EU banks with thinnest buffers tap heftiest IFRS 9 capital add-backs

EBA data shows lenders whose capital benefitted most from transitional loan-loss relief also have skinniest CET1 capital ratios

European Union banks that benefitted the most from IFRS 9 loan-loss relief also have the thinnest solvency ratios, European Banking Authority (EBA) data shows.

The temporary ability to add back to capital to offset provisions booked under the new framework has proved a boon to lenders in the bloc’s economic periphery. At Greece’s Piraeus, for example, such transitional adjustments made up 21% of the bank’s Common Equity Tier 1 (CET1) reserves at end-June, according to the EBA.

 

 

Those same lenders, however, also had the lowest CET1 capital ratios in the EBA’s sample once the add-backs were stripped out. At 8.8%, Piraeus’s ratio was the worst of the group – on par with Portugal’s Novo Banco, where add-backs made up 12% of capital, the fifth-highest proportion.

Conversely, banks such as Rabobank and ING, which made barely any use of transitional add-backs as of end-June – less than 0.1% of CET1 capital – were operating on robust fully loaded ratios of 17.2% and 15.7%, respectively.

There were outliers. At Romania’s Banca Transilvania, add-backs contributed 11.5%, well above the sample’s average, but the bank’s ratio would have been a solid 16.4% even on a fully loaded basis. A handful of global systemic lenders such as BNP Paribas, Deutsche Bank, Societe Generale and Santander, on the other hand, made minimal use of IFRS 9 recoups despite having razor-thin fully loaded ratios.

 

 

What is it?

The EU-wide transparency exercise discloses bank-by-bank data on capital positions, risk-weighted assets, leverage exposures and asset quality for 120 banks across 25 EU and European Economic Area (EEA) countries.

In June 2020, European policy-makers put together a ‘quick fix’ to the Capital Requirements Regulation to ease the burden of the Covid-19 crisis on the banking system.

IFRS 9 relief was part of the package, which allows lenders to ‘add back’ 100% of loan-loss provisions for ‘stage one’ and ‘stage two’ assets taken since January 1, 2020 into their regulatory capital. The temporary measures apply until end-2021.

This is in addition to pre-existing rules on capital requirements that allow banks to inject into their CET1 capital a set percentage of the higher loan-loss provisions they must hold under the new accounting regime. These arrangements phase out over a five-year period, starting at 95% of ‘IFRS 9-related’ provisions in 2018, falling to 85% in 2019, 70% in 2020, 50% in 2021 and 25% in 2022.

Why it matters

With the pick-up of IFRS 9 relief visibly concentrated among some thinly capitalised banks in weaker EU economies, the arrangement’s expiry risks entrenching the banking union’s north-south divide.

Across the EBA sample, banks that are both heavily reliant on transitional adjustments and most weakly capitalised are spread across Cyprus, Greece, Italy and Portugal – the bloc’s more economically troubled countries, which have been battered further by Covid.

Will pandemic-induced impairments roll-off these lenders’ books before relief arrangements are phased out? The trend at some banks bodes well. As a proportion of total CET1 capital, IFRS 9 add-backs at National Bank of Greece or Banca MPS are lower than they were nine or 12 months earlier, just after the first wave of infections in Europe. At Piraeus, they are noticeably more contained than at end-2019, despite the pandemic’s effect.

Still, reported numbers may not tell the full story. The EBA has recently chided some lenders for adjusting loan-loss parameters in the face of Covid vagaries in a way that produces lower IFRS 9 provisions. If regulators were to intervene in cases they deem egregious, some lenders may suddenly join the cohort of heavy transitional-arrangement users.

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