Company Registration Number: C56251
MULTITUDE BANK PLC (formerly known as
FERRATUM BANK PLC)
Annual Report and Financial Statements
31 December 2022
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
Pages
Directors’ report1 – 4
Statement of compliance with the code of principles of good corporate governance5 – 14
Remuneration statement15 - 17
Statement of financial position18
Statement of comprehensive income19
Statement of changes in equity20
Statement of cash flows21
 
Notes to the financial statements22 – 124
Five-year summary125 – 127
Shareholder register information128 – 129
Additional regulatory disclosures
Independent auditor’s report
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
1
Directors’ report
The directors present their annual report and the audited financial statements for the year ended 31 December 2022.
Principal activities
The Bank’s principal activity is the operation of a credit institution under the Banking Act (Cap. 371) of the Laws of Malta, in accordance with the credit institution licence granted by the Malta Financial Services Authority.
The Bank’s principal activity comprises the origination of unsecured lending and credit products which are distributed through an online platform. During 2022, the Bank provided its services in Estonia, Latvia, Czech Republic, Germany, Bulgaria, Sweden, Norway, Croatia, Denmark, Finland, Romania and Slovenia. The Bank has also strengthened its investment portfolio during the year. To part finance its lending activities, the Bank offers savings and term deposits for private individuals to its customers in Germany.
Change of name
Effective as from 1 October 2022, the Bank changed its name from Ferratum Bank plc to Multitude Bank plc.
Business development
The Bank continued to offer unsecured lending and credit products to its customers and during June 2022, the Bank started to offer its products in Slovenia.
The Bank’s investments are made up of investment in securitisation portfolio which amounted to €77.9 million and two new investments in debt instruments which amounted to €21.1 million.
The investment in securitisation portfolio is made up of notes in Ferratum Portfolio S.À.R.L, a private limited liability company incorporated under the laws of Luxembourg as an unregulated securitisation company. As at December 2022, Ferratum Portfolio S.À.R.L, acquired a portfolio of SME loans in Netherlands, Sweden, Finland and Lithuania. The Bank is the holder of Class A notes, which are senior notes, have a higher credit quality and the highest payment ranking amongst the other creditors.
The investment in debt instruments reflect the Bank's acquisition of secured bonds. Such bonds are secured by a number of loan portfolios which are pledged in favour of the Bank, and are subject to a number of covenants including predetermined ratios of ageing portfolios and advance rates. Such covenants are monitored on a regular basis by management and the Reserving Committee. Moreover, the Bank also has additional collateral in the form of cash deposited in its accounts or pledged financial instruments in its favour in respect of each investment.
On 27 April 2022, the Bank issued 5,052 unsecured bonds with a nominal value of €1,000 each, representing the first tranche under its Bond Issuance Programme of up to €40.0 million. These bonds are carried at a tenor of 10 years with a fixed coupon of 6%. The proceeds of the issuance were utilised to support the expansion of the Bank’s business. The bond issuance was listed in the Malta Stock Exchange.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
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Directors’ report – continued
Financial performance
The Bank registered a profit after tax of €20.6 million (2021: €11.0 million - restated) during the financial year under review.
The statement of comprehensive income is set out on page 19. The net interest income earned by the Bank amounted to €145.8 million during 2022, resulting in an increase of 16% over 2021. This is a reflection of the continued efforts made by the Bank to increase its lending business and investment operations. The net fee and commission income amounts to €0.7 million compared to €0.5 million during 2021. Overall, the Bank’s operating income increased by €19.7 million over that generated in 2021.
The Bank’s operating expenditure increased by 6% during the current financial year, and reached a total of €61.5 million, compared to €58.0 million during 2021. During 2022, the net impairment losses on the Bank’s lending business amounted to €62.1 million compared to €52.2 million during 2021, an increase arising on the growth of the portfolio.
In view of the above, the Bank reported a profit before tax of €22.2 million compared to €16.0 million during 2021, which is equivalent to €20.6 million and €11.0 million after tax respectively.
Financial position
The statement of financial position reflects an increase in total assets of €43.7 million, from €604.1 million as at the end of 2021 to €647.8 million as at 31 December 2022, an increase of 7%. The main assets of the Bank continue to comprise loans and advances to customers, which increased from €328.1 million to €407.8 million. The increase is partly attributable to a significant growth in the Bank’s credit limit portfolio, mainly in Sweden, Denmark, Finland and Latvia. The increase is also attributable to the Bank’s increased focus on the prime lending portfolio, particularly in Sweden, Finland, Latvia and Germany. The Bank’s main assets also comprises investments amounting to €99.1 million and balances with central banks and other banks amounting to €94.2 million as at 31 December 2022.
The Bank continued to fund its business through customer deposits, which grew from €486.0 million as at the end of 2021 to €503.4 million as at 31 December 2022. The Bank offers savings and term deposit products with different maturities ranging from 3 months to 36 months, which are predominantly sourced from the German market.
The Bank registered strong regulatory ratios throughout the financial year. The Liquidity Coverage Ratio metric, designed to ensure that a bank has sufficient unencumbered high-quality liquid assets (‘HQLA’ consisting of cash or assets that can be converted into cash at little or no loss of value in markets) to meet its liquidity needs in a 30-calendar-day liquidity stress scenario was 710.1% as at 31 December 2022.
The Bank is required to maintain a ratio of total regulatory capital to risk-weighted assets (“Capital requirements ratio”) above a minimum level of 16.20%. The Bank’s total capital ratio as at 31 December 2022 was 18.91%. The Bank is also required to maintain a CET 1 (“Common Equity Tier 1”) above a minimum level of 13.08%. The Bank’s total CET1 capital ratio as at 31 December 2022 was 18.21%.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
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Directors’ report – continued
Principal risks and uncertainties
The financial risk management note in the financial statements (Note 2) describes the process of how the Bank identifies and manages its risks and uncertainties. The main categories described in this note are credit risk, market risk, liquidity risk and operational risk. The same note includes extensive detail of the processes undertaken by the Bank to manage these risks.
During 2022 the Board continued to evaluate the effects of the geopolitical situation in Eastern Europe which has intensified throughout 2022, with Russia’s invasion of Ukraine. The Bank has no direct exposures to either Russia or Ukraine. The Bank is actively monitoring the situation and considering its circumstances and risk exposures when analysing how the accounting impacts arising from the war may affect its financial reporting. The Bank continued to assess the credit management process, the financial performance and the projected level of business and anticipated regulatory position for the next twelve months. On the basis of such assessment, the Board and management have concluded that there exists sufficient evidence to support the going concern assumption in the preparation of these financial statements.
The Bank is currently in the process of assessing its potential exposure to Environmental, Social and Governance related risk drivers, including in respect of climate change-related aspects. Following the outcome of the assessment, the Bank will review whether its current risk management processes adequately capture the nature and extent of such risks to which the Bank may be exposed, enhancing such processes as deemed necessary.
Dividends
During 2022, the Bank distributed a dividend amounting to €18.0 million (2021: €15.0 million). During 2022, the Bank received a capital contribution amounting to €18.0 million (2021: €18.0 million) from its ultimate parent company, which continued to strengthen the Bank’s equity structure.
Directors
The directors of the Bank who held office throughout the year were:
i.Charles Borg - Non-executive and independent Director and Chairman
ii.Jorma Olavi Jokela - Non-executive Director
iii.Lea Liigus - Non-executive Director
iv.Clemens-Matthias Fritz Krause - Non-executive Director
v.Esa Tapani Teravainen - Non-executive and independent Director
vi.Erik Mikael Ferm - Non-executive and independent Director
vii.Victor Alexander Denaro - Non-executive and independent Director
viii.Klaus Oscar Schmidt - Non-executive and independent Director
ix.Jussi Matti Eevertti Mekkonen - Non-executive and independent Director
(resigned on 3 June 2022)
In accordance with the Bank’s articles of association, the directors remain in office until they resign or are otherwise removed.
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Annual Report and Financial Statements - 31 December 2022
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Directors’ report – continued
Statement of directors’ responsibilities for the financial statements
The directors are required by the Maltese Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386) to prepare financial statements that give a true and fair view of the state of affairs of the Bank as at the end of each reporting period and of the profit or loss for that period.
In preparing the financial statements, the directors are responsible for:
•ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the EU;
•selecting and applying appropriate accounting policies;
•making accounting estimates that are reasonable in the circumstances; and
•ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business as a going concern.
The directors are also responsible for designing, implementing and maintaining internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Maltese Banking Act (Cap. 371) and the Companies Act (Cap. 386). They are also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors confirm that, to the best of their knowledge:
•the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2022, and of its financial performance and its cash flows for the year then ended, in accordance with International Financial Reporting Standards as adopted by the EU; and
•the Directors’ Report includes a fair review of the development and performance of the business and the position of the Bank, together with a description of the principal risks and uncertainties that the company faces.
Going concern basis
As required by Capital Markets Rule 5.62, the Directors have considered the Bank’s profitability and statement of financial position, and they confirm that the Bank has adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the financial statements.
Auditors
PricewaterhouseCoopers have indicated their willingness to continue in office and a resolution for their re-appointment will be proposed at the Annual General Meeting.
Signed on behalf of the Bank's Board of Directors on 29 March 2023 by Charles Borg (Director) and Victor Denaro (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and Financial Statements 2022.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
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Statement of compliance with the code of principles of good corporate governance
Introduction
The Board of Directors of the Bank is committed to promoting and implementing good corporate governance practices in line with the requirements set forth by the Listing Authority. The Board values transparency, honesty, and integrity, and believes that strong corporate governance structures contribute to market confidence and improved relations with stakeholders. The Bank strives to adhere to the Code of Principles of Good Corporate Governance, contained in Appendix 5.1 to Chapter 5 of the Capital Markets Rules, and is obliged to report on its compliance with the Code as per Capital Markets Rule 5.94.
The Bank is dedicated to maintaining the highest standards of disclosure and in this section accordingly provides information on its compliance and explains any instances of non-compliance.
Part 1: Compliance with the code
Principle 1: The Board
 
