Utrecht, Netherlands-based Volksbank NV, still awaiting clarity on new Basel capital requirements as well as Dutch loss-provisioning legislation, cannot accurately plan for its future capital positioning but is well prepared for upcoming regulatory changes, according to its CFO.
Volksbank, formerly known as SNS Bank, was part of SNS REAAL, which was bailed out by the Dutch government in 2013. It is owned by government entity de Volksholding BV.
"Our shareholder [the Dutch state] is not requesting us to release further capital and has indicated that there is a stance to await further and final regulation on Basel IV before we would start discussions on the capital positioning of the bank going forward," CFO Annemiek van Melick told analysts Aug. 24, on a call to discuss Volksbank's first-half earnings.
"Until that time we will continue to add profit and increase our capitalization further but also maintain our internal [capital] target which is a 15% [common Tier 1 equity] ratio."
So-called Basel IV rules aim to standardize the way banks calculate the riskiness of their assets.
The bank's fully loaded CET1 ratio under CRD IV increased to 32.8% at the end of June, from 29.6% at 2016-end and 27.0% as of June 30, 2016. Volksbank has set a considerably lower CET1 ratio target in its 2020 strategy as it expects a number of upcoming regulatory changes to weigh on its capital position, most notably the Basel requirements.
IRB model, IFRS9 impact
An ECB review of Volksbank's internal-ratings based risk model could lead to more assets being risk-weighted. The central bank may carry out "a proportional conservative adjustment on the margin of conservatism" in the bank's model, Van Melick said, which would increase risk-weighted assets in its retail mortgage book by approximately 1.5 percentage points.
The bank's RWA density declined to 13.5% at June-end from 15% at 2016-end; this was the main reason for the strong rise in CET1 ratio over the first half of the year, Van Melick said.
Meanwhile new accounting rules designed to tighten provisioning standards and better prepare banks for future crises will affect capital. The implementation of IFRS 9 rules in January 2018 will likely hit Volksbank's CET1 ratio by 140 basis points, around 110 of which are coming from the recalculation of impairments in a legacy mortgage portfolio.
The average expected CET1 ratio impact of IFRS 9 on European banks has been estimated at up to 45 basis points by the European Banking Association.
Prepared for Basel IV
But the impact of both IRB model changes and IFRS9 would be negligible compared to that of Basel IV, Van Melick noted.
Like other Dutch banks with very large mortgage books, Volksbank expects a significant impact from the new set of Basel capital rules. This would result in considerable RWA inflation and CET1 ratio deterioration, as higher loan-to-value mortgages would require higher risk-weights. Although LTVs have come down, the impact is still likely to be large.
"When we got the first guidance on Basel IV two years ago, we indicated ... that it could lead to a doubling of RWAs in mortgages," Van Melick said. "If you look at the current proposal, [including loan splitting], we would expect the impact to be less than that but still pretty significant, especially for the Dutch market."
The Basel IV rules were adjusted to allow the split-up of loans in a mortgage portfolio based on their level of risk. This would provide some relief and combined with Volksbank's improved capital position and RWA density explains the improved expectation, Van Melick said.
She stressed that the bank is well capitalized, and that even if all rules were to be implemented immediately, its CET1 ratio would still be above the targeted 15%.
Dutch decision on MREL in 2018
The CFO also said Volksbank has about €1 billion of new debt to issue in order to reach the bank's internal target of 8.5% target for minimum requirement for own funds and eligible liabilities, or MREL.
However, issuance may be postponed until 2018 as the Dutch government is yet to approve a new kind of MREL-eligible debt, dubbed senior nonpreferred.
Meanwhile, the government is not expected to change its plans for Volksbank in an upcoming update in front of parliament by indicating an imminent exit from the bank, the CFO added.