Banking, Reform Basel 4, less heavy rules, Ghos, Milano Finanza
The Ghos, the body that gathers governors and central bankers, yesterday published the long-awaited details of the Basel 4 reform package. At first reading, analysts at Credit Suisse stress this morning, “the proposal is better than expected and if we are right, it could act as a catalyst for the European banking sector “for more than one reason.
First of all, the planned 9-year transition period up to 2027 allows banks to build capital (no loss of capital). Secondly, despite an output floor, a minimum level for capital requirements on assets, at 72.5% with a transitional regime from 2022 to 2027, changes the standard approach (the division of loans and the potential national discretion on weighted mortgage risk) and the 12% gross increase in risk-weighted assets (Rwa) could be reduced to around 4%, according to Credit Suisse estimates. Last but not least, the measurement of leverage ratio (LR) exposure was changed by around 40bp.
“The market was ready for a 70-75% output floor and the floor-sensitive names were the” bottom performers “last month: Shb, Danske, Abn Amro, Nordea Bank, Cagr and Seb. 1.06 times the tangible book value 2018 did not discount a severe output floor, but now seems unlikely and “, according to Credit Suisse analysts,” investors will not anticipate this request, given the long transitional period, 9 years, and the fact that the prospect of national discretion could reduce the impact of the output floor “.
For analysts of the Swiss investment bank, price reactions will be determined by the statements of bank management on dividend policies and by political rejection or acceptance of a deal. At the preliminary level, the winners are the many banks exposed to mortgages with a manageable impact and / or buffer of considerable size, then Abn Amro, Danske and Lloyds Bank, or the banks with historically high litigation (Bnp Paribas and Lloyds Bank) from the moment that operational risk fell significantly.
With regards to Credit Agricole and Natixis, the floor is potentially applicable only to the controlling group and this is positive. Naturally banks with lower buffer / high impact of the output floor are more vulnerable: Seb, Shb and Deutsche Bank. This prudently indicated a 20% increase in the Rwa from Basel IV.
That said, “the announcement of the Ghos is not the end, but the beginning of a new political negotiation.The proposed floor of 72.5% could, without a mitigation, consume capital equal to about 13% of the borrowing capacity of European banks, suggesting that politicians could water down Basel 4 further, so as not to derail the growth program, “added the Credit Suisse experts.
“Given the long transitional phase, 8-10 years, and the potential for national discretion, banks with strong capital generation and significant buffers could act on excess capital.In our opinion, banks that could benefit from less heavy rules are Abn Amro, covered with an outperform rating and a target price of 16.5 euro, Natxis, also with an outperform rating and a target price of 7.4 euro and Danske, always outperforming a target price of 281 “, conclude the Credit Suisse analysts.
Source Milan Finance
December 08, 2017
Francesca Gerosa
