KENANGA ANNUAL REPORT 2019

253 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2019 50. FINANCIAL RISK MANAGEMENT (CONT’D.) (a) Credit risk (cont’d.) Impairment assessment (cont’d.) General approach (cont’d.) Key Components of ECL Measurement Probability of Default (PD) PD is an estimate of the likelihood of default over a given time horizon, in this case, 12 months. It is estimated as at a point in time. The calculation is based on internal credit risk rating model, comprising both quantitative and qualitative factors. The estimation is based on current conditions, adjusted to take into account estimates of future conditions that will impact PD. The Bank decides to adopt external PD published by local rating agency i.e. Malaysia Rating Corporate Berhad (MARC) as proxy, following adequate assessment and analysis on the suitability of data application i.e. rating mapping exercise due to lack of sufficient size and history. Loss Given Default (LGD) The rating mapping exercise involves the process whereby the Group’s and the Bank’s existing Internal Credit Risk Rating (“ICRR”) rating is mapped against MARC rating for the same counterparty. The Group and the Bank assess the definition of each ICRR rating band and makes reference to the definition of MARC credit rating band. Overall, both of the rating models have the same rating band i.e. AAA, AA, A, BBB, BB, B, C & D with BBB as the lowest investment grade category and BB and below as non-investment grade. The detailed rating characteristic for each rating band is similar in which AAA indicates superior or extremely high repayment capability and will be rated ‘D’ upon default. For unrated corporate loans, a default rating of ‘BBB2’ is applied (as per existing computation). Details on mapping of the Group’s and the Bank’s internal credit risk grades to external ratings are presented in Note 50(a)(i). LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from any collateral. Exposure at Default (EAD) EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities.