At UniCredit, XVAs amped trading gains in Q3

Italian bank claimed a €110 million benefit to earnings from valuation adjustments

Italian lender UniCredit made €455 million ($538 million) in trading income over the third quarter. But of this amount, 24% came about through favourable valuation adjustments (XVAs) to its derivatives portfolio rather than in cash revenue.

UniCredit said XVAs, including debit, credit and funding valuation adjustments, added €110 million to its trading income over Q3. In Q2, these adjustments cost the bank €158 million and in Q1 €67 million. Including XVA effects, trading income was up almost 28% quarter-on-quarter. Excluding them, it declined 33%.

The XVA boost made up 10% of third-quarter revenues at UniCredit’s corporate and investment bank. Without them, the division’s revenues would have been 13% lower than in Q2.


Valuation adjustments also had an effect on UniCredit’s risk-weighted assets. The bank said it had shifted XVA hedging to its banking book, a move which helped push its market RWAs down €3 billion (-19%) quarter-on-quarter. This in turn helped lower overall RWAs 4% to €336.4 billion.

By shrinking its RWAs, UniCredit boosted its Common Equity Tier 1 (CET1) capital ratio, which climbed 70 basis points over Q3 to 15.2%.

What is it?

Credit valuation adjustment (CVA) is a change to the market value of a derivatives instrument to account for counterparty credit risk. It represents the discount to the standard derivatives value that a buyer would offer after taking into account the possibility of a counterparty’s default.

Funding valuation adjustment (FVA) is the cost that arises when a dealer is unable to directly pass variation margin from an out-of-the-money client to an in-the-money client. The dealer then has to fund the margin itself, generating a cost.

Debit valuation adjustment (DVA) is an adjustment to the value of an outstanding derivatives contract to account for a bank’s own credit risk. It applies mainly to uncollateralised swap liabilities, becoming more positive as a bank’s creditworthiness deteriorates and more negative as it improves. 

Why it matters

Many banks have reported big XVA swings this year, reflecting the unprecedented market volatility unleased by the coronavirus crisis. At some firms, XVA additions have boosted already-impressive trading hauls. At others, they have masked disappointing results.

UniCredit is in the latter camp. Revenues are down quarter-on-quarter and year-on-year because of sluggish equity sales and what it calls a “seasonally lower” contribution from bonds and foreign exchange.

If markets continue to normalise and credit spreads close, the size of XVA gains and losses should shrink, too. However, the experience of the last few months has pushed some to question whether valuation adjustments should be reflected in profit and loss at all. The argument is that since banks have little control over how certain kinds of XVA effects manifest, they shouldn’t muddy their earnings statements.

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