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ABN AMRO may shrink i-bank in response to final Basel III rules

ABN AMRO Group NV has put all its investment banking activities under close scrutiny as it wants to make sure they can be profitable under the final Basel III rules, according to CEO Kees van Dijkhuizen.

"There is now clarity over Basel. We are testing the guidelines against our business models and looking if they still work. The process is ongoing," he said in an interview with Het Financieele Dagblad published Dec. 28. Results of the review will be presented in the second quarter of 2018, according to the CEO.

The finalization of the Basel III regulatory framework was eagerly awaited by large Dutch banks such as ABN AMRO in particular, as they expected a significant hit from the new rules given their large mortgage books with relatively high overall loan-to-value levels and relatively low risk cover.

The final set of Basel III requirements was designed to standardize the assessment of credit risk at banks and limit their ability to use internal models to determine the amount of their risk-weighted assets, which are used to calculate a bank's common equity Tier 1 ratio, a key measure for its capital strength.

Using their own internal models, big Dutch lenders have so far kept their RWAs relatively low, also resulting in fairly low RWA density ratios — that is, RWAs as a proportion of total assets — compared to their European peers. With a 72.5% output floor— that is, the percentage to which internal RWA assessment models should match the standardized approach devised by the regulator — set in the final Basel III framework, Dutch banks face a significant capital gap. The Dutch central bank has estimated that lenders in the country would need to raise around €14 billion to close that gap by 2027, when they would need to be fully compliant with Basel III.

Global corporate lending, clearing at risk

Even though the main impact from the new reform is expected in the banks' residential mortgage business, ABN AMRO's investment banking business will take a hard blow, too. Key problem areas would be those where ABN AMRO faces non-bank competitors, who do not have to comply with the tighter capital rules, and where the lender cannot pass costs on to its clients, according to Van Dijkhuizen.

ABN AMRO does not have many non-bank competitors in domestic lending to small and medium-sized enterprises. However, some parts of the international corporate lending business are under close scrutiny as the bank wants to assess their prospects for future yield based on who it is competing against, the CEO said. The bank is currently assessing the viability of lending to shipping, energy and natural-resource companies abroad, as well as its ABN AMRO Clearing unit, he said.

Traditionally, the contribution of the investment banking unit to ABN AMRO's profitability has been low, with the segment accounting for just 11% of total income of the Dutch group so far in 2017. On the other hand, the unit claims around 40% of the bank's core capital, according to Het Financieele Dagblad's report.

ABN AMRO's reported profit for the first nine months of 2017 stood at €2.25 billion, compared to €247 million reported profit at the corporate and institutional banking unit for the same period.

ABN AMRO has grown considerably in energy-sector lending over the last few years, and people familiar with that business believe the group makes a good return from it, according to Het Financieele Dagblad. The same cannot be said for the clearing unit, which is expected to suffer under the tighter capital requirements, according to the report.