolio optimisation techniques have been developed that show re- turns and risk profiles comparable to those of unconstrained portfolios (i.e., ones which did not consider ESG scores). As expected, low ESG scores influence portfolio performance negatively (as measured by the Sharpe ratio), but very high ESG scores have the same effect. Optimal ESG scores are those which represent the turning points of these relationships, i.e., those ESG scores which result in maximal Sharpe ratios. These optimisation techniques are applied to emerging market corporates for the first time. Over time, ESG scores have improved globally, at varying rates, and have resulted in a statistically significant decrease in risk and increase in returns. As volatility increases, optimal ESG grades rise slowly, and associated Sharpe ratios decrease, and it is postulated that this could be due to the option-like relationship between underlying volatility and inherent value. With a better understanding of trends, asset managers who consider ESG met-rics can confidently assert that ESG compliant portfolios do generate healthy risk-adjusted returns (Sharpe ratios) and that these values are improving over time. ESG compliant portfolios are now viable investments that align with responsible investment principles. Firms must estimate expected credit losses (EL) to comply with accounting standards and unex-pected credit losses (UL) to determine regulatory credit risk capital. Both rely on estimates of obligor probabilities of default (PD). Changes in climate, however gradual, increase firm default rates and climate shocks such as floods or droughts exacerbate these impacts. Investors pay close attention to credit ratings which are derived from inter alia default rates, but studies investigating the impact of climate change on PDs are currently limited and data are still relatively scarce. Africa will be most severely impacted by climate change: default rates will deteriorate leading to in- creased PDs, losses given default (LGDs), provision requirements (through increased ELs) and vi regulatory credit risk capital (through increased ULs). To investigate these effects theoretically, corporate equity prices are simulated using Geometric Brownian Motion (GBM) and shocks brought about by climate events of differing frequency and severity are applied to these simulated prices. Post shock prices and return volatilities are differentially affected depending on the nature of the applied shock. These are used as inputs into a well-known Merton (1974) model of corporate default from which market-implied PDs may be extracted. A possible calibration approach is developed for climate event-based impacts on corporate default rates. A scaling factor matrix (an amount by which the unaffected default rate increases after a specified climate event type occurs) can help market participants forecast default rate changes. Climate related impacts have been quan- tified, calibrated, and used to assess credit quality degradat
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    Determinants of credit risk on residential mortgage loans in South Africa
    (2021) Mbulana, Alikho
    Residential mortgages are an important asset class for banks as these assets provide the majority of bank’s income. By the nature of issuing loans to customers, this asset class also presents the greatest risk to the banks and as a result, banks need to constantly evaluate and review credit risk in order to ensure dynamic response strategies that curb losses and achieve sustainable profits. This study aims to investigate factors influencing credit risk on residential mortgage loans in South Africa. A regression analysis was conducted to capture the influence of both macroeconomic and bank specific factors on loans that have been in arrears for less than 89 days and on loans that have been in default for more than 90 days; using monthly data from an undisclosed bank over a period of eight years, 2010 to 2018. The results show that Housing Price Index, Unemployment, Household Disposable Income, Bank’s Capitalization and Operational Efficiency are the only significant determinants for non-performing residential mortgage loans that are less than 89 days. Credit Quality, Inflation, Unemployment, Household Disposable Income, Bank’s Capitalization, Operational Efficiency and are the main determinants of the non-performing residential mortgage loans greater than 90 days