The Board plays a crucial role in guiding the Bank's direction and growth. The members of the Board are highly qualified individuals who have been chosen for their integrity, competence, and suitability to lead the Bank. The Board is responsible for setting the Bank's strategy, values, and standards, and for providing oversight and stewardship. The Directors bring their knowledge, skills, and experience to the table, ensuring that the Bank's assets are well managed and shareholder value is enhanced.
The Board is dedicated to maintaining the highest standards of corporate governance and ethics, and is accountable to the Bank's shareholders and other stakeholders. The Directors regularly review the Bank's performance, financial situation, and risk management practices, and take steps to ensure that the Bank has the resources it needs to meet its objectives. They are also knowledgeable about the Bank's business and are aware of the relevant statutory and regulatory requirements.
The Bank’s Board is composed of the five non-executive and independent Directors, including the Chair of the Board and three non-executive directors.
The Board has delegated specific responsibilities to a number of committees, including the Audit Committee, the Risk Committee, the Credit Committee, the Reserving Committee, the ALCO Committee, the Executive Committee and the Remuneration and Nomination Committee. The process of appointing Directors is outlined in the Bank's Memorandum and Articles of Association, which states that the Board should consist of a maximum of ten Directors, appointed by the shareholders.
Further details in relation to the Committees and the responsibilities of the Board are found under Principles 4 and 5 of this Statement.
Principle 2: Chairman and Chief Executive
The Bank’s organisational structure incorporates the position of a Chief Executive Officer and that of a Chairperson, both of which are occupied by two different individuals. Through such an organisational structure, there is a clear division of responsibilities between the running of the Board of Directors and the Chief Executive Officer’s responsibility in managing the Bank’s business. Such separation of roles and responsibilities avoids concentration of authority and power in one individual.
The Chairperson’s responsibility is to lead the Board and to ensure that the directors receive precise, timely and objective information which enables them to better perform their role as directors. During Board meetings, the Chairperson encourages active engagement by all directors to ensure that the opinions of all the directors are considered in the relevant discussions.
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Statement of compliance with the code of principles of good corporate governance - continued
Part 1: Compliance with the code - continued
Principle 2: Chairman and Chief Executive - continued
The Chief Executive Officer is responsible to deliver performance within strategic goals and business plans agreed by the Board. He actively leads the senior management in the running of the Bank and the execution of the agreed strategy. His role involves taking decisions relating to the operations, performance, and strategy of the business, except for those matters reserved for the Board or specifically delegated by the Board to its Committees.
Principle 3: Composition of the Board
The affairs of the Bank are managed and administered by a Board of Directors consisting of not less than three and not more than ten in number. The Board of Directors is currently composed of eight Directors who are entrusted with the overall direction, administration and management of the Bank. As at the date of this statement, the Board is composed of the following persons:
i.Charles Borg - Non-executive and independent Director and Chairman
ii.Jorma Olavi Jokela - Non-executive Director
iii.Lea Liigus - Non-executive Director
iv.Clemens-Matthias Fritz Krause - Non-executive Director
v.Esa Tapani Teravainen - Non-executive and independent Director
vi.Erik Mikael Ferm - Non-executive and independent Director
vii.Victor Alexander Denaro - Non-executive and independent Director
viii.Klaus Oscar Schmidt - Non-executive and independent Director
All Board members are non-executive directors who are not engaged in the daily management of the Bank. It is considered that, in the current circumstances in which the Bank is operating, the size of the Board is sufficient for the requirements of the business and that the balance of skills and experience therein is appropriate to properly enable the Board to carry out its duties and responsibilities.
In preparing the financial statements, the directors are responsible for ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the EU, selecting and applying appropriate accounting policies, making accounting estimates that are reasonable in the circumstances; and ensuring that the financial statements are prepared on the going concern basis, unless it is inappropriate to presume that the Bank will continue in business as a going concern. The directors, individually and collectively, are considered fit and proper to direct the business of the Bank, having the necessary skills and experience to be able to do so.
Principle 4: The Responsibilities of the Board
The Board of Directors of the Bank has a broad range of responsibilities and duties that cover various aspects of the Bank's operations, including governance, strategy, risk management, compliance, and corporate culture. The Board plays a critical role in ensuring that the Bank's policies and procedures are in line with the best practices and that the Bank complies with statutory requirements, continuing listing obligations, and other regulatory frameworks.
The Board actively oversees the affairs of the Bank and stays attuned to material changes in the Bank's business and the external environment, and plays a leading role in establishing the Bank's corporate culture and values.
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Statement of compliance with the code of principles of good corporate governance - continued
Part 1: Compliance with the code - continued
Principle 4: The Responsibilities of the Board - continued
The Board, together with senior management and the Chief Risk Officer, is responsible for establishing the Bank's risk appetite, overseeing risk management, and ensuring that the Bank's policies and procedures comply with regulatory requirements. It also oversees the Bank's adherence to the Risk Appetite Statement, risk policy, and risk limits. The Board evaluates the Bank's long-term plans, budgets, and forecasts, as well as its financial and operating results, to ensure that they are aligned with the Bank's strategic objectives.
Furthermore, the Board is responsible for approving the approach and overseeing the implementation of key policies pertaining to the Bank's capital adequacy assessment process, capital and liquidity plans, compliance policies and obligations, and the internal control system. The Board oversees the integrity, independence, and effectiveness of the Bank's policies and procedures for whistleblowing.
The Board also ensures that the Bank has appropriate policies and procedures in place that guarantee that the Bank and its employees adhere to the highest standards of corporate conduct and comply with applicable laws, regulations, business, and ethical standards.
The Board also delegates specific responsibilities to Committees, which operate under their respective Charters or Policies. In this respect, the Board has established the following Committees:
Audit committee
The Board has delegated to the Audit Committee its oversight responsibilities for financial reporting, disclosures and the effectiveness of the Bank’s internal control systems. The Audit Committee is required at all times to be composed of at least three non-executive directors, with the majority of its members to be independent of the Bank.
The purpose of the Audit Committee is to:
i.oversee the integrity and quality of the Bank’s financial reporting process;
ii.the effectiveness of the internal audit function;
iii.monitoring of the Bank’s legal and ethical compliance;
iv.the monitoring of the qualifications, performance and independence of the Bank’s external auditors; and
v.the quality of the Bank’s internal controls.
The Audit Committee is composed of the following members:
i.Esa Tapani Teravainen (Chairman)
ii.Clemens-Matthias Fritz Krause
iii.Klaus Oscar Schmidt
Risk committee
The Board has delegated to the Risk Committee its oversight responsibilities of the risk management function of the Bank. The Risk Committee is required at all times to be composed of at least three directors, two of whom must be non-executive directors, and must have appropriate knowledge, skills and expertise concerning risk management and control practices.
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Statement of compliance with the code of principles of good corporate governance - continued
Part 1: Compliance with the code - continued
Principle 4: The Responsibilities of the Board - continued
Risk committee - continued
The purpose of the Risk Committee is:
i.to oversee the policy and framework for all risks to which the Bank may be exposed;
ii.to develop and monitor a risk management system across the Bank, including a risk appetite framework, and for ensuring the effective implementation of all risk policies;
iii.to ensure that all risk controls operating throughout the Bank are in accordance with regulatory requirements and best practice, and for advising the Bank on the co-ordination and prioritisation of risk management issues throughout the Bank;
iv.that through its active participation in the Internal Capital Adequacy Assessment Process and Internal Liquidity Adequacy Assessment Process suite of documents, the committee oversees the impact of the implementation of the strategies for capital and liquidity management, as well as reviewing a number of possible stressed scenarios to assess how the Bank’s risk profile would react to external and internal events; and
v.to ascertain the integrity and suitability of the recovery plan.
The Risk Management Committee is composed of the following members:
i.Erik Ferm (Chairman)
ii.Lea Liigus
iii.Victor Denaro
Asset and Liability committee
The Board has delegated to the Asset and Liability Committee its oversight responsibilities for the monitoring and management of the Bank’s liquidity risk, interest rate risk and capital adequacy positions. The Asset and Liability Committee is required at all times to be composed of at least three executive members of the Bank, the majority of which should be members of the Bank’s senior management.
The purpose of the Asset and Liability Committee is to ensure that the management of the Bank is appropriately identifying, measuring, controlling, and monitoring the Bank’s liquidity risk, interest rate risk, and capital adequacy positions.
The Asset and Liability Committee is composed of the following members:
i.Clemens-Matthias Fritz Krause (Chairman)
ii.Antti Kumpulainen
iii.Kenneth Zammit
iv.Louie Scicluna
v.Dario Azzopardi
Credit committee
The Board has delegated to the Credit Committee its oversight responsibilities of all aspects of credit risk management of the Bank. The Credit Committee is required at all times to be composed of at least three members of the Bank, the majority of whom are required to be members of the Bank’s senior management.
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Part 1: Compliance with the code - continued
Principle 4: The Responsibilities of the Board - continued
Credit committee - continued
The purpose of the Credit Committee is to ensure the effective management of the Bank’s credit portfolio through the implementation of sound and transparent credit scoring and decision-making processes around its various product lines. The Credit Committee is, inter alia, responsible to establish appropriate credit risk assessment practices and periodically review the appropriateness thereof.
The Credit Committee is composed of the following members:
i.Antti Kumpulainen (Chairman)
ii.Julie Chatterjee
iii.Louie Scicluna
iv.Kenneth Zammit
v.Clemens-Matthias Fritz Krause
vi.Dario Azzopardi
Reserving committee
The Board has delegated to the Reserving Committee its oversight responsibilities for the monitoring and management of the Bank’s credit loss reserves. The Reserving Committee is required at all times to be composed of at least three members of the Bank.
The Reserving Committee is primarily responsible for safeguarding the soundness of the valuation of the Bank’s lending portfolio. The purpose of the Reserving Committee is to ensure that the Bank has appropriate credit practices, including an effective system of internal control, to determine adequate expected credit loss allowances in accordance with IFRS 9, as well as the Bank’s stated policies. Additionally, the Reserving Committee is also responsible to ensure the Bank’s compliance with all the relevant supervisory guidance issued by the European Central Bank, as well as, the banking rules issued by the Malta Financial Services Authority, specifically Banking Rule 09.
The Reserving Committee is composed of the following members:
i.Clemens- Matthias Fritz Krause (Chairman)
ii.Bernd Egger
iii.Kenneth Zammit
iv.Louie Scicluna
v.Antti Kumpulainen
Remuneration and Nominations committee
The Remuneration and Nominations Committee of the Bank determines the remuneration policy which is applicable to the Bank’s employees, as well as that applicable to ‘identified staff’ (that is staff whose professional activities have a material impact on the Bank’s risk profile). The Remuneration and Nominations Committee has access to external consultants on remuneration matters and also calls on in-house expertise in compliance, finance, risk and HR. Among other matters, the committee also considers candidates proposed for senior management positions prior to their appointment.
The Remuneration and Nominations Committee is composed of the following members:
i.Charles Borg (Chairman)
ii.Jorma Jokela
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Statement of compliance with the code of principles of good corporate governance - continued
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Principle 5: Board Meetings
The Bank has systems in place to ensure the reasonable notice of meetings of the Board and the circulation of discussion papers in advance of meetings, so as to provide adequate time to directors to prepare themselves for such meetings. Minutes of Board meetings record attendance, discussions, and resolutions. These minutes are circulated to all directors as soon as practicable after the meeting, for approval.
The Board meets as needed, but not less than four (4) times a year, to fulfil its responsibilities in a manner consistent with that outlined in its Charter.
The Chairman is responsible for ensuring the efficient working of the board by ensuring that all relevant issues are on the agenda, supported by all available information. The Board agenda should strike a balance between long-term strategic and shorter-term performance issues. During meetings, the Chairman facilitates and encourages the presentation of views pertinent to the subject matter and gives all directors every opportunity to contribute to relevant issues on the agenda.
Directors are expected to attend and actively participate in each meeting, whether in person, by telephone or by teleconference or videoconference/web-cast conferencing, unless there are exceptional circumstances that prevent them from doing so. The Board determines the frequency, purpose, conduct, and duration of meetings, and meets regularly in line with the nature and demands of the company's business.
Notice of the dates of forthcoming meetings, along with supporting material, are circulated well in advance to directors to allow for appropriate consideration. In instances where ‘ad hoc’ meetings are required, advance notice is given so that all directors can participate.
Principle 6: Information and Professional Development
The Board appoints the Chief Executive Officer. The Bank Nomination and Remuneration Committee advises the Board on the appointment of the said Officer, as well as other senior management positions.
The Bank is committed to providing its directors with comprehensive training and advice as required, including regular attendance at relevant internal and external courses to enhance their effectiveness in their roles. Additionally, the directors receive periodic updates on the Company's financial performance and position.
The Company Secretary is responsible for ensuring that Board procedures are followed and for facilitating effective communication among the Board, its Committees, and senior management. Directors can also seek guidance and assistance from the Company Secretary.
In addition, the Board has the authority to engage any independent professional advice sought by Directors in the course of their duties. The Board and its committees are provided with adequate resources to carry out their functions effectively.
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Principle 7: Evaluation of the Board’s Performance
Members of the Board of Directors are subject to a comprehensive ‘fit and proper’ assessment by the Supervisory Authority before they are formally cleared for appointment to the Board.
The Board is confident that the Bank's directors possess the necessary skills and expertise to perform their duties with the required levels of skill and diligence. Furthermore, the Board believes that its current composition provides a diverse range of skills and experience, ensuring effective functioning.
Throughout the reporting year, the Board conducted a self-evaluation, as well as an assessment of the Chairman's and Committees' performances. This process was facilitated by the Nomination and Remuneration Committee, with the assistance of both internal and external advisors.
Principle 8: Committees
The Remuneration and Nomination Committee is covered under Principle 4, while the Remuneration Statement is included as part of the Annual Report.
Principle 9: Relations with Shareholders and with the Market
The Bank is committed to having an open relationship with its investors. The publication of interim and annual financial statements and ongoing company announcements keep bondholders informed on developments relevant to their investment. The Board serves the legitimate interests of the Bank and ensures that it communicates with the market effectively and in a timely manner through company announcements that are published from time-to-time, through which it informs the market of significant events relevant to the Bank and its business. The shareholders of the Bank are part of the same Group of companies, thereby facilitating the communication of the views of the said shareholders to the Board as a whole or with its Chairman, where this is deemed necessary.
The Bank recognises the importance of maintaining open channels of communication with the market to ensure that its strategies are well understood and disclosed in a timely manner. The Bank's website (www.multitudebank.com) is one of the means through which the market may be informed about the company and its business.
Principle 10: Institutional Shareholders
The directors hereby report that the requirements of this principle do not apply to the circumstances of the Bank.
Principle 11: Conflicts of Interest
The Bank expects its directors to maintain the highest ethical standards.
The Bank defines a conflict of interest as a situation where a director’s personal interests clash with the Bank's interests, leading to a potential impropriety in the performance of their duties or prejudicing their impartiality, objectivity, or independence. Personal interests also encompass those of the director's related parties, spouse/partner, family members, or any person over whom they exert any personal influence.
Directors have been made aware of their responsibility to prevent conflicts of interest and to act in the best interests of the Bank and its shareholders.
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Principle 11: Conflicts of Interest - continued
The Board Charter and the Code of Business Conduct and Ethics contain specific sections addressing conflicts of interest, emphasizing the need for directors to take all reasonable measures to avoid such situations.
Directors must inform the Board of any conflicts of interest and a record of their declaration is kept on file. Such a Director cannot participate in any vote on the conflicted matter and must excuse themselves during discussions on it. Directors are also reminded of their obligations regarding dealing in the Bank's bonds, as stipulated by relevant legislation and Capital Markets Rules.
Principle 12: Corporate Social Responsibility
The Board of Directors is dedicated to upholding high ethical standards and making positive contributions to the local community and society as a whole. The Bank acknowledges its significant role in corporate social responsibility and takes measures to ensure that the environment is treated with respect during its operations. Additionally, the Directors recognize the importance of fostering positive relationships with stakeholders and collaborate with them to invest in human capital and safety, while adopting environmentally responsible practices.
To this end, the Board advocates for the incorporation of strong corporate social responsibility principles in the Bank's ongoing management practices.
The Bank, in collaboration with the Group of which it forms part, supports initiatives aimed at promoting economic and societal development, as well as supporting charitable and humanitarian projects.
Part 2: Non-compliance with code
Principle 3: Composition of the Board
The Board consists of eight Non-Executive Directors, including the Chairman. The Code of Principles for Good Corporate Governance provides that the Board should have both Executive and Non-Executive Directors. Currently there are no Executive Directors on the Bank’s Board of Directors. Despite this, the Board believes that it can still fulfil its functions effectively through its diverse knowledge, judgment, and experience. The Board collectively performs the four basic roles of corporate governance, namely accountability, monitoring, strategy formulation, and policy development. The CEO is also regularly invited to attend Board meetings to provide executive management support.
The Bank recognizes the importance of having an Executive Director on the Board and is currently in the process of assessing the suitability of a prospective executive board member, following which the Bank will be liaising with the Supervisory Authority accordingly.
Principle 4: The Responsibilities of the Board
Code Provision 4.2.7 recommends “the development of a succession policy for the future composition of the Board of Directors and particularly the executive component thereof, for which the Chairman should hold key responsibility”. The Bank's Succession Policy is currently being developed and this is scheduled for completion by Q2 2023.
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Principle 5: Board Meetings
Code Provision 4.2. recommends that the attendance of Board members should be reported to shareholders at annual general meetings. The Bank notes that the attendance, participation and contribution at meetings of the Board and its Committees is taken into account during periodic performance evaluations. Furthermore, the shareholders of the Bank are part of the Multitude Group of companies, thereby facilitating communication between the Bank's Board and the same shareholders, where this is deemed necessary.
Principle 6: Information and Professional Development
The Code provides that the Chief Executive Officer should ensure that systems are in place to establish a succession plan for senior management.
Throughout the financial year being evaluated, the Bank didn’t have in place a formal succession plan for all senior management positions. Notwithstanding this, the Bank has consistently managed to appoint appropriate candidates, both internally and externally, and intends to develop a comprehensive and formal succession plan for all senior management positions.
Principle 8: Committees
The Code requires that “The Nomination Committee shall periodically assess the skills, knowledge and experience of individual directors, and report on this to the board”. Throughout the reporting year, the Board conducted a self-evaluation, as well as an assessment of the Chairman's and Committees' performances. This process was facilitated by the Nomination and Remuneration Committee with the assistance of both internal and external advisors. The procedures for assessing the individual and collective suitability of the Board shall be outlined in the Committee’s terms of reference. The Nomination and Remuneration Committee’s terms of reference shall include processes and procedures related to the succession planning, the nomination of directors and the individual and collective suitability of Board members.
Principle 9: Relations with Shareholders and with the Market
Code Provision 9.3 recommends procedures or mechanisms to be in place to trigger arbitration to resolve conflicts between minority shareholders and controlling shareholders. The Bank's Memorandum and Articles do not contain any established mechanism to trigger arbitration in the case of conflict between shareholders. Should any conflict arise, it would be expected for this to be addressed through the established communication channels between the Bank and the shareholders, or through the Bank's Board meetings. On the basis of the above, the Board does not presently consider there is the need to establish such an arbitration mechanism.
Internal controls
The Board of Directors is responsible for designing, implementing and maintaining internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Maltese Banking Act, 1994 and the Companies Act, 1995. It is also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
14
Statement of compliance with the code of principles of good corporate governance - continued
Part 3: Internal controls - continued
The Bank’s Audit Committee is responsible for reviewing the adequacy and proper operation of internal controls in individual areas of operation, overseeing the quality and integrity of the Bank’s financial reports, monitoring the Bank’s compliance with legal, ethical and regulatory requirements, and for recommending areas of improvement across the business.
The Bank’s Risk Management function has the overall responsibility for the development of the entity’s risk strategy and the implementation of risk principles, framework, policies and related limits.
The Bank’s objective is to deploy an integrated risk management approach that ensures an awareness of, and accountability for, the risks taken throughout the Bank and also to develop the tools needed to address those risks. Strong risk management and internal controls are core elements of the Bank’s strategy. The Bank has adopted a risk management and internal control structure, referred to as the Three Lines of Defence, to ensure it achieves its strategic objectives while meeting regulatory and legal requirements and fulfilling its responsibilities to shareholders, customers and staff. In the three lines of defence model, business line management is the first line of defence (including those functions that are responsible for day-to-day operations and the Treasury function), the various risk control and compliance oversight functions established by management represent the second line of defence, and internal audit is the third. Each of these three “lines” play a distinct role within the Bank’s wider governance framework. Although the Bank adopts a “three lines of defence” model, it is worth mentioning the additional interaction between the Bank and its regulatory bodies adds further “lines of defence”, albeit they are not depended upon internally by the Bank to act in such capacities.
Conclusion
The Bank acknowledges that the Code does not dictate or prescribe mandatory rules but recommends principles of good practice. However, the directors strongly believe that such practices are in the best interests of the Company, its shareholders, and other stakeholders.
Signed on behalf of the Bank’s Board of Directors on 29 March 2023 by Charles Borg (Director) and Victor Denaro (Director) as per the Directors’ Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and Financial Statements 2022.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
15
Remuneration statement
The Bank recognises the importance which remuneration plays in any business. Remuneration is fundamental to attract, retain and motivate talented individuals but, if not well managed, it can undermine sound and effective risk management and could also contribute to insolvency.
The remuneration policy (in force) aims at strengthening the interests of the employees to be more aligned with the main target of creating sustainable value for shareholders over the medium/long-term, as well as attracting, motivating, and retaining talent in order to manage successfully the Bank.
The Bank’s remuneration approach is founded on high performance, competitive remuneration, encouraging value creation behaviour and long-term sustainability.
The policy complies with applicable legislation and the requirements of article 92 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV), Commission Delegated Regulation 604/2014 of 4 March 2014 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile, Banking Rule 6 and Banking Rule 12, and was approved by the board of directors and shareholders. The nominations and remuneration committee will put forward minor revisions to the policy in 2023 for board approval.
In defining the remuneration policy set out in the first section of this report, the best national and international practices were considered to promote competitiveness and long-term financial success of the Bank and to ultimately contribute to the favorable development of shareholder value.
This report is split into two main sections:
i.The first section describes the remuneration policy adopted by the Bank for the members of the Board of Directors and the Executives with strategic responsibilities with reference to the financial year 2022.
ii.The second section provides disclosure on the compensation paid to the Board of Directors and senior executives.
Remuneration policy at a glance
In line with the Bank’s remuneration policy for Board of directors and CEO, the reward approach is structured throughout the organization to drive the mutual generation of value for the group and for the directors and the alignment of their long-term interests with those of shareholders, ensuring total transparency.
Remuneration for the Board of directors (the “Board”) is organized separately from the remuneration systems applicable to the Bank’s Executive group and management. The board do not receive fringe benefits and are not included in the bonus and incentive schemes or share-based bonus schemes that may exist for Bank personnel. The fees paid to the directors are as determined by the General Meeting of shareholders, which can be paid in cash and/or partially or entirely in shares or other financial instruments.
Remuneration of the senior executives consists of a fixed monthly salary, fringe benefits, an incentivizing performance bonus scheme, and long-term incentives. The objective is to align the objectives of the shareholders and the senior executives to increase the value of Multitude Bank in the long term, to implement the Bank’s strategy.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
16
Remuneration statement – continued
Remuneration policy at a glance – continued
All senior executives are contracted for an indefinite period and there are no provisions for termination payments. Additionally, non-executive directors are not paid any benefits linked to the termination of their office and they do not benefit from any pension or early retirement scheme by virtue of their office. No supplementary pension or other pension benefits are payable to the senior executives.
The Board may temporarily deviate from the remuneration policy for governing bodies only in exceptional circumstances in which the key operating preconditions would have changed after the General meeting of shareholders and the deviation is necessary to ensure Multitude Bank’s long-term interest. Although 2022 was still unpredictable, no deviations to the remuneration policy for the governing bodies or claw backs were carried out in 2022.
Nominations and remuneration committee
The Bank nominations and remuneration committee is responsible for adopting and maintaining the remuneration policy of the institution and overseeing its implementation to ensure it is fully operating as intended.
The nominations and remuneration committee is composed of members of the board of directors who do not perform executive functions. The chair is independent.
During FY 2022 the Committee was composed of Charles Borg (Chairman) and Jorma Jokela as members. The Chief Executive Officer attends meetings of the Committee as and when needed. None of the Executives participated in the discussion regarding their remuneration. The Committee held one meeting in April which was attended by all members.
The work of the nominations and remuneration committee and its governance is set out in a newly approved committee charter, which was approved by the board in March 2023.
The focus of the remuneration committee is based on a set of core principles as set out by the committee. These include focusing on:
i.Retaining executives who are key to value creation and long-term strategy of the organisation;
ii.Driving synergies between remuneration and the Bank’s strategy, by applying long-term financial and non-financial performance measures to incentive programs;
iii.Performance reviews of key executives;
iv.Major organizational changes and HR policies;
v.Subsequent material exemption and risk mitigation; and
vi.Nomination – leading process for board appointments and key succession.
2022 remuneration at a glance
To ensure long term stability, the Bank seeks to compensate its management in a competitive manner compared to relevant external benchmarks. The individual base salaries consider market remuneration levels, as well as the relevant skills and experience. In addition, base salary is considered in the context of the employee’s total remuneration. Non-executive directors are not paid any benefits linked to the termination of their office and they do not benefit from any pension or early retirement scheme by virtue of theirXXXfficee. No supplementary pension or other pension benefits are payable to the senior executives.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
17
Remuneration statement – continued
2022 remuneration at a glance – continued
Short term incentives – Pay for performance is a key element of the overall remuneration strategy for the Bank. The short-term incentives are aligned with the bonus schemes for the critical roles throughout the Bank. The model is tied to financials as well as individual OKR’s, including specific organisation topics. Each year the structure, weighting and OKR’s of the bonus scheme are adjusted towards the intended focus areas of the Bank. For 2022 it was decided to focus on financials, as well as 4 main objectives, being People and Culture, Customers, Profitable Growth and Operational Excellence.
Long term incentives – Performance share program awarded to ensure long term retention. During 2021, the Multitude Group started a performance share program. The performance share plan was structured as a conditional right for participants to receive shares after a 3-year performance period at no payment. At the time the performance share awards were made to selected critical roles. The performance shares vest subject to continuous service and the achievement of agreed targets.
Given the macroeconomic environment, and to ensure that the program ensures long term retention, the Group board approved a recommendation to extend the period from December 2023 to December 2024 and revise the targets for key executives. Most employees of the Group, including the Bank’s senior executives, are offered the possibility to join a matching share plan. Eligible employees are given the opportunity to invest up to 10% of their salary in any given calendar year in shares issued by Multitude SE, the ultimate parent company within the Group (Investment Shares). The Investment Shares vest after a 2-year holding period, following which Multitude SE provides free shares for participants in relation to size of the investment, with a ratio of 1:1, minus any applicable local taxes. The receipt of any free shares is subject to a number of conditions that participants need to satisfy. As at end December 2022, the total number of shares taken up by the Bank’s senior executives totals 39,482.
Remuneration and company performance
The Bank’s remuneration guiding principles set in the policy are applicable to all employees, including the key executives. The short-term incentive scheme is designed to drive the achievement of the short-term business plan and has been consistently based on profitability over the past years. The long-term incentive is designed to align the interests of key employees with those of the Bank’s shareholders. By aligning the incentives schemes with the goals of the Bank, remuneration drives its best interests.
Total emolument by senior executives and directors for 2022
Fixed
Variable
Total for
remuneration
remuneration*
the year
€’000
€’000
€’000
Total emoluments received by senior executives
1,509
154
1,663
Total emoluments received by directors
181
-
181
Total emoluments
1,690
154
1,844
In 2022 there were no compensations paid or receivable by former directors or senior executives in connection with termination of activities during the same financial year.
*Total amount of variable compensation to senior executives was paid in cash.
Signed on behalf of the Bank’s Board of Directors on 29 March 2023 by Charles Borg (Director) and Victor Denaro (Director) as per the Directors’ Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and Financial Statements 2022.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
18
Statement of financial position
2022
2021
(as restated*)
1 January 2021
(as restated*)
Notes
€’000
€’000
€’000
ASSETS
Balances with Central Banks
4
66,808
138,921
96,334
Loans and advances to banks
5
27,356
48,165
56,303
Loans and advances to customers
6
407,796
328,097
244,860
Loans and advances to group companies
7
26,576
15,486
14,875
Investments
8
99,064
60,685
7,629
Right of use asset
9
1,205
805
2,212
Property and equipment
10
506
640
786
Intangible assets
11
1,235
1,256
1,320
Deferred tax assets
-
-
4,168
Derivative financial instruments
17
729
-
-
Other assets
12
16,530
10,029
16,106
Total assets
647,805
604,084
444,593
EQUITY AND LIABILITIES
Equity
Share capital
13
10,000
10,000
10,000
Capital contribution reserve
14
78,500
60,500
42,500
Other reserves
15
2,592
2,592
2,592
Retained earnings
35,245
32,618
36,619
Total equity
126,337
105,710
91,711
Liabilities
Amounts owed to customers
16
503,377
486,040
340,427
Derivative financial instruments
17
-
297
-
Debt securities
18
4,980
-
-
Lease liability
9
1,052
776
2,247
Other liabilities
19
9,685
8,757
8,462
Current tax liabilities
2,374
2,504
1,746
Total liabilities
521,468
498,374
352,882
Total equity and liabilities
647,805
604,084
444,593
MEMORANDUM ITEMS
Commitments
20
7,895
6,515
4,530
The notes on pages 22 to 124 are an integral part of these financial statements.
*See Note 33 for details regarding the restatement.
The financial statements on pages 18 to 124 were approved and authorised for issue by the Board of Directors on 29 March 2023. The financial statements were signed on behalf of the Bank's Board of Directors Charles Borg (Director) and Victor Denaro (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Report and Financial Statements 2022.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
19
Statement of comprehensive income
Year ended 31 December
2022
2021
Restated*
Notes
€’000
€’000
Interest and similar income
21
150,848
131,033
Interest and similar expense
22
(5,052)
(5,223)
Net interest income
145,796
125,810
Fee and commission income
23
1,668
1,918
Fee and commission expense
23
(928)
(1,417)
Net fee and commission income
740
501
Net trading expense
24
(652)
(86)
Total operating income
145,884
126,225
Employee compensation and benefits
25
(8,078)
(7,779)
Other operating costs
25
(52,300)
(48,867)
Depreciation and amortisation
25
(1,153)
(1,349)
Net impairment losses
6
(62,105)
(52,221)
Profit before tax
22,248
16,009
Tax expense
28
(1,621)
(5,010)
Profit for the year – total comprehensive income
20,627
10,999
The notes on pages 22 to 124 are an integral part of these financial statements.
*See Note 33 for details regarding the restatement.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
20
Statement of changes in equity
Notes
Capital
Share
contribution
Other
Retained
Total
capital
reserve
reserves
earnings
equity
€’000
€’000
€’000
€’000
€’000
At 1 January 2021
(as originally reported)
10,000
42,500
2,592
33,223
88,315
Restatement* (before tax)
33
-
-
-
3,653
3,653
Tax effect
33
-
-
-
(257)
(257)
Restated total equity at the beginning of the financial year
10,000
42,500
2,592
36,619
91,711
Comprehensive income
Profit for the year (as restated*)
-
-
-
10,999
10,999
Total comprehensive income
for the year (restated*)
-
-
-
10,999
10,999
Transactions with owners
Capital contribution from
shareholders
14
-
18,000
-
-
18,000
Dividends
30
-
-
-
(15,000)
(15,000)
Total transactions with owners
-
18,000
-
(15,000)
3,000
Balance at 31 December 2021 (as restated*)
10,000
60,500
2,592
32,618
105,710
At 31 December 2021
(as originally reported)
10,000
60,500
2,592
28,747
101,839
Restatement* (before tax)
33
-
-
-
4,165
4,165
Tax effect
33
-
-
-
(294)
(294)
Restated total equity at 31 December 2021
10,000
60,500
2,592
32,618
105,710
Comprehensive income
Profit for the year
-
-
-
20,627
20,627
Total comprehensive income
for the year
-
-
-
20,627
20,627
Transactions with owners
Capital contribution from
shareholders
14
-
18,000
-
-
18,000
Dividends
30
-
-
-
(18,000)
(18,000)
Total transactions with owners
-
18,000
-
(18,000)
-
Balance at 31 December 2022
10,000
78,500
2,592
35,245
126,337
The notes on pages 22 to 124 are an integral part of these financial statements.
*See Note 33 for details regarding the restatement.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
21
Statement of cash flows
Year ended 31 December
2022
2021
Notes
€’000
€’000
Cash flows from operating activities
Interest and commission receipts
152,137
139,461
Interest and commission payments
(5,751)
(13,649)
Net trading expense
(338)
(61)
Income tax paid
(1,751)
(84)
Payments to employees and suppliers
(65,880)
(50,373)
Cash flows from operating profit before changes
in operating assets and liabilities
78,417
75,294
Changes in operating assets and liabilities:
Loans and advances to group companies (Note 7)
(11,090)
(611)
Loans and advances to customers
(141,951)
(134,054)
Amounts owed to customers
17,347
145,441
Amounts paid in favour of Depositor Compensation
Scheme
(1,603)
(562)
Net cash (used in)/generated from operating activities
(58,880)
85,508
Cash flows from investing activities
Purchase of investment in securitisation portfolio
8
(17,200)
(52,897)
Purchase of investments in debt instruments
8
(20,800)
-
Purchase of property and equipment
10
(71)
(89)
Purchase of intangible assets
11
(254)
(337)
Net cash used in investing activities
(38,325)
(53,323)
Cash flows from financing activities
Principal element of lease payment
9
(769)
(736)
Proceeds from issuance of debt securities
18
5,052
-
Shareholders’ contribution
14
18,000
18,000
Dividends paid to equity holders of the Bank
30
(18,000)
(15,000)
Net cash generated from financing activities
4,283
2,264
Net movement in cash and cash equivalents
(92,922)
34,449
Cash and cash equivalents at beginning of year
187,086
152,637
Cash and cash equivalents at end of year
29
94,164
187,086
The notes on pages 22 to 124 are an integral part of these financial statements.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
22
Notes to the financial statements
1. Summary of significant accounting policies
The principal accounting policies adopted in the preparation of these financial statements are set out below.
1.1 Basis of preparation
The Bank’s financial statements have been prepared in accordance with the requirements of International Financial Reporting Standards (IFRSs) as adopted by the EU and with the requirements of the Banking Act (Cap. 371) and the Maltese Companies Act (Cap. 386). These financial statements are prepared under the historical cost convention, as modified by the fair valuation of certain financial assets and financial liabilities measured at fair value.
The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of certain accounting estimates. It also requires the directors to exercise their judgement in the process of applying the Bank’s accounting policies (see note 3 – Critical accounting estimates, and judgements in applying accounting policies).
During 2022 the Board continued to evaluate the effects of the geopolitical situation in Eastern Europe which has intensified throughout 2022, with Russia’s invasion of Ukraine. The Bank has no direct exposures to either Russia or Ukraine. The Bank is actively monitoring the situation and considering its circumstances and risk exposures when analysing how the accounting impacts arising from the war may affect its financial reporting. The Bank continued to assess the credit management process, the financial performance and the projected level of business and anticipated regulatory position for the next twelve months. On the basis of such assessment, the Board and management have concluded that there exists sufficient evidence to support the going concern assumption in the preparation of these financial statements.
The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of certain accounting estimates. It also requires the directors to exercise their judgement in the process of applying the Bank’s accounting policies (see note 3 – Critical accounting estimates, and judgements in applying accounting policies).
Standards, interpretations and amendments to published standards effective in 2022
In 2022, the Bank adopted a number of interpretations and amendments to standards in the financial statements of the Bank. These changes did not have a significant impact on the Bank’s accounting policies and on the financial performance and financial position.
No new standards were adopted during the year.
Standards, interpretations and amendments to published standards that are not yet effective
Certain new standards, interpretations and amendments to existing standards which are mandatory for accounting periods beginning after 1 January 2023 have been published by the date of authorisation for issue of this financial information. The Bank has not early adopted these requirements of IFRSs as adopted by the EU and the Bank’s directors are of the opinion that, there are no requirements that will have a possible significant impact on the Bank’s financial statements in the period of initial application.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
23
1. Summary of significant accounting policies - continued
1.2 Foreign currency transactions and balances
Functional and presentation currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in euro, which is the Bank’s functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
1.3 Financial assets
1.3.1 Initial recognition and measurement
The Bank recognises a financial asset in its statement of financial position when it becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are recognised on the trade date, which is the date on which the Bank commits to purchase or sell the asset. Accordingly, the Bank uses trade date accounting for regular way contracts when recording financial asset transactions.
At initial recognition, the Bank measures a financial asset at its fair value plus or minus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset, such as fees and commissions. Transaction costs of financial assets carried at FVPL are expensed in profit or loss. Immediately after initial recognition, an expected credit loss allowance (ECL) is recognised for financial assets measured at amortised cost and investments in debt instruments measured at fair value through other comprehensive (FVOCI), which results in an accounting loss being recognised in profit or loss when an asset is newly originated.
When the fair value of financial assets differs from the transaction price on initial recognition, the Bank recognises the difference as follows:
-When the fair value is evidenced by a quoted price in an active market for an identical asset (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised as a gain or loss.
-In all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the instrument, deferred until the instrument's fair value can be determined using market observable inputs, or realised through settlement.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
24
1. Summary of significant accounting policies - continued
1.3 Financial assets – continued
1.3.2 Classification and subsequent measurement
The Bank applies IFRS 9 and classifies its financial assets in the following measurement categories:
-Fair value through profit or loss;
-Fair value through other comprehensive income; or
-Amortised cost.
Debt instruments
Debt instruments are those instruments that meet the definition of a financial liability from the issuer's perspective, such as loans, government and corporate bonds, investment in securitisation portfolio and trade receivables purchased from clients in factoring arrangements without recourse.
Classification and subsequent measurement of debt instruments depend on:
(i) the Bank's business model for managing the asset; and
(ii) the cash flow characteristics of the asset.
Based on these factors the Bank classifies its debt instruments into one of the following three measurement categories:
-Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest ('SPPI'), and that are not designated at FVPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured as described in note 1.4. Interest income from these financial assets is included in 'Interest and similar income' using the effective interest rate method.
-Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets' cash flows represent solely payments of principal and interest, and that are not designated at FVPL, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument's amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in 'Net Investment income'. Interest income from these financial assets is included in 'Interest income' using the effective interest rate method.
-Fair value through profit or loss (FVPL): Assets that do not meet the criteria for amortised cost or FVOCI, are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL and is not part of a hedging relationship, is recognised in profit or loss and presented in the profit or loss statement within 'Net trading expense' in the period in which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for trading, in which case they are presented separately in 'Net investment income'. Interest income from these financial assets is included in 'Interest income' using the effective interest rate method.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
25
1. Summary of significant accounting policies - continued
1.3 Financial assets – continued
1.3.2 Classification and subsequent measurement – continued
Debt instruments - continued
The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability.
The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired ('POCI') financial assets - assets that are credit-impaired at initial recognition - the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows.
When the Bank revises the estimates of future cash flows, the carrying amount of the respective financial asset or financial liability is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in profit or loss.
The Bank reclassifies debt instruments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period.
The Bank’s financial assets measured at amortised cost comprise primarily of balances with Central Banks, loans and advances to banks, loans and advances to customers, investment in securitisation portfolio and loans and advances to group companies.
(a)Business model assessment
Key management personnel determine the Bank’s business model by considering the way financial instruments are managed in order to generate cash flows. That is, whether the Bank's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of 'other' business model and measured at FVPL. Such assessment is performed at a ‘portfolio level' as it best reflects the way the business is managed and information is provided to management.
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1. Summary of significant accounting policies - continued
1.3 Financial assets – continued
1.3.2 Classification and subsequent measurement - continued
Debt instruments - continued
(a)Business model assessment - continued
The information that will be considered in such assessment includes:
•the objectives for the portfolio including whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of assets;
•the method for the evaluation of the performance of the portfolio and how such performance is reported to the Bank’s management;
•the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and
•the frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realised.
Financial assets that are held for trading and those that are managed and whose performance is evaluated on a fair value basis will be measured at FVPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Securities held for trading are held principally for the purpose of selling in the near term or are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.
The Bank may also irrevocably designate financial assets at FVPL if doing so significantly reduces or eliminates a mismatch created by assets and liabilities being measured on different bases.
(b)Cash flows that represent solely payment of principal and interest (SPPI)
In respect of assets where the intention of the business model is to hold the financial assets to collect the contractual cash flows or to hold to collect and to sell, the Bank assesses whether the financial instruments’ cash flows represent solely payments of principal and interest (the ‘SPPI test’). In making this assessment, the Bank considers whether the contractual cash flows are consistent with a basic lending agreement. ‘Principal’ is the fair value of the financial asset at initial recognition. It is not the amount that is due under the contractual terms of an instrument. ‘Interest’ is the compensation for time value of money and credit risk of a basic lending-type return. A basic lending-type return could also include consideration for other basic lending risks (for example, liquidity risk) and consideration for costs associated with holding the financial asset for a particular period of time (for example, servicing or administrative costs) and/or a profit margin. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at FVPL.
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1. Summary of significant accounting policies - continued
1.3 Financial assets – continued
1.3.2 Classification and subsequent measurement - continued
Debt instruments – continued
(b) Cash flows that represent solely payment of principal and interest (SPPI) - continued
Unlike the business model assessment, the SPPI assessment is performed for each individual product or portfolio of products. The following considerations are made when assessing consistency with SPPI:
•contingent events that would change the amount and timing of cash flows such as contractual term resetting interest to a higher amount in the event of a missed payment;
•leverage features, being contractual cash flow characteristics that increase the variability of the contractual cash flows with the result that they do not have economic characteristics of interest;
•contractual terms that allow the issuer to prepay (or the holder to put a debt instrument back to the issuer) before maturity and the prepayment amount substantially represents unpaid amounts of principal and interest, which may include reasonable compensation for early termination of the contract;
•contractual terms that allow the issuer or holder to extend the contractual term and the terms of the extension option result in contractual cash flows during the extension period that are solely payments of principal and interest, which may include reasonable compensation for the extension of the contract; and
•features that modify consideration for the time value of money (for example, periodic reset of interest rates).
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Equity instruments
Equity instruments are instruments that meet the definition of equity from the issuer's perspective, that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer's net assets. Examples of equity instruments include basic ordinary shares.
The Bank subsequently measures all equity investments at FVPL, except where the Bank's management has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. The Bank's policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. When this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal.
Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the Bank's right to receive payments is established.
Gains and losses on equity investments at FVPL are included in the 'Net trading expense’ line in the income statement.
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1.Summary of significant accounting policies - continued
1.4 Impairment of financial assets
The Bank assesses on a forward-looking basis the expected credit losses (‘ECLs’) associated with its debt instruments carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial guarantee contracts. The Bank recognises a loss allowance for such losses at each reporting date. The measurement of ECLs reflects:
i.An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
ii.The time value of money; and
iii.Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
Note 2.2.5 provides more detail of how the expected credit loss allowance is measured.
Expected credit loss allowances are presented in the statement of financial position as follows:
•Financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;
•Loan commitments and financial guarantee contracts: generally, as a provision;
•Financial instrument with both a drawn and undrawn component, whereby the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components, as a deduction from the gross carrying amount of the drawn component; and
•Debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position against the carrying amount of the asset because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve, i.e. presented within other comprehensive income.
1.5 Modification of financial assets
A modification occurs when there is a change in the contractual cash flows of a financial asset as a result of modifications or renegotiations to the terms and conditions of the underlying loan agreement finalised with the borrower. The Bank’s terms and conditions of consumer loans generally include clauses allowing customers to request modifications to the terms and conditions as a value-added product feature. These modifications can take different forms, can happen at different stages during the maturity period of the loan. During 2022, the Bank has updated its policies to reflect whether such modifications granted by the Bank constitute forbearance as defined by EU Regulation 575/2013 (‘CRR2’).
Please refer to note 2.2.11 for further details on modification of financial assets and the impact on the expected credit loss calculation in respect of these modifications.
 
