A forbearance measure is profitable when it is more advantageous than the alternative of terminating the deal and liquidating the collateral. The comparison of these alternatives is based on the corresponding net present value. The measure with the highest net present value is assumed to be the most suitable and sustainable measure. 

Such a benefit assessment may be mandatory for the bank and/or the supervisory authorities. According to the EBA guidelines on management of non-performing and forborne exposures (EBA/GL/2018/06), a comparison of the planned forbearance measure with alternative measures should be performed. In particular, it must be examined whether a termination of the deal and a liquidation of the collateral leads to a higher fair value than the continuation of the deal when granting the forbearance measure.

The following present values are calculated as part of the profitability test using the effective interest rate (EIR) for discounting:

• present value of the exposure, assuming the forbearance measure will be carried out
  
  • This time value is calculated on the basis of the resulting payment plan after the planned business events related to the forbearance measure have been carried out.
    
    
• present value for the alternative of terminating the deal and liquidating the collateral
  
  • If no collateral is assigned to the deal, its time value is equal to 0.
  • If collateral is assigned to the deal, the time value is determined on the basis of assumptions about the liquidation of the collateral.
  • The calculation procedure is identical to the calculation of the recoverable amount for specific deals classified as stage 3 in the IFRS 9 risk provisions. In this process, the market value of the collateral, reduced by the expected liquidation costs, is discounted at date of the benefit assessment, starting from the liquidation date for the respective collateral.

In conclusion, a forbearance measure is profitable if the present value of the exposure – assuming the forbearance measure will be carried out – is greater than or equal to the present value for the alternative of terminating the deal and liquidating the collateral. The result of the profitability test as well as the parameters used in the calculation are traceable in detail and also available for auditing purposes after approval.