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Rabobank expects risk-weighted assets to soar due to Basel III

Rabobank faces a 30% to 35% increase in risk-weighted assets as a result of the implementation of Basel III capital requirements but will not change its medium-term capital targets yet as EU regulators may still amend the proposed rules, according to CFO Bas Brouwers.

"The Basel proposals ... have to be approved and transferred into law by the European Commission, and there is still a possibility that they will make some amendments to the current proposal," he told analysts at a presentation of the Dutch lender's earnings for 2017. "We would appreciate if the level playing field can be restored because we think that for a bank with our risk profile the effect [of the new rules] is disproportional."

Brouwers also hopes that when the final rules are being adopted in the Netherlands, national supervisor DNB might consider amending the capital requirements it has imposed on Dutch banks due to the effect of the Basel rules.

Those rules, which were finalized at the end of 2017 and are often referred to as Basel IV, are aimed at standardizing the way banks assess the riskiness of their assets, forcing them to hold at least 72.5% of the capital against risky assets recommended by standard models. This so-called output floor will be gradually phased in between 2022 and 2027, and will have a significant impact on banks with large mortgage books and lower risk cover. Dutch and Nordic banks traditionally fall into that category because they hold a large number of mortgage loans, which they consider less risky than the Basel Committee for Banking Supervision does, as mortgage default rates in their countries have historically been lower than those in other European markets.

"Mortgages are of course one of the drivers for the higher RWAs," Brouwers said. "Another part is collateralized lending in our [agricultural] business because the collateral that we have [there] is not fully appreciated by the Basel proposals," he added, saying Rabobank would "also have to apply [output] floors for our internal-rating-based-approach models" in that segment.

Risk-weighted assets, or RWAs, play an important role in calculating a bank's common equity Tier 1 ratio, which is the key gauge for its capital strength.

'Quite confident'

Brouwers did not comment on the total impact of Basel III on Rabobank's capital, saying that to do so would be premature as the full application of the rules is still far away. But CEO Wiebe Draijer noted that Rabobank has been on a "strategic journey" to prepare for the impact of the rules over last three years and feels ready now.

"We have taken steps already, so we are quite confident that whatever the ultimate shape of Basel IV will take, we are well underway [in terms] of absorbing its consequences," he told analysts.

"Offsetting measures are something that we are doing for the last couple of years, both with funding relief and capital relief transactions," Brouwers explained. "We are currently looking into the different asset classes that we have on our balance sheet for repricing possibilities in the market. Another way to offset the impact is becoming more cost efficient."

Both Wiebe and Brouwers said Rabobank has no plans to revise the 14% CET1 target it has set for 2020.

"The target that we've set is based on Pillar I and Pillar II requirements plus a management buffer that we would like to keep," Brouwers said, adding that the target of 14% will remain until there is a change in either the capital requirements or the buffer. "If some of the elements change, we will revisit our target."

Rabobank's fully loaded CET1 ratio rose to 15.5% at the end of 2017 from 13.5% a year earlier.