Taking cognisance of the nature of the modifications granted by the Bank (refer to note 2.2.11), given that the terms are not substantially different, the modification is not expected to result in derecognition, and the Bank recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in profit or loss if material.
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1.Summary of significant accounting policies – continued
1.5 Modification of financial assets – continued
If the terms are substantially different, the Bank derecognises the original financial asset and recognises a 'new' asset at fair value, and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. However, the Bank would also assess whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amount would also be recognised in profit or loss as a gain or loss on derecognition.
The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).
1.6 Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Bank transfers substantially all the risks and rewards of ownership, or (ii) the Bank neither transfers nor retains substantially all the risks and rewards of ownership and the Bank has not retained control.
The Bank enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Bank:
i.Has no obligation to make payments unless it collects equivalent amounts from the assets;
ii.Is prohibited from selling or pledging the assets; and
iii.Has an obligation to remit any cash it collects from the assets without material delay.
1.7 Derivative financial instruments
The Bank deploys no hedging strategies that achieve hedge accounting in terms of IFRS 9.
 
Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into, and are subsequently remeasured at their fair value. Fair values are obtained from valuation techniques for over-the-counter derivatives, including discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Fair values for currency forwards are determined using forward exchange market rates at the end of the reporting period. Discounting techniques, reflecting the fact that the respective exchange or settlement will not occur until a future date, are used when the time value of money has a significant effect on the fair valuation of these instruments.
Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss. The Bank uses derivatives such as cross currency swaps and forward foreign exchange contracts.
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1.Summary of significant accounting policies – continued
1.8 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
1.9 Intangible asset
Intangible assets are recognised when they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably.
Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives once the software has been put into use. Software has a maximum expected useful life of 7 years.
Intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount may not be recoverable.
Trademarks, licences and rights with indefinite useful life are tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and are carried at cost less accumulated impairment losses.
1.10 Property and equipment
All property and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial year in which they are incurred.
Depreciation is calculated using the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives, as follows:
%
Furniture and fittings
12.5
Computer hardware
25
Office equipment
25
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1.11).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in profit or loss.
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1. Summary of significant accounting policies - continued
1.11 Impairment of non-financial assets
Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). The impairment test can also be performed on a single asset when the fair value less costs to sell or the value in use can be determined reliably.
1.12 Other receivables
Other receivables are amounts due to the Bank for services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.
Other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provisions for impairment (note 1.4). The carrying amount of the asset is reduced through the use of an impairment allowance account, and the amount of the impairment loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written off are credited in profit or loss.
1.13 Current and deferred tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period.
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
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1. Summary of significant accounting policies - continued
1.13 Current and deferred tax - continued
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority.
1.14 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.
1.15 Financial liabilities
1.15.1 Initial recognition and measurement
The Bank recognises a financial liability on its statement of financial position when it becomes a party to the contractual provisions of the instrument. Financial liabilities not at FVPL are recognised initially at fair value, being the fair value of consideration received, net of transaction costs that are directly attributable to the acquisition or the issue of the financial liability.
1.15.2 Classification and subsequent measurement
Financial liabilities are classified as subsequently measured at amortised cost, except for:
•Financial liabilities at fair value through profit or loss: this classification is applied to derivatives, financial liabilities held for trading (e.g. short positions in the trading book) and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at FVPL are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk of the liability are also presented in profit or loss;
•Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Bank recognises any expense incurred on the financial liability; and
•Financial guarantee contracts and loan commitments (see note 1.17).
Financial liabilities measured at amortised cost comprise principally amounts owed to banks, amounts owed to customers, debt securities in issue together with other liabilities.
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1. Summary of significant accounting policies - continued
1.15.3 Derecognition
The Bank derecognises a financial liability from its statement of financial position when the obligation specified in the contract or arrangement is discharged, is cancelled or expires.
The exchange between the Bank and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability.
1.16 Other liabilities
 
