Rabobank secured €10 billion in new funding during the first half, which covers two-thirds of its full-year needs of around €15 billion, and is also getting to closer to its medium-term funding targets, Chairman Wiebe Draijer told analysts Aug. 17.
The Dutch bank is aiming to reduce its wholesale lending to less than €150 billion by 2020 and to diversify its funding sources to become "less sensitive to potential future financial-market instability," Draijer told analysts during a first-half earnings call. "I would expect that funding needs for the next year would be in a rather similar size."
As of June 30, Rabobank's wholesale lending volume was €171 billion, down from €189 billion a year earlier. In a move to diversify funding, the bank completed its first ever covered bond issue of €2.5 billion in May and increased the share of its participation in the EU targeted longer-term refinancing operations program, or TLTRO, to €5 billion during the first half from €2 billion a year earlier.
The bank also aims to reduce the layer of additional Tier 1 capital to 2% of risk-weighted assets by 2020, compared to 3.1% in the first half. Its RWAs declined to €207.6 billion at June-end from €211.2 billion at 2016-end. The reduction is necessary to meet tighter regulatory requirements on cash reserves, Rabobank said. This will change the focus of future issuances to Tier 2 capital, according to Draijer.
"It will be quiet for the next year and a half on the [additional] Tier 1 front," he said. "For Tier 2, we are closely following the insights that we get for MREL."
New requirements
Along with some other new key regulations that are expected to take effect from next year, the minimum requirement for own funds and eligible liabilities, or MREL, has been a determining factor in Rabobank's capital strategy. The lender has already achieved its 2020 targets by reaching a total capital ratio of 25% and a common equity Tier 1 ratio of 14%. At June-end, the lender's total capital ratio stood at 25.5% and its fully loaded CET1 ratio at 14.7%.
Although there is still no clarity on the final MREL rules, Rabobank has already received guidance from the regulator on its own specific requirements, Draijer said, adding that he could not disclose the exact figure yet, though.
The issuance of a new type of MREL-eligible debt dubbed senior non-preferred will realistically come in the second half of 2018 at the earliest since the Dutch government has not passed a law on the new MREL rules yet, Draijer said, adding that the law is expected to be passed in the first half of next year. Senior non-preferred debt would allow banks to substitute part of their capital with securities that are redeemable in case they run into trouble and need bail-in funding.
The bank is still expecting a final decision on the latest installment of the Basel III regulatory framework that aims to standardize the way banks assess the riskiness of their assets. Like other mortgage-heavy Dutch lenders, Rabobank could be severely affected by the new capital rules, dubbed Basel IV, as they will introduce minimum output floors for the amount of capital that has to be held against loans and other assets. The currently discussed floor of 75% is considered very high and has been a cause for concern of all large Dutch banks.
"We have a strange situation. Normally, when a process comes to an end it gets clearer, and in this case, the uncertainty is only increasing," Draijer said, commenting on Basel IV. "The range of how much we will be impacted will very much depend on the ultimate floor level, but also on whether there will be caveats for specific product categories."