Other liabilities comprise obligations to pay for goods or services that have been acquired in the ordinary course of business. Other liabilities are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.
Other liabilities are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
1.17 Financial guarantee contracts
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are issued by the Bank to financial institutions and other entities on behalf of customers to secure micro-loans and other credit related products.
Financial guarantee contracts are initially measured at fair value and subsequently measured at higher of:
•The amount of the loss allowance (calculated as described in note 1.4); and
•The premium received on initial recognition less income recognised in accordance with the principles of IFRS 15.
'Loan commitments' are the Bank’s commitments to provide credit under pre-specified terms and conditions and are measured as the amount of the loss allowance (calculated as described in note 1.4).
For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. However, for contracts that include both a loan and an undrawn commitment and the Bank cannot separately identify the expected credit losses on the undrawn commitment component from those on the loan component, the expected credit losses on the undrawn commitment are recognised together with the loss allowance for the loan. To the extent that the combined expected credit losses exceed the gross carrying amount of the loan, the expected credit losses are recognised as a provision.
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1. Summary of significant accounting policies - continued
1.18 Interest income and expense
Interest income and expense for all interest-bearing financial instruments are recognised within ‘interest income’ and ‘interest expense’ in the profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.
The Bank’s income streams consist of process fees, rescheduling fees (charged when a customer applies to extend the repayment date), reminder fees (charged when reminder actions are effected with respect to a loan) and other fees and interest charged on revolving and longer term credit products. All these fees are considered to be an integral part of the effective interest rate of the loans and advances taking cognisance of the nature of these fees, the purposes for which these fees are assessed and the substance of the services provided. Accordingly, these fees are amortised to profit or loss using the effective interest method over the expected term of the instruments and presented within ‘Interest and similar income’.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability.
The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired ('POCI') financial assets - assets that are credit-impaired at initial recognition - the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows.
Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for:
•POCI financial assets, for which the original credit-adjusted effective interest rate is applied to the amortised cost of the financial asset; or
•Financial assets that are not 'POCI' but have subsequently become credit-impaired (or 'stage 3'), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of the expected credit loss provision).
1.19 Fees and commissions
Fee and commission income and expense that are an integral part of the effective interest rate on a financial asset or liability are included in the calculation of the effective interest rate and treated as part of effective interest. Other fees and commissions are generally recognised on an accrual basis when the service has been provided.
1.20 Net trading income or expense
The line item includes fair value changes, interest, dividends and foreign exchange differences attributable to financial instruments measured at FVPL. Net income or expense from derivatives (such as cross-currency swaps and forward exchange contracts) is included within this line item.
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1. Summary of significant accounting policies - continued
1.21 Leases
Lease liabilities are initially measured at the present value on a present value basis. Lease liabilities include the net present value of the following lease payments:
•fixed payments (including in-substance fixed payments), less any lease incentives receivable;
•variable lease payments that are based on an index or a rate, initially measured using the index
•or rate as at the commencement date;
•amounts expected to be payable by the group under residual value guarantees;
•the exercise price of a purchase option if the group is reasonably certain to exercise that option; and
•payments of penalties for terminating the lease, if the lease term reflects the group exercising
•that option.
Lease payments to be made under reasonably certain extension options are also included in the
measurement of the liability.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right of use assets are measured at cost comprising the following:
•the amount of the initial measurement of lease liability;
•any lease payments made at or before the commencement date less any lease incentives
received;
•any initial direct costs; and
•restoration costs.
1.22 Cash and cash equivalents
Cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less, together with borrowed funds having the same maturity.
1.23 Dividend distribution
Dividend distribution to the Bank’s shareholders is recognised as a liability in the Bank’s financial statements in the period in which the obligation to pay a dividend is established.
1.24 Segmental reporting
The Chief Executive Officer, supported by the Board of Directors, is considered to be the Chief Operating Decision Maker (‘CODM’) for the purposes of identifying the Bank’s reportable segments.
Through its consumer unsecured loans, the Bank serves customers in two main geographic areas being Northern and Western Europe, and Eastern Europe. These two geographic areas are identified as operating segments and reported separately as they are operating segments exceeding the quantitative thresholds in IFRS 8.
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2. Financial risk management
2.1 Introduction
The Bank’s activities expose it to a variety of financial risks and these activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. The Bank’s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the entity’s financial performance.
The Board of directors oversees credit, market, funding and liquidity, operational and strategic business risks. The Bank has developed an integrated risk management framework to identify, assess, manage and report risks and risk adjusted returns.
The Bank’s risk management policies are designed to identify and analyse risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to date information systems. The Board is responsible for the overall effectiveness of the risk management function, which function is however carried out by the members of the Bank’s management team.
Throughout this financial year, the Bank has made certain changes to its strategy, inter alia the origination of a credit card product, further investment in securitisation portfolio and securitised investments in external instruments. Whilst actively working to mitigate its respective risks, the Bank has also affected updates to its risk policies accordingly, in order to reflect these changes in its strategy.
The Board may delegate any of its powers to a Committee consisting, in most cases, of one or more Directors. The Board establishes Committees in order to focus on specific risk areas and issues and consider certain issues and functions in greater detail.
 
These Committees may only act in accordance with the powers and responsibilities delegated to them by the Board, and in this regard, the extent to which a Committee is empowered to make decisions is carefully defined.
The Bank’s governance structure comprises three Board Committees, namely the Audit Committee, the Risk Committee and the Remuneration Committee, as well as four Management Committees, namely the Executive Committee (EXCO), Asset Liability Management Committee (ALCO), the Credit Committee and the Reserving Committee.
The Bank’s Executive Committee (EXCO) is responsible to oversee the activities of the Bank and its Management in the implementation of its strategy, and is accountable for the soundness of the Bank’s lending portfolio and for the implementation of the Capital Requirements Directive (as transposed into the Maltese regulatory framework) and capital allocation decisions.
The Bank’s Asset and Liability Committee (ALCO) is responsible for managing assets, liabilities and the overall financial position and is also responsible for the management of funding and liquidity risks.
The Bank’s Risk Committee is responsible for overseeing the policy and framework for all banking and operational risks, for developing and overseeing the risk management framework including the Bank’s risk appetite and tolerance levels, for ensuring the ongoing execution of all risk policies, and for ensuring that all risk controls operating throughout the Bank are in accordance with regulatory requirements and best practices.
The Bank’s Credit Committee is responsible to ensure the effective management of the Bank’s credit portfolio through the implementation of sound and transparent credit scoring and decision-making processes around its various product lines.
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2. Financial risk management - continued
2.1 Introduction - continued
The Bank’s Reserving Committee is primarily responsible for safeguarding the soundness of the valuation of the Bank’s lending portfolio by inter alia ensuring that the Bank has appropriate credit risk practices to determine adequate expected credit loss (ECL) allowances in accordance with IFRS 9, as well as, the Bank’s stated policies.
The Bank’s Audit Committee is responsible for reviewing the adequacy and proper operation of internal controls in individual areas of operation, overseeing the quality and integrity of the Bank’s financial reports, monitoring the Bank’s compliance with legal, ethical and regulatory requirements, and for recommending areas of improvement across the business.
The Bank’s Risk Management function has the overall responsibility for the development of the entity’s risk strategy and the implementation of risk principles, framework, policies and related limits.
The Bank’s objective is to deploy an integrated risk management approach that ensures an awareness of, and accountability for, the risks taken throughout the Bank and also to develop the tools needed to address those risks. Strong risk management and internal controls are core elements of the Bank’s strategy. The Bank has adopted a risk management and internal control structure, referred to as the Three Lines of Defence, to ensure it achieves its strategic objectives while meeting regulatory and legal requirements and fulfilling its responsibilities to shareholders, customers and staff.
In the three lines of defence model, business line management is the first line of defence (including those functions that are responsible for day-to-day operations and the Treasury function), the various risk control and compliance oversight functions established by management represent the second line of defence, and internal audit is the third. Each of these three “lines” play a distinct role within the Bank’s wider governance framework. Although the Bank adopts a “three lines of defence” model, it is worth mentioning the additional interaction between the Bank and its regulatory bodies adds further “lines of defence”, albeit they are not depended upon internally by the Bank to act in such capacities.
2.2 Credit risk
2.2.1 Introduction
The Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss for the Bank by failing to discharge an obligation.
Credit risk is the most important risk for the Bank’s business; accordingly management carefully manages its exposure to this risk. Credit exposures arise principally through the Bank’s lending activities in various European countries, together with the placement of liquidity with banks domiciled in Malta and other European countries.
The Bank is also exposed to credit risk arising from the issuance of financial guarantee contracts to entities granting micro-loans and other related credit products to individuals located in certain European countries.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.1 Introduction - continued
The Bank’s exposure to credit risk also arises on its exposure to the investment in securitisation portfolio in which the Bank holds Class A senior notes, which rank before the class B notes in the applicable contractual priority payments. The securitisation vehicle invests in the portfolio of SME loans and is subject to a continuous, and thorough monitoring and oversight process in order to identify any financial instruments which require increased monitoring of performance. The Bank has purchased Class A Notes, which are senior to the Class B Notes in terms of the applicable priority of payments.
The Bank is also exposed to credit risk arising on its exposure to investment in debt instruments. The investment in debt instruments reflect the Bank's acquisition of secured bonds as outlined in Note 8. Such bonds are secured by a number of loan portfolios which are pledged in favour of the Bank, and are subject to a number of covenants including predetermined ratios of ageing portfolios and advance rates. Such covenants are monitored on a regular basis by management and the reserving committee. Moreover, the Bank also has additional collateral in the form of cash deposited in its accounts or pledged financial instruments in its favour in respect of each investment.
Credit exposures arising through advances to group undertakings located in Finland and operating balances with other group undertakings located in European countries also give rise to credit risk.
During the financial year 31 December 2022, the impact of the COVID-19 pandemic which had dominated the previous two financial years declined and the different territories in which Bank operates experienced, albeit to different extents, signals of an economic rebound close to the levels experienced prior to the onset of the pandemic in early months of 2020.
In view of the tightening of the credit origination protocols which were introduced by the Bank during 2020 as a reaction to the pandemic, which had triggered a consequential pressure on consumer spending which was mitigated, in part, through different forms of levels of government induced support and relief in the respective territories, the Bank has not experienced an anomalous level of defaults during the preceding financial years.
Nonetheless, during 2022 the levels of economic uncertainty were exacerbated again by the geopolitical developments which were unleashed by the military conflict between Russia and Ukraine which occurred on the back of pressures which were already being experienced in supply chain disruptions - as different economies struggled to recover from the impacts of the pandemic. These new conditions triggered new spiraling inflationary pressures across the world and pushed central banks, including the European Central Bank (‘ECB’), to invoke specific monetary policy actions at their disposal, namely the increase of interest rates to manage demand with a view curb inflation.
In a reaction to this, a number of governments implemented different levels of price mitigating fiscal measures to support the respective economies and ease pressures especially, on energy prices, which were particularly subject to significant price volatility.
The consequential effect of this new economic landscape implied new economic uncertainties which affected, amongst other things, the disposable income of households and individuals in different European territories, and which represent the customer base of the Bank.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.1 Introduction – continued
In view of the above, during financial year 2022, the Bank was engaged in a process of macroeconomic forecasting and modelling to assess how the Bank’s different geographical portfolios are affected by current economic developments. The model considers the equivalent of a ‘Macro Exposure Score’ to each country by factoring several parameters, including actual payment behavior trends, inflation, other macro indicators and government aid. Based on the assessments of the outcomes of the modelling process, the Bank executed strategic decisions to tighten lending in certain markets where the model indicated unfavorable expectations. This process further assisted the Bank to monitor its customer payment behavior in different territories and enabled agile action where circumstances necessitated the tightening or loosening of underwriting scorecards accordingly.
The calibration of the forward-looking information incorporated in the expected credit losses model (Note 2.2.5.4) and the determination of weightings assigned to the different scenarios also considered the new elevated level of economic uncertainty. The unfolding economic scenario was also considered in the process of collectively managing the loan portfolios and in determining whether particular cohort of debtors exhibited any significant increase in credit risk or demonstrated any unlikely to pay indicators as a result of prevailing economic conditions.
2.2.2 Credit risk management
Loans and advances to customers
The Bank’s lending activities comprise the granting of unsecured short-term micro-loans, other medium-term credit products, other amortising, long-term credit products with instalment repayment features and revolving credit facilities to individual customers in specific European jurisdictions. All loans to customers are granted on the basis of the outcome of the scoring model, depending on the loan type, and the rules embedded within the credit policy. Each lending transaction and the related agreement are determined on the strength of an individual credit decision. All credit decisions are handled and processed within the Bank’s internal loan handling system.
The creditworthiness of potential customers is assessed by reference to the calculation of a credit score for each loan application received and based on the customer’s specific affordability. The relevant credit score is computed through the application scorecard for first time customers and through the behaviour scorecard for repeat customers. Based on the credit score registered, customers are grouped into risk classes. The respective risk class determines the maximum credit amount allowable for each customer. The scoring model and linked scorecards are monitored by the Risk management function of the Bank. These are applied in all jurisdictions in which the Bank operates with specific adaptations at country level taking cognisance of the different characteristics of each market; with the adaptations being centrally approved.
The scorecards are reviewed on an ongoing basis by the management team of the Bank and updated according to market trends, political circumstances in the particular jurisdiction, legislative and socio-economic changes.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.2 Credit risk management - continued
Loans and advances to customers – continued
Prior to generation of internal scores, credit policy checks or underwriting actions are carried out within the loan handling system referring to factors emanating from the Bank’s credit policy rules such as applicant’s age, number of outstanding loans, existence of duplicate applications, reference to Bank’s internal customer blacklist, previous loan repayment behaviour and linkage to external collection company information.
These underwriting actions generate an internal credit score for the customer. Subsequently, specifically designed underwriting actions are carried out to finalise the loan application review and decision making process. These underwriting actions comprise requests for checks in relation to existence of bad debts reported by credit agencies, requests for external credit scoring checks with a view to checking external sources of credit information about the client, and requests for additional checks in respect of certain customer details. The outcome of these underwriting actions is reflected in the loan handling system and updates the scorecard in an automated manner. If the scored or approved amount is higher than or equal to the requested amount, the loan is then approved. Otherwise, the loan is approved up to the scored amount.
Expected credit loss (ECL) allowances are calculated in respect of the Bank’s short-term micro-loans, other medium-term credit products, other amortising, long-term credit products with instalment repayment features and revolving credit facilities at a collective portfolio level, as according to loan type, the portfolios consist of a large pool of homogeneous loans which by nature cannot be considered individually significant. The Bank’s ECL methodology is set out in extensive detail in note 2.2.5 below.
The Bank has a formal rigorous debt collection process that provides for the way the Bank deals with past due loans and advances. This process is supported by procedures for use within the operations in the respective territories with formal documented adaptations for the respective territories. The procedures highlight the prescribed actions, channels and mechanisms utilised to follow up on outstanding exposures indicating the precise point in time at which the respective actions are taken and allocating roles and responsibilities in this respect.
These procedures also focus on the extent to which collection activities are carried out by the Bank and the stage or phase at which external collection companies are utilised.
The Bank also enters into sale arrangements with third parties for the transfer of outstanding balances in respect of certain credit products granted in specific territories once such balances reach pre-established trigger points in terms of days past due. Such transfers take place at pre-established levels of consideration. These arrangements constitute an intrinsic part of the Bank’s management of past due and non-performing assets.
During 2022, the Bank has also originated a loan to a corporate entity. Whilst forming part of the Bank’s loans and advances to customers, this loan, given the distinct inherent nature, is assessed and managed separately.
Banking Rule BR/09/2019: Measures Addressing Credit Risks Arising from the Assessment of the Quality of Asset Portfolios of Credit Institutions Authorised under the Maltese Banking Act, 1994 requires banks to allocate funds to the General Banking Risks reserve for cover against potential risks linked to the Bank’s non-performing loans and advances. In line with the requirements under Banking Rule BR/09/2019 at the reporting date, the balance of the reserve in this respect amounted to €1,519,000 (2021: €1,519,000).
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2.Financial risk management - continued
2.2 Credit risk - continued
2.2.2 Credit risk management - continued
Loans and advances to customers – continued
The Bank also falls within the scope of paragraphs 45-53 of Banking Rule BR/09/2019 which establishes a framework for the deliberate and sustainable reduction of NPLs in banks’ balance sheets in line with the European Central Bank’s Guidance to Banks on Non-performing Loans of March 2017. In terms of BR/09/2019, credit institutions with a two-year average NPL ratio exceeding 6% are to submit a multi-year NPL Reduction Plan targeting the decrease in these exposures to the set target, as required by paragraph 46 of BR/09/2019. The Bank’s two-year average NPL ratio as at 31 December 2021 exceeded the 6% threshold. Accordingly, the Bank prepared and submitted an NPL Reduction Plan in line with the requirements of BR/09/2019 in April 2022.
Moreover, the Bank is required to accumulate a Reserve for Excessive NPLs in line with the requirements of Paragraphs 54-60 of BR/09/2019. In this respect, the Bank has allocated a Reserve for Excessive NPLs amounting to €1,073,000 (2021: €1,073,000).
Loans and advances to group companies
The advances to a group undertaking, Ferratum Capital Oy, which were outstanding at 31 December 2022 were primarily secured against the entire consumer lending portfolio of all group companies that operate in the consumer and business lending business. During 2016, the Bank had entered into a Foreign Exchange Risk Agreement with this group company, where the latter provides cover to the Bank over realised and unrealised foreign exchange differences. Any realised and unrealised gains or losses attributable to foreign exchange rate movements registered by the Bank are allocated to the group company at the end of each month, in line with the terms of this agreement. The terms of this agreement stipulate fees payable by the Bank to the group company. As from 2021, the Bank started to hedge a small portion of its foreign currency open positions with a third party financial institution. This continued further in 2022. However, the vast majority of the Bank’s foreign currency exposure remains to be fully hedged with the Group.
Operating balances with other group companies are monitored on an ongoing basis, taking cognisance of the related party relationship, utilising a limit framework and reporting mechanism. The balances are normally repayable within short periods of time. Repayment behaviour and performance are reviewed in this respect.
Investment in securitisation portfolio
All exposures classified under investment in securitisation portfolio undergo a thorough analysis process, not only from an internal credit perspective but also from a legal and financial perspective. The Bank’s Credit Committee, which manages the credit analysis and research process, is composed of highly-trained individuals with specialised skills. The securitisation vehicle invests in the portfolio of SME loans and is subject to a continuous, and thorough monitoring and oversight process in order to identify any financial instruments which require increased monitoring of performance.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.2 Credit risk management - continued
Investment in debt instruments
The investments in debt instruments represent the acquisition by the Bank of secured bonds issued by corporate entities. These investments are evaluated and assessed at inception in order to determine the credit quality of the investment and potential credit risks that may arise. Moreover, on an ongoing basis, the Bank actively monitors respective credit risk related clauses that have been agreed to in order to ensure that these are still being adhered to.
These investments in debt instruments are secured by a number of loan portfolios which are pledged in favour of the Bank, and are subject to a number of covenants including predetermined ratios of ageing portfolios and advance rates. Such covenants are monitored on a regular basis by management and the reserving committee. Moreover, the Bank also has additional collateral in the form of cash deposited in its accounts or pledged financial instruments in its favour in respect of each investment. Additionally, the investments in debt instruments encompass several clauses and covenants to reduce the credit risk in relation to such investments.
Other financial assets
The majority of the Bank’s cash is held with Central Banks. Other than cash held with Central Banks, the Bank’s cash is dispersed amongst a large number of credit and financial institutions, following limits set in the Bank’s Treasury Management Policy (TMP). Other receivables are assessed in line with large exposure limits set in the Capital Requirements Regulation (CRR).
Credit related commitments
The Bank issues financial guarantee contracts to other parties that grant micro-loans and other short-term credit products. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties, and carry the same credit risk as loans. The Bank’s credit risk management framework applied to issuance of micro-loans and related products, described in detail in the preceding sections, is utilised for management of issuance of guarantee contracts.
2.2.3 Credit risk measurement
 
(a) Loans and advances to customers
The Bank uses internal credit risk gradings (Note 2.2.10) to reflect its assessment of the probability of default of individual counterparties. The Bank’s credit grading and monitoring systems are also in place to react to any early identification and management of deterioration in loan quality. Internal credit risk gradings is based on payment behaviour of the borrower. The Bank monitors the payment behaviour of its clients and other key risk indicators at portfolio level and at cohort level. The latter is regarded as an important metric as it tracks the behaviour of recent loans granted.
At onboarding stage, any known information about a borrower which impacts their creditworthiness - such as unemployment and previous delinquency history - is assessed during the initial credit assessment. After the date of initial recognition, for consumer lending facilities, the payment behaviour of borrowers is monitored on an ongoing basis at a collective portfolio level.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.3 Credit risk measurement - continued
 
(a) Loans and advances to customers - continued
The corporate loan that the Bank has originated was assessed and is managed separately from the collective portfolio of consumer lending facilities. A thorough assessment was conducted on the entity prior to the granting of the loan by the Bank. After the date of initial recognition, the payment behaviour of the entity, along with other financial metrics, are monitored on an ongoing basis.
(b) Investment in securitisation portfolio
The securitisation vehicle acquires portfolio of loans consisting of current and 1-30 days past due exposures with an underlying and estimated probability of default which is not in excess of 20%. The Bank is the holder of Class A Notes, which are senior to the Class B Notes in terms of the applicable priority of payments and thus also have a higher credit quality.
The management of ‘expected credit losses’ considers that an exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The expected credit risk of the underlying portfolio in SME loans which the securitisation vehicle invests in is measured using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is consistent to the approach used for the purposes of measuring Expected Credit Loss (ECL) under IFRS 9. Refer to note 2.2.5 for more details.
In this respect, the Bank actively assesses the underlying loan portfolios which were acquired by the securitisation vehicle for indications of impairment. The Bank conducts periodical sensitivity analysis in relation to the respective portfolio, taking into consideration plausible worst-case scenarios, in order to assess whether the Bank should provide for expected credit losses. The outcome of such sensitivity analysis, coupled with the fact that a substantial amount of potential losses would first be absorbed by Class B Notes holder, does not indicate any requirements for the Bank to provide for expected credit losses.
(c) Investments in debt instruments
The investments in debt instruments represent the acquisition by the Bank of secured bonds issued by corporate entities. These investments in debt instruments are secured by loan portfolios that are pledged in favour of the Bank, and are subject to a number of covenants including predetermined ratios of ageing portfolios and advance rates. Such covenants are monitored on a regular basis by management and the reserving committee. Moreover, the Bank also has an additional collateral in the form of cash deposited in its accounts or pledged financial instruments in its favour in respect of each investment. Additionally, these investments encompass several clauses and covenants for the purpose of managing the credit risk in relation to such investments.
The Bank’s Risk Management team evaluates and assesses these investments at inception in order to determine the credit quality of the investment and the potential credit risks that may arise. Moreover, on an ongoing basis, the Bank actively monitors the applicable covenants to ensure that these are still being adhered to.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.3 Credit risk measurement - continued
(c) Investments in debt instruments - continued
The Bank also conducts periodical assessments to the pledged loan portfolios, in order to assess whether the Bank should provide for expected credit losses. Such assessments are based on the credit information supplied by the bond issuers which the Bank has invested in. In order for its ECL methodology to represent an appropriate estimation of its credit risk emanating from said investments, the Bank assesses the ECL on each credit portfolio securing the Bank’s investment separately. Consistent with regulatory and industry best practices, the Bank’s ECL calculations are based on Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is consistent to the approach used for the purposes of measuring Expected Credit Loss (ECL) under IFRS 9 for credit products originated by the Bank. Refer to note 2.2.5 for more details.
The outcome of such assessments, also in the light of clauses and covenants contained within the agreements, indicate that no requirement for the accounting of any expected credit losses arises in relation to these investments.
(d) Other financial assets
Other financial assets include Balances with Central Bank of Malta, Central Bank of Sweden, Central Bank of Czech Republic and Central Bank of Lithuania, loans and advances to credit and financial institutions and loans and advances to group companies. The Bank uses external risk grades to reflect its assessment of the probability of default of individual counterparties. These published grades are continuously monitored and updated. The PDs associated with each grade are determined based on realised default rates over the prior 12 months, as published by rating agencies.
In determining the probability of default of individual counterparties, the Bank distinguishes between exposures considered ‘investment-grade’ defined by recognized external rating agencies as a rating between AAA-BBB- (Standard & Poor’s, Fitch) and Aaa-Baa3 (Moody’s), and ‘non-investment grade’ exposures. Credit risk in other financial assets is also mitigated through limits set in the Bank’s treasury management policy and in accordance with large exposure limits set in the CRR respectively.
2.2.4 Categorisation of loans and advances to customers for ECL measurement
The Bank’s expected credit loss allowances on loans and advances to customers are modelled on a collective basis. As a result, a grouping of exposures is performed on the basis of shared risk characteristics, such that risk exposures within a group of financial assets are homogenous. In performing this grouping, the Bank ensures that there is sufficient information for the group of financial assets to be statistically credible. In this respect, the Bank considers the following categories for ECL measurement of loans and advances to customers:
i.Micro-credit portfolios which are subject to bullet repayment characteristics,
ii.Credit portfolios with instalment repayment features and revolving credit facilities; and
iii.Other amortising, long-term credit products with instalment repayment features.
During 2022, the Bank originated a new exposure to a corporate entity which in view of its significance is assessed individually.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement
Loans and advances to customers
IFRS 9 outlines a 'three-stage' model for impairment based on changes in credit quality since initial recognition as summarised below:
i.A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit risk continuously monitored by the Bank.
ii.If a significant increase in credit risk ('SICR') since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit-impaired. Please refer to note 2.2.5.1 for a description of how the Bank determines when a significant increase in credit risk has occurred.
iii.If the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. Please refer to note 2.2.5.2 for a description of how the Bank defines credit-impaired and default.
iv.Financial instruments in ‘Stage 1’ have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in ‘Stages 2 or 3’ have their ECL measured based on expected credit losses on a lifetime basis. Please refer to note 2.2.5.3 for a description of inputs, assumptions and estimation techniques used in measuring the ECL.
v.A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward looking information. Note 2.2.5.4 includes an explanation of how the Bank has incorporated this in its ECL models.
vi.Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis (‘Stage 3’).
Further explanation is also provided in respect of how the Bank determines appropriate groupings of loans and advances to customers for ECL measurement (refer to note 2.2.4).
The expected credit loss requirements apply to financial assets measured at amortised cost and FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, an impairment allowance (or provision in the case of commitments and guarantees) is required for ECL resulting from default events that are possible within the next 12 months (“12-month ECL”). In the event of a significant increase in credit risk, an allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument (“lifetime ECL”). In line with the ‘three stage’ model described above, financial assets where 12-month ECL is recognised are considered ‘Stage 1’. Financial assets which are considered to have experienced a significant increase in credit risk would be classified as ‘Stage 2’ and financial assets for which there is objective evidence of impairment, thus considered to be in default or otherwise credit-impaired, would be classified as ‘Stage 3’.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5Expected credit loss measurement - continued
Loans and advances to customers - continued
The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired financial assets):
 
Stage 1
Stage 2
Stage 3
(Initial recognition)
(Significant increase in credit risk since initial recognition)
(Credit-impaired financial assets)
12-month expected credit losses
Lifetime expected credit losses
Lifetime expected credit losses
2.2.5.1 Significant increase in credit risk
To determine whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information. Such analysis is based on the Bank’s historical experience, credit assessment and forward-looking information.
Loans and advances to customers
The Bank’s consumer lending exposures are not managed on a credit-by-credit basis due to the high volume of relatively low value and homogeneous exposures. As a result, it is not feasible to include qualitative information based on an expert credit assessment performed on an individual credit basis. On this basis, the Bank adopts a retail portfolio methodology which takes into account the nature of the consumer lending exposures and the underlying credit risk management practices of the Bank.
                   Change in credit quality since initial recognition
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5Expected credit loss measurement - continued
2.2.5.1 Significant increase in credit risk - continued
Loans and advances to customers - continued
The consumer lending portfolio comprises of credit facilities with bullet repayment or instalment loan characteristics, revolving credit facilities as well as other amortising, long-term credit products with instalment repayment features. Given how such retail facilities are originated and managed for internal risk management purposes, consumer loans within a particular segment are expected to have similar credit risk characteristics.
As a result, for loans and advances to customers, which are managed on a portfolio basis for credit risk purposes, the Bank measures a significant increase in credit risk based on a quantitative assessment driven by the delinquency status of borrowers (days past due). The Bank presumptively considers that a significant increase in credit risk occurs when an asset is more than 30 days past due, in line with the backstop indicator established under IFRS 9. The Bank determines days past due by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received.
For year-ended 31 December 2022, the Bank assessed all the different portfolios of loans and advances to customers by product and by country to determine whether a significant increase in credit risk was observed. The assessment is conducted by analysing the rate of default in the 1-30 days past due ageing buckets in each portfolio. When the Bank identifies a significant increase in credit risk in any of the portfolios, it shifts the calculation of ECL of the respective ageing bucket from 12-month to lifetime as required by IFRS 9.
Moreover, the Bank on a regular basis also conducts a separate assessment on exposures which were granted a payment holiday or other modifications, in order to assess for indicators of a significant increase in credit risk.
Investment in securitisation portfolio
The Bank actively assesses the underlying loan portfolios which were acquired by the securitisation vehicle for indications of impairment. The Bank conducts periodical sensitivity analysis in relation to the respective portfolio, taking into consideration plausible worst-case scenarios, in order to assess whether the Bank should provide for expected credit losses.
A significant increase in credit risk is deemed to arise, inter alia, if repayment of interest and/or capital are in arrears or if there are indications of impairment based on sensitivity analysis and other parameters as outlined in Note 2.2.5.3.
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2. Financial risk management - continued
2.2Credit risk - continued
2.2.5Expected credit loss measurement - continued
2.2.5.1 Significant increase in credit risk - continued
Investments in debt instruments
The Risk Management team of the Bank evaluates and assesses these investments at inception in order to determine the credit quality of the investment and potential credit risks that may arise. Moreover, on an ongoing basis, the Bank actively monitors respective credit risk related clauses that have been agreed to in order to ensure that these are still being adhered to.
The Bank also conducts periodical assessments in relation to the respective portfolio, in order to assess whether the Bank should provide for expected credit losses. In order for its ECL methodology to represent an appropriate estimation of its credit risk emanating from said investments, the Bank assesses the ECL on each investment separately.
In relation to investments in debt instruments, a significant increase in credit risk is deemed to arise, inter alia, if any of the covenants are breached or if repayment of interest and/or capital are in arrears.
Other financial assets
In the case of other financial assets, the Bank applies low credit risk simplification to all its exposures considered ‘investment-grade’, thus they are not subject to the SICR assessment. Moving from ‘investment-grade’ to ‘non-investment grade’ does not automatically mean that there has been a SICR.
2.2.5.2 Definition of default and credit-impaired assets
The Bank did not experience sustained deterioration in the payment behaviour of the customers during 2022 and therefore no significant increase in credit risk was noted.
The Bank’s assessment to determine the extent of increase in credit risk of a financial instrument since initial recognition is performed by considering the change in the risk of default occurring over the remaining life of the financial instrument.
IFRS 9 does not specifically define default, but requires it to be applied on a consistent basis with internal credit risk management practice for the relevant instruments and requires consideration of qualitative factors where appropriate. In addition, IFRS 9 also introduces a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless there is reasonable and supportable information to demonstrate that a more lagging criterion is appropriate.
In this respect, the Bank generally defines a financial instrument as in default (credit impaired and in Stage 3 for impairment purposes), when the borrower is more than 90 days past due on any material credit obligation to the Bank. During 2022, the Bank has further aligned the definition of default on a number of products in specific territories from 60 to 90 days in line with internal risk management practices and analysis of the pay back rates arising on such portfolio.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement – continued
2.2.5.2 Definition of default and credit-impaired assets - continued
Moreover, in accordance with EBA guidelines, the Bank has further updated its policies to factor in observable events which may indicate Unlikeliness-To-Pay (‘UTP’) which also constitute default. Through this process, the Bank assesses developments occurring at the level of the individual debtor. The UTP criteria adopted by the Bank are the following:
•Suspected Fraud - Unlikeliness to pay is triggered if a loan has been identified as possible fraud in the fraud management tool;
•Insolvency - Unlikeliness to pay is triggered if a customer has notified the Bank of insolvency, through either collection tool or debt manager systems; and
•Death - Unlikeliness to pay is triggered if the Bank has been notified of death, through either collection tool or debt manager systems.
The UTP assessment enhances the ECL methodology through the application of a loan-by-loan focus with a view to determine whether a customer’s performance has deteriorated based on other criteria that can be observed before meeting the hard days past due criterion.
The definitions of credit-impaired and default are aligned so that Stage 3 represents all loans which are considered defaulted or credit-impaired. Whenever the Bank enters into a forward sale agreement with a third party, the definition of default is usually aligned with the contractual days past due under such agreement.
The default definition has been applied consistently to model the Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD) throughout the Bank's expected loss calculations.
In addition to the above, the Bank has an Arrears Management Policy to direct its credit portfolio management strategy in certain territories with a view to improve its debt collection capabilities in respect of overdue loan facilities. In achieving this strategy, the Bank prescribes four stages, these being, (i) early collection stage, (ii) late collection stage carried out through third party management and debt collection agencies, (iii) legal collections and (iv) debt sales. The Bank also seeks to extend its debt collection period with customers in order to increase recoveries from loan repayments prior to termination of loan contracts. Additionally, the Bank negotiates forward sale agreements with third parties in order to conduct regular sales of overdue loan facilities subsequent to a greater level of ageing that is sufficient to enable the Bank to perform its internal debt collection procedures for a sufficiently extended period prior to sale. Subsequent to the aforementioned portfolio management strategies being implemented, the Bank assesses the impact, if any, on the definition of default that it uses in estimating IFRS 9 expected credit losses in the respective territories. Significant judgement is required throughout this process, particularly in the event that changes to the impairment methodology are required, such as revisions to the probabilities of default utilised in the expected credit loss calculation.
The Bank considers other financial assets, mainly loans and advances to banks and investments respectively, to be in default when a payment due (including a coupon payment) is not affected. In relation to investments in debt instruments, apart from being considered in default when a payment due is not affected, other clauses and caveats are also established within respective contractual agreements which could trigger an event of default.
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2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.3 Measuring ECL - Explanation of inputs, assumptions and estimation techniques
The Expected Credit Loss (ECL) is measured on either a 12-month (12M) or on a lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. Expected credit losses are the discounted product of the Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD).
Loans and advances to customers
The ECL is determined by projecting the PD, EAD and LGD at a collective portfolio level as allowable under IFRS 9 in the case of retail portfolios comprising individually insignificant exposures that are homogenous in nature. These three components are multiplied together effectively calculating the forward-looking ECL, which is then discounted back to the reporting date. The discount rate used in the ECL calculation is the actual effective interest rate or an approximation thereof.
The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated on a similar basis for the residual life of the exposure.
The PD, EAD and LGD parameters are derived from internally developed statistical models and other historical data, adjusted to reflect forward-looking information as described below.
The PD represents the likelihood of a borrower defaulting on its financial obligation (as per "definition of default and credit-impaired" above), either over the next 12 months (12M PD), or over the remaining lifetime (Lifetime PD) of the obligation. Accordingly, the 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument, respectively.
In the case of micro lending facilities with bullet repayment characteristics, the Bank utilises roll-rate methodology in order to estimate its PDs. This methodology employs statistical analysis of historical data and experience of delinquency and default to estimate the amount of loans that will eventually be written off as unrecoverable. This methodology is applied at territory or country level with adaptations to reflect the different nature of the respective markets in which the Bank operates. Under this methodology, loans are grouped into ranges according to the number of days past due and statistical analysis is used to estimate the likelihood that loans in each range will progress through the various stages of delinquency, and ultimately prove irrecoverable.
In the case of credit facilities with characteristics similar to instalment loans or revolving facilities, the Bank utilises curve-stitching methodology in order to estimate its PDs. Under this approach, an analysis of historical default data is carried out in order to estimate cumulative monthly loss rates at various snapshot dates. Subsequently, statistical analysis is employed in order to combine curves with different historical performance windows into a single PD curve over the expected lifetime of the micro-credit exposures. This methodology is also applied at territory or country level in order to incorporate adaptations to reflect the nature of the different markets in which the Bank operates. Under this approach, loans are also grouped into ranges according to the number of days past due, with an individual lifetime PD curve being calculated for each range.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
51
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.3 Measuring ECL - Explanation of inputs, assumptions and estimation techniques
- continued
Loans and advances to customers - continued
The conditional PD is adjusted to consider forward-looking information through macroeconomic modelling.
EAD is based on the amounts the Bank expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD). EAD represents the expected exposure in the event of a default (including any expected drawdowns of committed facilities).
The 12-month and lifetime EADs are determined based on the total balance of loans receivable at the reporting date, taking into account the total amount receivable from borrowers inclusive of principal, interest and fees that are accounted for as part of the effective interest rate. This is deemed an adequate representation of the expected balance at default in the case of the Bank’s credit facilities given that the Bank models its ECLs on a collective portfolio level with the modelling of the EAD for each future month on an individual loan-by-loan basis not being deemed practical. Additionally, in the case of revolving credit facilities the Bank also factors in expected drawdowns of committed facilities.
The Loss Given Default (LGD) represents the Bank’s expectation of the extent of loss on a defaulted exposure. Hence, the LGD represents expected credit losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral values (if any) at the time it is expected to be realised and the time value of money. The LGD is determined based on the factors which impact the recoveries made post default.
Given that its credit facilities are generally unsecured in nature, the Bank estimates LGD parameters based on the history of recovery rates in respect of claims against defaulted customers, which rates are highly impacted by collective debt recovery strategies. Moreover, the Bank’s LGDs comprise the effects of the Bank’s ability to dispose of overdue loans originated in specific territories to other parties at pre-established prices, that are dependent on the credit quality or ageing of the loans, emanating from existing contractual arrangements. Estimated LGDs are also impacted by historical one-off portfolio sales and the expected future uncontracted portfolio sales activity. Recoveries from loan portfolio sales are calculated on a discounted cash flow basis using the contractual default interest rate as the discounting factor.
The Bank has a number of forward flow agreements in place with third parties whereby loans and advances which are more than certain days past due will be sold to the third party in batch at an agreed price. The Bank is also capable of selling loans and advances on the market which it cannot collect or recover internally in the form of debt sales.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
52
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.3 Measuring ECL - Explanation of inputs, assumptions and estimation techniques
- continued
Loans and advances to customers - continued
The ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the Bank is exposed to credit risk. With respect to non-revolving credit facilities, the contractual life of the facility is considered. In the case of revolving credit facilities, provided that such facilities do not have a fixed term or repayment structure, the Bank defines the lifetime of such exposures as 24 months in line with observed borrower behaviour in specific territories. The lifetime of revolving credit facilities is re-assessed by the Bank at a territory level based on more recent borrower behaviour patterns on a periodic basis.
Forward-looking economic information is also included in determining the 12-month and lifetime PD and LGD. Refer to note 2.2.5.4 for an explanation of forward-looking information and its inclusion in ECL calculations.
The Bank performs a historical analysis to identify the key economic variables affecting credit risk and expected credit losses for each product portfolio at a territory level. These economic variables and their associated impact on the PD, EAD and LGD may vary by portfolio or territory.
In relation to the corporate loan that the Bank has originated, consistent with regulatory and industry best practices, the Bank’s ECL calculations are based on PD, EAD and LGD. The 12-month PD of the entity, applicable for a Stage-1 financial asset, is derived from information obtained by external credit bureaus, the EAD equates to the investment itself, whilst the LGD is derived based on historical data available from Multitude Group in relation to SME exposures in respective jurisdictions.
Investment in securitisation portfolio
The expected credit risk of the underlying portfolio in SME loans which the securitisation vehicle invests in is measured using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD).
In this respect, the Bank actively assesses the securitisation portfolio for indications of impairment. The Bank conducts periodical sensitivity analysis in relation to the respective portfolio, taking into consideration plausible worst-case scenarios, in order to assess whether the Bank should provide for expected credit losses.
Additionally, the analysis includes the test for impairment using the expected theoretical profit / loss for the SPV. The Bank also assesses the weighted average PD of the exposures within the SPV and the expected credit losses that the SPV is providing for. The latter is then compared to the SPV / ECL Break-Even Point, which is the highest potential weighted average ECL at which the different portfolios would ultimately break-even from a P&L perspective. This is an indication as to whether the investment in the SPV needs to be impaired or not. This break-even point is recalculated periodically to make sure that any newly-emerging trends in the underlying’s performance is taken into account.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
53
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.3 Measuring ECL - Explanation of inputs, assumptions and estimation techniques
- continued
Investment in debt instruments
The Risk Management team of the Bank evaluates and assesses these investments at inception in order to determine the credit quality of the investment and potential credit risks that may arise. Moreover, on an ongoing basis, the Bank actively monitors respective covenants, including the ones relating to credit risk that have been contracted to in order to ensure that these are still being adhered to.
The Bank also conducts periodical assessments in relation to the respective underlying pledged portfolio, in order to assess whether the Bank should account for expected credit losses. In order for its ECL methodology to represent an appropriate estimation of its credit risk emanating from said investments, the Bank assesses the ECL on each investment separately. Consistent with regulatory and industry best practices, the Bank’s ECL calculations are based on Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). The 12-month PD applicable for a Stage-1 financial asset is derived from information obtained by external credit bureaus, the EAD equates to the investment itself, whilst the LGD is derived based on the loss arising on default when comparing the initial investment and the expected recoverability of the pledged portfolio.
2.2.5.4 Forward-looking information incorporated in the ECL model
The calculation of ECL incorporates forward-looking information. The Bank performs a historical analysis to identify the key economic variables affecting credit risk and expected credit losses for each product portfolio at a territory level. These economic variables and their associated impact on PD, EAD and LGD may vary by portfolio or territory.
The Bank has identified key drivers of credit risk and credit losses for each portfolio of financial instruments and using an analysis of historical data, has analysed relationships between macroeconomic variables, credit risk and credit losses. This analysis was conducted at a territory and sub portfolio level in order to take into consideration possible differences in customer behaviour and default experience arising from different product characteristics.
The determination impact of the territories specific macroeconomic variables have been determined by performing statistical regression analysis to understand the correlation between these macroeconomic variables and the historical default rates.
In those territories where due to certain risk data limitations, statistical relationships to macroeconomic variables were not deemed to be statistically significant (e.g. in those territories where the Bank has recently launched new products resulting in limited available historical default experience), the Bank has utilised proxy statistical data available in other territories with close geographical and demographic similarities.
The Bank has improved the reliability of its macroeconomic modelling approach by incorporating multiple forward-looking economic conditions into its ECL estimates.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
54
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
To be able to determine the manner in which economic conditions will be impacting the ECL estimates, the Bank first performs an assessment to select the Macroeconomic Variable (‘MEV’) which has the highest correlation to credit risk factors for a certain country and product. The Bank does this through the implementation of a one-step Error Correction Model (‘ECM’). The ECM is a multiple regression model that automatically corrects short-term deviations from the long-term equilibrium relationship such that the defaulted loan amount is restored back to its long-term equilibrium at a specific speed of adjustment.
Through the utilisation of this model the Bank has determined a set of three MEVs to which the Bank’s portfolios are the most sensitive, namely Gross Domestic Product (‘GDP’), Personal Disposable Income (‘PDI) and Unemployment Rate (‘UR’). The choice of macroeconomic variable to be used for a particular territory and product is determined through an optimised approach in which the ECM is run separately for each of these variables. The variable that is ultimately applied for the territory / product is the one that produces the most statistically significant result.
In order to capture a range of possible future outcomes, three possible scenarios are considered in the determination of the Bank’s ECL. The ‘base line’ scenario represents the most-likely outcome. It is based on forecasted economic variables, provided by Oxford Economics, referred to above and providing the best estimate view of each respective country within the Bank’s consumer lending portfolio. Apart from the ‘base line’ scenario, the Bank considers two other macro-economic scenarios – ‘Upside’ and ‘Downside’ scenarios – which respectively represent a more optimistic and a more pessimistic outcome, as further explained in this section. The more optimistic and more pessimistic scenarios are economically plausible and will not necessarily be as severe as scenarios used in stress testing.
Each scenario is weighted by a probability of occurrence, determined by a combination of macroeconomic research and expert credit judgement, taking account the range of possible outcomes each chosen scenario represents. The Bank measures ECL as either a probability weighted 12-month ECL (Stage 1), or a probability weighted lifetime ECL (Stages 2 and 3). These probability-weighted ECLs are determined by running each scenario through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs).
As with any macro-economic forecasts, the projections and likelihoods of occurrence are subject to a degree of uncertainty, and therefore, the actual outcomes may be different to those projected. The Bank considers these forecasts to represent its best estimate of the possible outcomes.
The weightings assigned to each economic scenario, which are unchanged from 2021 were 60%, for the ‘Base’ scenario, 20% for the ‘Downside’ scenario and 20% for the ‘Upside’ scenario. The number of scenarios used is based on the analysis of each major product type to ensure that non-linearities are captured. The number of scenarios and their attributes are reassessed at each reporting date. The probability weightings assigned to the respective scenarios reflect an unbiased evaluation of range of possible outcomes.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
55
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
In relation to the Bank’s investments in debt instruments, the Bank also incorporates these macro-economic forecasts in its periodical assessments on the pledged loan portfolios, in order to assess whether the Bank should provide for expected credit losses. Such assessments are based on the credit information supplied by the bond issuers which the Bank has invested in. In order for its ECL methodology to represent an appropriate estimation of its credit risk emanating from said investments, the Bank assesses the ECL on each credit portfolio securing the Bank’s investment separately.
Consistent with regulatory and industry best practices, the Bank’s ECL calculations are based on Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). The 12-month PD applicable for a stage 1 financial asset is derived from information obtained by external credit bureaus, the EAD equates to the investment itself, whilst the LGD is derived based on the loss arising on default when comparing the initial investment and the expected recoverability of the pledged portfolio.
ECL sensitivity analysis in respect of macroeconomic scenarios
Notwithstanding the significant number of assumptions and different aspects forming part of the Bank’s methodology for modelling expected credit loss allowances in respect of exposures classified within the Bank’s portfolios of financial instruments, the ECL measurement is deemed to be mostly sensitive to the estimations made in respect of the modelling of the macroeconomic scenarios described above, particularly as at 31 December 2022, due to the uncertainty induced by prevailing macroeconomic conditions, in the context of a post Covid-19 pandemic economy thwarted by inter alia supply-chain disruption, energy crisis accelerated by the Russia-Ukraine war, inflation and montetary policy tightening.
In view of the above, the Bank assessed and is hereby presenting the sensitivity analysis in respect of credit loss allowances for loans and advances to customers as at 31 December 2022, estimated by determining the range of credit loss allowances which would have been measured by assigning a 100% weighting to each of the three macroeconomic scenarios developed as presented in the table below.
(Decrease) / increase in ECL
(Decrease) / increase in ECL
2022
2021
€’000
€’000
100% Base
(201)
(179)
100% Downside
4,949
5,936
100% Upside
(4,394)
(5,448)
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
56
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
The macroeconomic scenarios applied in the calculation of ECL are based on the following:
For baseline scenario, the global economic outlook had become less positive than previously assumed. As a result, Oxford Economics have revised down the baseline forecast for world GDP for 2023 to 1.3%. World GDP forecast has been downgraded on the basis of severe energy market disruption, being the key near term downside risk to the global economy, and other inflation related risks, which also remain prominent. Albeit, an early end to the supply chain turmoil is expected to alleviate some of the pressures on the global economy. Overall, Oxford Economics expect the US, Eurozone, UK, and Canada all to record GDP contractions in 2023 as high inflation bites alongside monetary policy tightening and falling house prices.
For the downside scenario, management has considered the current gas rationing scenario to be more severe in terms of outlook. This scenario incorporates a complete stop to all flows of natural gas from Russia to Europe. The supply of oil is also more limited than in the baseline forecast. It is expected that the energy market disruption weighs heavily on Europe in such scenario. Against the backdrop of a relatively cold European winter, governments prioritise household heating needs and agree to ration natural gas use in the industry. With higher energy prices pushing up inflation and inflation expectations, central banks in Europe tighten policy further in the near term. European equity prices fall sharply, weighing additionally on domestic demand. The global economy thus contracts in the very near term, with global GDP standing at 0.8% in 2023, 0.5ppts below baseline.
An optimistic scenario was modelled for global economy in which inflationary pressures ease through the end of the supply-chain crisis. In this scenario, supply-chains normalise more quickly than expected, aided by an early and successful pivot by the Chinese authorities away from their zero-Covid policy. With commodity market disruption also more limited than anticipated, earlier rises in producer prices partially unwind. In financial markets, sentiment improves, with equities rising and government bond yields falling below baseline. Business and consumer confidence also improve, aiding the recovery in demand. Central banks remain cautious, with policy rates in the major economies on hold throughout 2023, but lower inflation then allows a sharper loosening of monetary policy than in the baseline forecast. Overall, the global economy expands by 2.2% in 2023, 0.9ppts above baseline.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
57
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
The respective macro-economic variables as of 31 December 2022 used in the multiple regression were obtained from Oxford Economics and were as follows:
As of 31 December 2022
2023
2024
2025
Bulgaria
Gross domestic product
Lev millions: chained 2015 prices
Baseline
9,013
9,238
9,455
Downside
8,977
9,163
9,360
Upside
9,134
9,402
9,594
Czech Republic
Unemployment rate
Annualised %
Baseline
4.09
3.74
3.61
Downside
4.36
4.11
4.14
Upside
3.92
3.50
3.43
Denmark
Personal disposable income
Kroner billions: 2010 prices
Baseline
86
89
92
Downside
86
89
92
Upside
87
90
93
Estonia
Gross domestic product
Euro millions: chained 2015 prices
Baseline
2,189
2,304
2,387
Downside
2,146
2,270
2,362
Upside
2,206
2,330
2,412
 
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
58
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
As of 31 December 2022
2023
2024
2025
Finland
Personal disposable income
Euro billions: 2015 prices
Baseline
10
11
11
Downside
10
11
11
Upside
11
11
11
Germany
Gross domestic product
Euro billions: chained 2015 prices
Baseline
271
278
283
Downside
267
275
279
Upside
276
283
286
Latvia
Personal disposable income
Euro millions: chained 2015 prices
Baseline
946
977
992
Downside
930
964
980
Upside
960
993
1,005
Norway
Gross domestic product
Kroner billions: chained 2020 prices
Baseline
318
322
327
Downside
316
320
325
Upside
321
326
330
Poland
Unemployment rate
Annualised %
Baseline
6.08
4.88
4.88
Downside
6.35
5.24
5.36
Upside
5.87
4.71
4.70
 
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
59
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
As of 31 December 2022
2023
2024
2025
Romania
Unemployment rate
Annualised %
Baseline
2.46
2.16
2.18
Downside
2.71
2.60
2.67
Upside
2.22
2.04
2.04
Slovenia
Personal disposable income
Euro millions
Baseline
2,670
2,744
2,807
Downside
2,624
2,703
2,773
Upside
2,703
2,800
2,861
Sweden
Personal disposable income
Kronor millions: chained 2021 prices
Baseline
212,354
216,694
220,849
Downside
211,945
216,345
220,487
Upside
214,176
218,966
223,567
Source: Oxford Economics
The chained prices in respect to Gross Domestic Product and Personal Disposable Income outlined above adjust the respective real currency amounts for inflation over time to allow the comparison of figures from different periods.
Management monitors on an ongoing basis, the economic forecasts releases and adjusts its model inputs and assess the connected outcomes in the light of revised macroeconomic data and other quantitative and qualitative information.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
60
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
The respective macro-economic variables as of 31 December 2021 used in the multiple regression were obtained from Oxford Economics and were as follows:
As of 31 December 2021
2022
2023
2024
Bulgaria
Unemployment Rate
Annualised %
Baseline
5.06
4.66
4.62
Downside
5.97
4.60
4.35
Upside
4.78
4.31
4.29
Czech Republic
Gross Domestic Product
Koruna Billions: chained 2015 prices
Baseline
454
470
483
Downside
438
474
489
Upside
462
477
488
Denmark
Unemployment Rate
Annualised %
Baseline
3.41
3.57
3.73
Downside
4.26
3.47
3.32
Upside
3.06
3.24
3.48
Estonia
Gross Domestic Product
Euro Millions: chained 2015 prices
Baseline
2,336
2,417
2,487
Downside
2,312
2,413
2,497
Upside
2,350
2,439
2,508
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
61
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
As of 31 December 2021
2022
2023
2024
Finland
Unemployment Rate
Annualised %
Baseline
7.00
6.94
6.73
Downside
7.39
6.86
6.61
Upside
6.65
6.70
6.54
Germany
Personal Disposable Income
Euro Billions: chained 2015 prices
Baseline
166
169
171
Downside
163
170
173
Upside
166
169
171
Latvia
Gross Domestic Product
Euro Millions: chained 2015 prices
Baseline
2,483
2,573
2,633
Downside
2,459
2,569
2,641
Upside
2,499
2,594
2,651
Norway
Unemployment Rate
Annualised %
Baseline
3.35
3.40
3.38
Downside
3.83
3.29
3.19
Upside
2.93
3.10
3.16
Poland
Gross Domestic Product
Zloty Millions: chained 2015 prices
Baseline
195,295
202,148
207,792
Downside
190,217
203,495
209,292
Upside
197,043
203,965
209,490
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
62
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.5 Expected credit loss measurement - continued
2.2.5.4 Forward-looking information incorporated in the ECL model - continued
ECL sensitivity analysis in respect of macroeconomic scenarios - continued
As of 31 December 2021
2022
2023
2024
Romania
Gross Domestic Product
Lei Billions: chained 2000 prices
Baseline
16
16
16
Downside
15
16
16
Upside
16
16
17
Sweden
Personal Disposable Income
Kronor Millions: chained 2020 prices
Baseline
213,523
215,759
219,337
Downside
211,722
215,380
219,464
Upside
213,895
216,309
219,883
Source: Oxford Economics
The chained prices in respect to Gross Domestic Product and Personal Disposable Income outlined above adjust the respective real currency amounts for inflation over time to allow the comparison of figures from different periods.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
63
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.6 Maximum exposure to credit risk
An ‘exposure’ is defined as the amount at risk arising from the Bank’s assets and off-balance sheet items. The Bank’s maximum credit risk with respect to on- and off-balance sheet items can be classified into the following categories:
•Financial assets recognised on-balance sheet comprising principally balances with Central Banks, investment in securitisation portfolio loans and advances to banks, customers and group companies and investments in debt instruments . The maximum exposure to credit risk of these financial assets equals their gross carrying amounts.
•Financial guarantee contracts entered into with related group companies. The latter carry the same credit risk as loans and advances to customers. The maximum exposure to credit risk is the full amount that the Bank would have to pay if the guarantees are called upon.
•Loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities. The maximum exposure to credit risk is the full amount of the committed facilities. However, the likely amount of loss is less than the total unused commitments as most commitments to extend credit are contingent upon customers maintaining specific credit standards. These exposures are monitored in the same manner in respect of loans and advances and predominantly arise on revolving credit facilities.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
64
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.6 Maximum exposure to credit risk - continued
The Bank’s credit risk exposures relating to on-balance sheet assets and off-balance sheet instruments, reflecting the maximum exposure to credit risk before collateral held or other credit enhancements include the following:
2022
2021
Gross
Gross
carrying
ECL
carrying
ECL
amount
allowance
amount
(restated)
allowance
(restated)
€’000
€’000
€’000
€’000
Credit risk exposures relating to
on-balance sheet assets:
Subject to IFRS 9 impairment allowance
requirements
Financial assets measured at
amortised cost:
Balances with Central Banks
66,808
-
138,921
-
Loans and advances to banks
27,356
-
48,165
-
Loans and advances to customers
473,527
(65,731)
390,672
(62,575)
Loans and advances to group companies
26,576
-
15,486
-
Investment in securitisation portfolio
77,957
-
60,685
-
Investment in debt instruments
21,107
-
-
-
Other financial assets
16,012
-
10,029
-
 
Not subject to IFRS 9 impairment
requirements
Derivative financial instruments
729
-
-
-
Credit risk exposure
710,072
(65,731)
663,958
(62,575)
Credit risk exposures relating to
off-balance sheet instruments:
Financial guarantees
7,895
(3,507)
6,515
(1,974)
Credit risk exposure
7,895
(3,507)
6,515
(1,974)
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
65
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.7 Credit concentration risk
Within the Bank, concentration risk of losses results from inadequate diversification of the credit exposures. This risk is managed by actively measuring, reporting and monitoring on a regular and ongoing basis risk concentration levels against reasonable thresholds for counterparties, products, and territories.
Credit concentration risk for counterparties
The Bank’s loans and advances to customers mainly comprise of retail exposures which are individually insignificant. The Bank’s underlying investment in securitisation portfolio comprise of multiple exposures of SME loans which are spread throughout multiple countries.
As at 31 December 2022 and 2021, no loans and advances to customers or other financial assets were deemed to be in excess of the large exposures, prior to any eligible exemptions, in accordance with the requirements of Part Four: Large Exposures, of the CRR. The Bank’s loans and advances comprise of a large number of customer accounts with no individual customer or group of dependent customers being considered by management as a significant concentration of credit risk in the context of the CRR. Nonetheless, these exposures are monitored and reported frequently and rigorously.
Credit concentration risk by geographical region
The geographical concentration of the Bank’s financial assets as at the end of the reporting period is analysed below. For the purposes of this analysis, the Bank has allocated exposures to regions based on the country of domicile of the respective customers or counterparties.
At the end of the reporting period, loans and advances to banks were placed with banks domiciled in the following countries:
2022
2021
€’000
€’000
Malta
2,438
10,233
Czech Republic
4,355
11,189
Slovakia
-
11
Poland
477
7,091
France
-
5,155
Bulgaria
621
574
Estonia
126
166
Spain
2
4,125
Croatia
65
4,320
Sweden
7,542
-
United Kingdom
5,824
2,529
Lithuania
579
168
Italy
223
865
Luxemburg
3,667
-
Romania
1,437
1,739
Gross loans and advances to banks
27,356
48,165
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
66
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.7 Credit concentration risk - continued
Credit concentration risk by geographical region - continued
At 31 December 2022, the balances with the Central banks represented a deposit with the Central Bank of Malta, a deposit with Central Bank of Sweden, a deposit with Central Bank of Czech and a deposit with the Central Bank of Lithuania. At 31 December 2022 and 2021, loans and advances to group companies consisted of advances with an undertaking registered in Finland.
The Bank’s loans and advances to customers as at 31 December 2022 are principally linked to lending and related operations in the following countries:
2022
2021
(restated)
€’000
€’000
Poland
2,294
4,295
Estonia
27,194
25,860
Latvia
95,185
80,557
Czech Republic
14,744
19,356
Germany
47,476
32,467
Bulgaria
7,856
7,511
Sweden
114,908
111,078
Norway
8,026
7,494
Spain
-
649
Croatia
4,955
5,726
Denmark
58,519
41,074
Finland
84,443
50,213
Romania
7,855
4,392
Slovenia
72
-
Gross loans and advances to customers
473,527
390,672
The Bank’s investment in securitisation portfolio and investment in debt instruments are linked to the following countries:
2022
2021
€’000
€’000
Cyprus
10,229
-
Estonia
10,878
-
Luxembourg
77,957
60,685
Investments
99,064
60,685
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
67
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.8 Information on credit quality of balances with other banks
In the normal course of business, the Bank places funds and carries out transactions through correspondent accounts with high credit quality local listed banks and international banks having a good credit rating, subject to the operational requirements and the application of a limit framework. Accordingly, such exposures are monitored through the practical use of exposure limits. In certain countries, the Bank had to utilise unrated financial institutions due to operational constraints within such country, in view of the profile of the banking sector in those territories. The Bank would carry out a comprehensive due diligence on such banks, prior to engaging with the banks, and on an event-driven basis throughout the term of the relationship.
At 31 December 2022, loans and advances to banks consisted primarily of immediately withdrawable nostro balances and term placements maturing within one month.
The Bank runs the risk of loss of funds due to the possible political, economic and other events in a particular country where funds have been placed or invested with several counterparties domiciled in the same country or region. Countries are assessed according to their size, economic data and prospects together with credit ratings issued by international rating agencies. Existing country credit risk exposures, based on groupings of individual counterparties, are monitored and reviewed periodically. The Bank’s assets are predominantly in Europe.
At the end of the reporting period, none of the financial assets referred to were past due or impaired.
The following tables set out information about the credit quality of specific financial assets measured at amortised cost. The credit quality of the financial assets is determined by credit ratings applicable to issuers or counterparties based on external ratings published by reputable credit rating agencies:
2022
Stage 1
Stage 2
Stage 3
12-month ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Balances with Central Banks
at amortised cost
A+ to A-
66,808
-
-
66,808
Gross carrying amount
66,808
-
-
66,808
Loss allowance
-
-
-
-
Carrying amount –
net of loss allowance
66,808
-
-
66,808
In this regard, the Government of Malta and Government of Lithuania as at 31 December 2022 had both a rating of A2, as issued by Moody’s on 18 November 2022 and 29 April 2022, respectively. (2021: A2, as issued by Moody’s on 06 August 2021 and 12 February 2021, respectively.) The Government of Sweden as at 31 December 2022 had a rating of AAA as issued by Moody’s on 25 March 2022 (2021: AAA, as issued by Moody’s on 27 March 2020). The Government of Czech as at 31 December 2022 had a rating of AA3 as issued by Moody’s on 5 August 2022 (2021: AA3, as issued by Moody’s on 5 February 2021).
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
68
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.8 Information on credit quality of balances with other banks - continued
As at 31 Decemberr 2022, expected credit loss allowances in respect of balances with the Central Banks (which are assumed to have the same credit quality as the Government of Malta, Government of Lithuania, Government of Czech and Government of Sweden) were deemed to be insignificant.
Similarly, the Bank holds immediately withdrawable balances with highly rated and reputable financial institutions. As at 31 December 2022, expected credit loss allowances in respect of such balances were deemed to be insignificant.
2021
Stage 1
Stage 2
Stage 3
12-month ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Balances with Central Banks
at amortised cost
A+ to A-
138,921
-
-
138,921
Gross carrying amount
138,921
-
-
138,921
Loss allowance
-
-
-
-
Carrying amount –
net of loss allowance
138,921
-
-
138,921
2022
Stage 1
Stage 2
Stage 3
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Loans and advances to
banks at amortised cost
A+ to A-
3,795
-
-
3,795
BBB+ to BBB-
4,478
-
-
4,478
BB+ to BB-
241
-
-
241
Unrated
18,842
-
-
18,842
Gross carrying amount
27,356
-
-
27,356
Loss allowance
-
-
-
-
Carrying amount -
net of loss allowance
27,356
-
-
27,356
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
69
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.8 Information on credit quality of balances with other banks - continued
The Bank’s loans and advances to group companies consist of advances with an undertaking registered in Finland and comprise of Stage 1 (12-month ECL) financial assets as at 31 December 2022. The external credit rating of the Multitude Group as at 31 December 2022 was B+, issued by Fitch Ratings on 28 February 2022 (2021: B+, issued by Fitch Ratings on 10 June 2021). On this basis, credit loss allowances in respect of the Bank’s loans and advances to Multitude Group as at 31 December 2022 were deemed to be immaterial.
As at 31 December 2022 and 2021, there were no acquired credit-impaired assets.
After the end of the reporting period there were no significant changes in credit ratings reflected in the tables above which have a material impact on the credit quality of the financial assets.
2021
Stage 1
Stage 2
Stage 3
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Loans and advances to
banks at amortised cost
A+ to A-
14,283
-
-
14,283
BBB+ to BBB-
19,063
-
-
19,063
BB+ to BB-
1,016
-
-
1,016
Unrated
13,803
-
-
13,803
Gross carrying amount
48,165
-
-
48,165
Loss allowance
-
-
-
-
Carrying amount -
net of loss allowance
48,165
-
-
48,165
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
70
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.9 Information on credit quality of investments
Investment in securitisation portfolio
The Bank’s investment in securitisation portfolio consist of notes, which are structured in tranches amounting to €200,000 each, in Ferratum Portfolio S.À.R.L, a private limited liability company incorporated under the laws of Luxembourg as an unregulated securitisation company, which was set up during 2020. The principal activity of this company consists of the purchase and acquisition of receivables to entities which fall part of the Small and Medium Entities (SME) industry classification. As of 31 December 2022, Ferratum Portfolio S.À.R.L, acquired a portfolio of SME loans in Netherlands, Sweden, Finland and Lithuania.
According to the note purchase agreement dated 21 August 2020 Ferratum Portfolio S.À.R.L acquires receivables which are not defaulted, disputed or insolvent. The acquired portfolio consists of current and 1-30 days past due exposures with an underlying estimated probability of default which is not in excess of 20%.
Multitude Bank is the holder of Class A notes, which are senior notes and have a higher credit quality and also the highest priority of payment amongst the other creditors.
In this respect, the Bank actively assesses the securitisation portfolio for indications of impairment. The Bank conducts periodical sensitivity analysis in relation to the respective portfolio, taking into consideration plausible worst-case scenarios, in order to assess whether the Bank should provide for expected credit losses.
Additionally, the analysis includes the test for impairment using the theoretical profit/loss for the SPV, the weighted average PD of the SPV and the SPV ECL as a percentage of its Gross AR which is compared to the SPV Break-Even Point (which is the weighted average ECL break-even point for the different portfolios within the same compartment) as this is the final indication as to whether the investment in the SPV needs to be impaired or not. This break-even point is recalculated periodically to make sure that any newly-emerging trends in the underlying’s performance is taken into account.
The outcome of such analysis, coupled with the fact that a substantial amount of potential losses would first be absorbed by Class B Notes holder, does not reflect any need for the Bank to provide for expected credit losses.
2022
Stage 1
Stage 2
Stage 3
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Investment in securitisation
portfolio at amortised cost
Unrated
77,957
-
-
77,957
Gross carrying amount
77,957
-
-
77,957
Loss allowance
-
-
-
-
Carrying amount
77,957
-
-
77,957
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
71
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.9 Information on credit quality of investments - continued
Investment in securitisation portfolio – continued
2021
Stage 1
Stage 2
Stage 3
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Investment in securitisation
portfolio at amortised cost
Unrated
60,685
-
-
60,685
Gross carrying amount
60,685
-
-
60,685
Loss allowance
-
-
-
-
Carrying amount
60,685
-
-
60,685
Investment in debt instruments
The investment in debt instruments reflect the Bank's acquisition of secured bonds. Such bonds are secured by loan portfolios that are pledged in favour of the Bank, taking into consideration pre-established collateralised ratios in relation to the amount invested and also encompassing pre-established ratios of exposures by ageing of the underlying pledged portfolio. Moreover, the Bank also has an additional collateral in the form of cash deposited in its accounts or pledged financial instruments in favour of the Bank in respect of this investment.
The Bank conducts periodical assessments in relation to the respective portfolio, in order to assess whether the Bank should provide for expected credit losses. The outcome of such assessments, coupled with the several clauses contained within the agreement, does not reflect any need for the Bank to provide for expected credit losses in relation to this investment as at period ended 31 December 2022.
2022
Stage 1
Stage 2
Stage 3
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Investments in debt instruments at amortised cost
Unrated
21,107
-
-
21,107
Gross carrying amount
21,107
-
-
21,107
Loss allowance
-
-
-
-
Carrying amount
21,107
-
-
21,107
 
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
72
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.10 Information on credit quality of loans and advances to customers
The Bank manages the credit quality of its loans and advances to customers by using internal risk grades, which provide a progressively increasing risk profile ranging from ‘Regular’ (best quality, less risky) to ‘Loss’. These risk grades are an essential tool for the Bank to identify both non-performing exposures and better-performing customers. The internal risk grades used by the Bank are as follows:
-Performing: Internal grade ‘Regular’
-Under performing: Internal grades ‘Watch’ and ‘Substandard’; and
-Non-performing: Internal grades ‘Doubtful’ and ‘Loss’.
Regular
The Bank’s loans and advances to customers which are categorised as ‘Regular’ are principally debts in respect of which payment is not overdue by 30 days and no recent history of customer default exists. Management does not expect losses from non-performance by these customers, which are considered as fully performing.
Watch
Loans and advances that attract this category principally comprise those where:
(i)payment becomes overdue by 30 days, but does not exceed 60 days where a loan is deemed to be as non-performing when past due for more than 90 days;
(ii)payment becomes overdue by 30 days but does not exceed 45 days where a loan is deemed to be as non-performing when past due for more than 60 days; and
(iii)there are indicators of a significant increase in credit risk in instances when loans were granted a payment holiday in a specific portfolio (refer to Note 2.2.5.1).
Substandard
Exposures that are categorised within this category comprise those where:
(i)payment becomes overdue by 61 days but does not exceed 90 days for where a loan is deemed to be as non-performing when past due for more than 90 days; and
(ii)where payment becomes overdue by 46 days, but does not exceed 60 days where a loan is deemed to be as non-performing when past due for more than 60 days;
Doubtful
Loans and advances which attract a ‘Doubtful’ grading are principally those assets in respect of which:
(i)repayment becomes overdue by 61 days and over but not exceeding 180 days for where a loan is deemed to be as non-performing when past due for more than 60 days;
(ii)and repayment becomes overdue by 91 days and over but not exceeding 180 days for a loan is deemed to be as non-performing when past due for more than 90 days; or
(iii)have indicated Unlikeliness-To-Pay criteria, as outlined in Note 2.2.5.2.
Loss
Loans and advances in respect of which payment becomes overdue by 180 days.
The following table sets out information about the credit quality of financial assets measured at amortised cost. Explanation of the terms: 12-month ECL, lifetime ECL and credit-impaired are included in note 2.2.5.3.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
73
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.10 Information on credit quality of loans and advances to customers - continued
2022
 
Stage 1
Stage 2
Stage 3
 
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Loans and advances to
customers at amortised cost
Regular
375,980
-
-
375,980
Watch
-
17,250
-
17,250
Substandard
-
12,112
-
12,112
Doubtful
-
-
16,873
16,873
Loss
-
-
51,312
51,312
Gross carrying amount
375,980
29,362
68,185
473,527
Loss allowance
(20,605)
(8,246)
(36,880)
(65,731)
Carrying amount
355,375
21,116
31,305
407,796
Off-balance sheet items:
Financial guarantee contracts
Gross carrying amount
3,694
756
3,445
7,895
Loss allowance
(727)
(389)
(2,391)
(3,507)
Carrying amount
2,967
367
1,054
4,388
2021 (restated)
 
Stage 1
Stage 2
Stage 3
 
12-month
ECL
Lifetime
ECL
Lifetime
ECL
Total
€’000
€’000
€’000
€’000
Loans and advances to
customers at amortised cost
Regular
286,826
-
-
286,826
Watch
-
15,827
-
15,827
Substandard
-
6,037
-
6,037
Doubtful
-
-
20,640
20,640
Loss
-
-
61,342
61,342
Gross carrying amount
286,826
21,864
81,982
390,672
Loss allowance
(15,627)
(5,847)
(41,101)
(62,575)
Carrying amount
271,199
16,017
40,881
328,097
Off-balance sheet items:
Financial guarantee contracts
Gross carrying amount
4,318
650
1,547
6,515
Loss allowance
(623)
(335)
(1,016)
(1,974)
Carrying amount
3,695
315
531
4,541
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
74
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.10 Information on credit quality of loans and advances to customers - continued
The Bank also had undrawn commitments to lend which predominantly comprise of undrawn balances on revolving credit facilities. The Bank may be exposed to losses equivalent to the total unused commitments (if drawn down by customers), however, additional drawdowns are contingent on customers maintaining specific credit standards.
Financial guarantee contracts as at 31 December 2022 amounting to €7,895,000 (2021: €6,515,000) are sub-divided between the staging classifications (Stages 1 to 3) as illustrated in the table presented on the previous page. ECL allowances on financial guarantee contracts as at 31 December 2022 amounted to €3,507,221 (2021: €1,974,000).
As at 31 December 2022 and 2021, there are no acquired credit-impaired assets.
The following table analyses the impaired loans and advances, gross of impairment allowances, by geographical sector:
2022
2021
€’000
€’000
Poland
1,558
1,649
Estonia
4,816
5,528
Latvia
12,962
15,509
Czech Republic
3,811
5,908
Germany
7,613
4,603
Bulgaria
7,791
7,249
Sweden
11,866
24,727
Norway
2,595
2,312
Spain
-
702
Croatia
132
741
Denmark
3,153
2,149
Finland
10,558
10,515
Romania
1,330
390
Gross impaired loans and advances to customers
68,185
81,982
Past due but not impaired
As at 31 December 2022, loans and advances to customers amounting to €84,743,000 (2021: €61,649,000) were deemed to be past due (and not deemed credit impaired or collectively impaired), taking cognisance of the manner in which, the Bank practically manages its collection activities. A financial asset is past due when a customer has failed to effect payment when contractually due, but normally, given the nature of the Bank’s loan portfolio, the impaired status is not formally assigned until the exposure is more than 90 days past due (or 60 days in the case of specific products). An ageing analysis of these past due loans and advances is accordingly presented within the tables on the previous pages.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
75
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.11 Modification of financial assets
As explained in note 1.5, the Bank sometimes modifies the terms of loans provided to customers. These modifications can take different forms, can happen at different stages during the maturity period of the loan. During 2022, the Bank updated its policies to reflect whether such modifications granted by the Bank constitute forbearance as defined by EU Regulation 575/2013 (‘CRR2’).
The following are the most widely used modification clauses incorporated in terms and conditions by the Bank:
i.Rescheduling
Rescheduling is applied in short-term credit products where the customer requests an extension of the maturity period of up to one month in consideration of a fee payable to the Bank at the time that the rescheduling is accepted. The extension period varies in different markets but is pre-established by the Bank as part of the product feature. The upfront payment of a rescheduling fee is a pre-condition for the modification to be accepted and for the loan term to be extended. The rescheduling is not tied to the lack of repayment capabilities of the customer and indeed, this upfront payment requirement, together with the short-term of the extension period, is considered inconsistent with the profile of a customer who is experiencing financial difficulties.
ii.Payment Holidays
Payment holidays are a standard feature of the Bank’s credit line facility which allow customers who are repaying on time to request the Bank to reduce the monthly minimum payment to zero on not more than two occasions in any twelve-month period. The customer’s request will not be accepted unless the customer has been paying on time.
Additionally, the Bank incorporates the following modification options for its customers under the terms and conditions of its long-term credit products:
iii.Due date change
Generally, the repayment date is assigned by the Bank thirty days after the loan agreement date and recurs monthly thereafter. This product feature allows customers to change the monthly payment due date to one that is more convenient for them. The new payment due date will apply throughout the maturity period of the loan, unless subsequently modified. This modification is not granted due to the customers experiencing financial difficulties; the customers simply continue to pay their monthly instalments on a different day of the month.
iv.Modification to the payment schedule
During the term of the loan, the customer may choose to modify the standard maturity date and payment schedules included in the loan agreement by increasing the number of monthly instalments, and thus extending the maturity period of the loan. This gives customers more flexibility through tailor-made payment schedules. An assessment is conducted by the Bank to evaluate whether the customer is experiencing financial difficulties before granting this modification. If the customer is not experiencing financial difficulties, then this modification does not constitute forbearance.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
76
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.11 Modification of financial assets - continued
v.Payment-free month
Long-term credit products allow for the customer to apply for a payment-free month under terms and conditions prescribed by the Bank. The policy under which a payment-free month may be granted includes the conditions that the loan must have been open for a number of months as specified in the policy and that the customer must have been making timely repayments. This modification is not granted to customers who are experiencing financial difficulties, but is meant to make the products better adapted to the customers’ needs.
Apart from modifications which are carried out in accordance with the terms and conditions of the loan agreements, the Bank also grants other modifications as part of its collection policies. The most widely used modification option as part of the Bank’s collection policies is the payment plan where the customer is granted a longer schedule in which to pay the amounts due. The Bank may also grant a grace period for the payment of the principal amount due for a short period of time. An assessment is conducted by the Bank to evaluate whether the customer is experiencing financial difficulties before granting these modifications. If the customer is experiencing financial difficulties, then these exposures are marked as forborne.
During 2022, the Bank modified loans and advances to customers amounting to €93,188,893 (2021: €71,001,188). These are analysed below by Stage as follows:
2022
Stilloutstanding at31 January 2023
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
amount
losses
amount
losses
€’000
€’000
€’000
€’000
Stage 1
81,192
5,234
75,316
4,896
Stage 2
6,381
1,922
6,722
1,970
Stage 3
5,616
2,334
6,228
2,592
93,189
9,490
88,266
9,458
2021
Stilloutstanding at28 February 2022
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
amount
losses
amount
losses
€’000
€’000
€’000
€’000
Stage 1
59,256
3,526
52,501
2,992
Stage 2
6,088
1,781
6,253
1,766
Stage 3
5,657
2,307
7,918
3,361
71,001
7,614
66,672
8,119
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
77
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.11 Modification of financial assets - continued
The Bank’s modified loans are analysed by geographical location as follows:
2022
2021
€’000
€’000
Bulgaria
29
64
Croatia
9
-
Czech Republic
6,338
7,495
Denmark
19,181
11,021
Estonia
7,452
6,676
Finland
14,618
10,306
Germany
3,005
2,886
Latvia
10,710
8,265
Norway
84
8
Romania
44
227
Sweden
31,719
24,053
93,189
71,001
In cases where the Bank grants specific modifications to customers who are assessed by the Bank as experiencing financial difficulties, then these exposures are marked as forborne as explained above in line with the Bank’s updated policies in relation to forbearance. During December 2022, total loans which were identified as forbone amounted to €258,212 on which a total ECL of €67,108 was accounted for.
During 2021 and 2022, a number of loan moratoria were granted by the Bank to certain COVID-19 impacted customers, as was mandated by the European Banking Authority in the light of the COVID-19 crisis. The total loan moratoria and rescheduled loans extended by the Bank to COVID-19 impacted customers as of 31 December 2022 amounted to €53,063 (2021: €61,398) or 0.01% (2021: 0.02%) of the gross carrying amount of total consumer loans as of the end of the financial year. The Bank assessed the impact that such measures (and any potential cliff effect when these measures expire) have on its results, and the potential impact in ECL was deemed to be insignificant. In view of the underlying nature of the loan portfolio which is managed collectively and the non-significance of the total COVID-19 related rescheduled loans in the context of the aggregate value of amounts owed to customers, such moratoria and rescheduled loans were not deemed to impact the overall Bank’s credit risk management’s process which is described in Note 2.2.5.1.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
78
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.11 Modification of financial assets - continued
2022
2021
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
amount
losses
amount
losses
€’000
€’000
€’000
€’000
Stage 1
2
1
1
-
Stage 2
4
2
11
5
Stage 3
47
35
49
31
53
38
61
36
2.2.12 Loss allowances
Reconciliation of 12-month and lifetime ECL provision
The loss allowance recognised in the period is impacted by a variety of factors, as described below:
•Transfers between ‘Stage 1’ and ‘Stages 2 or 3’ due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent "step up" (or "step down") between 12-month and Lifetime ECL;
•Additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments derecognised in the period;
•Impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from regular refreshing of inputs to models;
•Impacts on the measurement of ECL due to changes made to models and assumptions;
•Discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis;
•Foreign exchange retranslations for assets denominated in foreign currencies and other movements; and
•Financial assets derecognised during the period and write-offs of allowances related to assets that were written off during the period.
The significant change in the gross carrying amount of financial assets that contributed to changes in loss allowances was mainly due to growth in the loan book, which was aligned with the Bank's growth objectives.
The following table explains changes in the gross carrying amount of the financial assets to help explain their significance to the changes in the loss allowance for the same portfolios as discussed above:
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
79
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
Reconciliation of 12-month and lifetime ECL provision - continued
Stage 1
Stage 2
Stage 3
Total
Gross
Expected
Gross
Expected
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
carrying
credit
carrying
credit
amount
losses
amount
losses
amount
losses
amount
losses
€’000
€’000
€’000
€’000
€’000
€’000
€’000
€’000
Balances with Central Banks
at amortised cost
at 1 January 2022
138,921
-
-
-
-
-
138,921
-
Financial assets derecognised
(72,113)
-
-
-
-
-
(72,113)
-
during the year
At 31 December 2022
66,808
-
-
-
-
-
66,808
-
Total net income statement
change during the year
-
-
-
-
-
-
-
-
Investments at amortised cost
at 1 January 2022
60,685
-
-
-
-
-
60,685
-
Financial assets originated or
purchased during the year
38,379
-
-
-
-
-
38,379
-
At 31 December 2022
99,064
-
-
-
-
-
99,064
-
Total net income statement
change during the year
Loans and advances to banks
at amortised cost
at 1 January 2022
48,165
-
-
-
-
-
48,165
-
Financial assets
derecognised during the year
(20,809)
-
-
-
-
-
(20,809)
-
At 31 December 2022
27,356
-
-
-
-
-
27,356
-
Total net income statement
change during the year
Loans and advances to group
companies at amortised cost
at 1 January 2022
15,486
-
-
-
-
-
15,486
-
Financial assets originated or
purchased during the year
11,090
-
-
-
-
-
11,090
-
At 31 December 2022
26,576
-
-
-
-
-
26,576
-
Total net income statement
change during the year
-
-
-
-
-
-
-
-
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
80
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
Reconciliation of 12-month and lifetime ECL provision - continued
Stage 1
Stage 2
Stage 3
Total
Gross
Expected
Gross
Expected
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
carrying
credit
carrying
credit
amount
losses
amount
losses
amount
losses
amount
losses
€’000
€’000
€’000
€’000
€’000
€’000
€’000
€’000
Balances with Central Banks
at amortised cost
at 1 January 2021
96,334
-
-
-
-
-
96,334
-
Financial assets originated or
purchased during the year
42,587
-
-
-
-
-
42,587
-
At 31 December 2021
138,921
-
-
-
-
-
138,921
-
Total net income statement
change during the year
-
-
-
-
-
-
-
-
Investment in securitisation
portfolio at amortised cost
at 1 January 2021
7,629
-
-
-
-
-
7,629
-
Financial assets originated or
purchased during the year
53,056
-
-
-
-
-
53,056
-
At 31 December 2021
60,685
-
-
-
-
-
60,685
-
Total net income statement
change during the year
-
-
-
-
-
-
-
-
Loans and advances to banks
at amortised cost
at 1 January 2021
56,303
-
-
-
-
-
56,303
-
Financial assets
derecognised during the year
(8,138)
-
-
-
-
-
(8,138)
-
At 31 December 2021
48,165
-
-
-
-
-
48,165
-
Total net income statement
change during the year
-
-
-
-
-
-
-
-
Loans and advances to group
companies at amortised cost
at 1 January 2021
14,875
-
-
-
-
-
14,875
-
Financial assets originated or
purchased during the year
611
-
-
-
-
-
611
-
At 31 December 2021
15,486
-
-
-
-
-
15,486
-
Total net income statement
change during the year
-
-
-
-
-
-
-
-
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
81
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
Changes in the gross carrying amount and loss allowance between the beginning and the end of the annual period: - continued
Stage1
Stage2
Stage 3
Total
Gross
Expected
Gross
Expected
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
carrying
credit
carrying
credit
amount
losses
amount
losses
amount
losses
amount
losses
€’000
€’000
€’000
€’000
€’000
€’000
€’000
€’000
Loans and advances to customers
at amortised cost
at 1 January 2022
286,826
(15,627)
21,864
(5,847)
81,982
(41,101)
390,672
(62,575)
New and further lending
509,729
(30,061)
30,426
(8,905)
52,791
(16,109)
592,946
(55,075)
Repayments and disposals
(366,691)
21,112
(20,373)
5,417
(107,029)
32,671
(494,093)
59,200
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(13,159)
822
13,159
(822)
-
-
-
-
Transfer from Stage 1 to Stage 3
(36,222)
2,449
-
-
36,222
(2,449)
-
-
Transfer from Stage 2 to Stage 1
3,119
(810)
(3,119)
810
-
-
-
-
Transfer from Stage 2 to Stage 3
-
(11,647)
3,121
11,647
(3,121)
-
-
Net remeasurement of ECL arising
from stage transfers
and changes in risk parameters
865
(2,346)
(12,643)
-
(14,124)
Write-offs
-
-
-
-
(6,357)
(50,573)
(6,357)
(50,573)
Total net income statement
charge during the year
(5,623)
(2,725)
(52,224)
-
(60,572)
Impact of unwinding ECL provisions
-
-
(340)
-
(340)
Write-offs
-
-
56,287
-
56,287
Exchange differences and other
movements
(7,622)
645
(948)
326
(1,071)
498
(9,641)
1,469
At 31 December 2022
375,980
(20,605)
29,362
(8,246)
68,185
(36,880)
473,527
(65,731)
ECL allowances on undrawn commitments to lend are incorporated within ECL allowances on loans and advances to customers so as not to distort the ECL-related disclosures.
The movement in ECL allowances illustrated above excludes the movement in ECL allowances amounting to €1,533,000 (2021: €621,000) in respect of off-balance sheet financial guarantee contracts which are separately disclosed in the table on the following pages.
The unwind of discount on Stage 3 financial assets is reported within 'Interest Income' so that interest income is recognised on the amortised cost (after deducting the ECL allowance).
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
82
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
Changes in the gross carrying amount and loss allowance between the beginning and the end of the annual period: – continued
Stage1
Stage2
Stage 3
Total
Gross
Expected
Gross
Expected
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
carrying
credit
carrying
credit
amount
losses
amount
losses
amount
losses
amount
losses
€’000
€’000
€’000
€’000
€’000
€’000
€’000
€’000
Loans and advances to customers
at amortised cost
at 1 January 2021
203,200
(14,338)
15,394
(4,296)
85,047
(43,800)
303,641
(62,434)
New and further lending
466,884
(27,987)
21,240
(6,262)
45,007
(18,651)
533,131
(52,900)
Repayments and disposals
(345,181)
21,734
(14,855)
4,716
(78,630)
37,937
(438,666)
64,387
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(13,076)
1,307
13,076
(1,307)
-
-
-
-
Transfer from Stage 1 to Stage 3
(28,194)
2,287
-
-
28,194
(2,287)
-
-
Transfer from Stage 2 to Stage 1
3,722
(922)
(3,722)
922
-
-
-
-
Transfer from Stage 2 to Stage 3
-
(9,263)
2,785
9,263
(2,785)
-
-
Net remeasurement of ECL arising
from stage transfers
and changes in risk parameters
2,292
(2,376)
(17,709)
-
(17,793)
Write-offs
-
-
-
-
(6,886)
(45,294)
(6,886)
(45,294)
Total net income statement
charge during the year
(1,289)
(1,522)
(48,789)
(51,600)
Impact of unwinding ECL provisions
-
-
408
-
408
Write-offs
-
-
51,164
-
51,164
Exchange differences and other
movements
(529)
-
(6)
(29)
(13)
(84)
(548)
(113)
At 31 December 2021
286,826
(15,627)
21,864
(5,847)
81,982
(41,101)
390,672
(62,575)
 
 
 
 
 
 
 
 
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
83
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
Changes in the gross carrying amount and loss allowance between the beginning and the end of the annual period in respect of financial guarantee contracts:
Stage1
Stage2
Stage 3
Total
Gross
Expected
Gross
Expected
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
carrying
credit
carrying
credit
amount
losses
amount
losses
amount
losses
amount
losses
€’000
€’000
€’000
€’000
€’000
€’000
€’000
€’000
Financial guarantee contracts
at amortised cost
at 1 January 2022
4,318
(623)
650
(335)
1,547
(1,016)
6,515
(1,974)
New and further lending
14,692
(2,473)
1,164
(595)
2,860
(1,948)
18,716
(5,016)
Repayments and disposals
(14,162)
2,385
(584)
310
(2,590)
1,909
(17,336)
4,604
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(75)
11
75
(11)
-
-
-
-
Transfer from Stage 1 to Stage 3
(1,124)
181
-
-
1,124
(181)
-
-
Transfer from Stage 2 to Stage 1
45
(22)
(45)
22
-
-
-
-
Transfer from Stage 2 to Stage 3
-
-
(504)
260
504
(260)
-
-
Net remeasurement of ECL arising
from stage transfers
and changes in risk parameters
-
(186)
-
(40)
-
(895)
-
(1,121)
Total net income statement
charge during the year
(104)
(54)
(1,375)
(1,533)
At 31 December 2022
3,694
(727)
756
(389)
3,445
(2,391)
7,895
(3,507)
 
 
 
 
 
 
 
 
Remeasurement of loss allowance arising from foreign-exchange and other movements was not considered significant.
Net changes in gross carrying amount in respect of financial guarantee contracts during 2022 amounting to €1,380,000 (2021: €1,985,000) mainly related to the net effect of the expiry or enforcement of existing financial guarantees and the issuance of new financial guarantees during 2022.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
84
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
Changes in the gross carrying amount and loss allowance between the beginning and the end of the annual period in respect of financial guarantee contracts: – continued
Stage1
Stage2
Stage 3
Total
Gross
Expected
Gross
Expected
Gross
Expected
Gross
Expected
carrying
credit
carrying
credit
carrying
credit
carrying
credit
amount
losses
amount
losses
amount
losses
amount
losses
€’000
€’000
€’000
€’000
€’000
€’000
€’000
€’000
Financial guarantee contracts
at amortised cost
at 1 January 2021
2,970
(389)
332
(152)
1,228
(812)
4,530
(1,353)
New and further lending
16,399
(1,920)
1,415
(700)
1,891
(1,240)
19,705
(3,860)
Repayments and disposals
(14,537)
1,672
(904)
446
(2,279)
1,662
(17,720)
3,780
Transfers of financial instruments
Transfer from Stage 1 to Stage 2
(40)
5
40
(5)
-
-
-
-
Transfer from Stage 1 to Stage 3
(510)
74
-
-
510
(74)
-
-
Transfer from Stage 2 to Stage 1
36
(15)
(36)
15
-
-
-
-
Transfer from Stage 2 to Stage 3
-
-
(197)
91
197
(91)
-
-
Net remeasurement of ECL arising
from stage transfers
and changes in risk parameters
-
(50)
-
(30)
-
(461)
-
(541)
Total net income statement
charge during the year
(234)
(183)
(204)
(621)
At 31 December 2021
4,318
(623)
650
(335)
1,547
(1,016)
6,515
(1,974)
 
 
 
 
 
 
 
 
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
85
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
The following table sets out information about the Bank’s ECL charge for the year by territory, as follows:
2022
Increase /
Increase /
(reversal) of ECL
(reversal) of ECL
allowances on
allowances on
Total income
loans and
off-balance sheet
statement charge
advances
Write-offs
items
for the year
 
€’000
€’000
€’000
€’000
Poland
(270)
322
-
52
Slovakia
-
(14)
-
(14)
Estonia
103
2,910
-
3,013
Latvia
(1,126)
9,994
-
8,868
Czech Republic
(2,547)
4,521
-
1,974
Germany
2,592
5,337
-
7,929
Bulgaria
309
2,842
1,533
4,684
Sweden
904
17,208
-
18,112
France
-
-
-
-
Norway
651
1,250
-
1,901
Spain
(545)
581
-
36
Denmark
1,886
5,921
-
7,807
Finland
1,517
3,851
-
5,368
Romania
805
1,564
-
2,369
Slovenia
6
-
-
6
4,285
56,287
1,533
62,105
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
86
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.12 Loss allowances - continued
2021
Increase /
Increase /
(reversal) of ECL
(reversal) of ECL
allowances on
allowances on
Total income
loans and
off-balance sheet
statement charge
advances
Write-offs
items
for the year
 
€’000
€’000
€’000
€’000
Poland
(3,245)
3,574
-
329
Slovakia
-
(42)
-
(42)
Estonia
1,851
200
-
2,051
Latvia
4,204
3,042
-
7,246
Czech Republic
330
4,225
-
4,555
Germany
2,226
2,007
-
4,233
Bulgaria
(237)
3,395
621
3,779
Sweden
7,290
5,667
-
12,957
France
-
(52)
-
(52)
Norway
557
953
-
1,510
Spain
(11,949)
14,417
-
2,468
Denmark
(3,842)
12,205
-
8,363
Finland
2,377
600
-
2,977
Romania
874
973
-
1,847
436
51,164
621
52,221
 
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
87
2. Financial risk management - continued
2.2 Credit risk - continued
2.2.13 Write-off policy
The Bank writes off loans and advances to customers when it determines that these are uncollectible and it has exhausted all practical recovery efforts. This is generally the case when the Bank has applied debt recovery strategies for a significant period of time and has concluded there is no reasonable expectation of recovery, generally those loans aged 1080 days or more.
In those cases where it has no reasonable expectation of full or partial recovery from overdue credit facilities, the Bank may opt to conduct one-off loan portfolio sales with third parties or group companies. Subsequent to the conduct of such sales, the Bank writes-off any unrecovered amounts (after taking into account expected credit losses originally reserved against the portfolio).
2.2.14 Collateral
The Bank’s consumer lending portfolio is generally unsecured, in line with the typical nature and characteristics observed for short-term retail portfolios.
However, the Bank employs a range of policies and practices to mitigate credit risk, which include collection strategies, contractual arrangement by virtue of which the bank can sell aged portfolios once specific loans reach a predetermined ageing profile and one off debt sales. Note 6 discloses the amount of loans and advances to customers disposed of during the year. With respect to loans and advances originated in particular countries, which comprise 1.13% (2021: 1.48%) of the Bank’s total gross loan portfolio as at 31 December 2022, the Bank is the holder of financial guarantee contracts issued by other parties.
These financial guarantee contracts require the issuer to make specified payments to reimburse the holder (the Bank) for a loss it incurs because a specified debtor fails to make payments when due. Since a financial guarantee contract represents a guarantee on an individual loan entered into with the loan contract and is essentially a pre-condition for granting the respective loan, the guarantee effectively forms part of the terms of the loan. Credit loss allowances are calculated on such loans in accordance with the Bank’s accounting policy, where any credit loss allowances are reflected net of the financial guarantee reimbursement.
The investments in debt instruments are secured by loan portfolios that are pledged in favour of the Bank, taking into consideration pre-established collateralised ratios in relation to the amount invested and also encompassing pre-established ratios of exposures by ageing of the underlying pledged portfolio. Moreover, the Bank also has an additional collateral in the form of cash deposited in its accounts or pledged financial instruments in favour of the Bank in respect of this investment.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
88
2. Financial risk management - continued
2.3 Financial risk factors
(a) Market risk
The Bank takes on exposure to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in currency and interest rate products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as foreign exchange rates and interest rates.
Foreign exchange risk
The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Foreign exchange risk is the risk to earnings and value caused by a change in foreign exchange rates. Foreign exchange risk arises when financial assets or liabilities are denominated in currencies that are different from the Bank’s functional currency (euro), principally in Polish Zloty, Czech Koruna, Swedish Krona, Norwegian Krona, Bulgarian Lev, Croatia Kuna, Danish Krone and Romanian Lue. However, the Bank is not in substance exposed to fluctuations in exchange rates with respect to the Bulgarian Lev as this currency is pegged to the euro. Furthermore, subsequent to 31 December 2022, the Bank will not longer be exposed to fluctuatitons in exchange rates with respect to the Croatia Kuna since the conversion from HRK to EUR took place on 1 January 2023.
The Bank manages its currency risk on an ongoing basis by ensuring that foreign currency liabilities are utilised to fund assets denominated in the same foreign currency thereby matching asset and liability positions as much as is practicable. In relation to the resultant asset and liability foreign currency position mismatching, the Bank has entered into an agreement with a group company to provide cover to the Bank from realised and unrealised exchange differences.
The Bank’s exposures to Polish Zloty, Czech Koruna, Swedish Krona, Norwegian Krona, Croatia Kuna, Danish Krone and Romanian Lue, arise from its lending and credit related activities in Poland, Czech Republic, Sweden, Norway Croatia, Denmark and Romania respectively, as the loans and other credit related instruments are denominated in that currency. Furthermore, the Bank also has exposure to Swedish Krona emanating from its investment in the securitisation portfolio. The overall objective is to fund the activities in these countries in the same local currency.
As previously explained, the Bank is party to a Foreign Exchange Risk Agreement with a group company, where the latter provides cover to the Bank in respect of realised and unrealised foreign exchange differences in lines with terms of this agreement. Any realised and unrealised gains or losses attributable to foreign exchange fluctuations registered by the Bank covered by this agreement are allotted on to the group entity at the end of each month, in line with the Terms of this agreement.
The Bank also seeks to manage its foreign exchange exposures through derivative instruments such as currency forwards.
MULTITUDE BANK PLC (formerly known as FERRATUM BANK PLC)
Annual Report and Financial Statements - 31 December 2022
89
2. Financial risk management - continued
2.3 Financial risk factors - continued
(a) Market risk - continued
Foreign exchange risk - continued
The Bank’s financial assets and liabilities at the end of the reporting periods are analysed into the respective currencies in the following tables.
Total
EUR
PLN
SEK
CZK
BGN
NOK
DKK