December 21, 2016 / 12:18 PM / 9 months ago

Fitch: Banks May Not Trim Capital despite Lower ECB Requirements

(The following statement was released by the rating agency) LONDON, December 21 (Fitch) Eurozone banks are unlikely to trim capital levels despite lower requirements from the ECB following the completion of the supervisory review and evaluation process (SREP) for 2016, Fitch Ratings says. The ECB, as supervisor of the biggest eurozone banks, is following the UK's lead in dividing the Pillar 2 capital component into required (P2R) and guidance (P2G) amounts. This split effectively lowers the level of capital needed to avoid triggering maximum distributable amount (MDA) restrictions, which prevent the bank from making distributions if capital buffers are breached. However, we believe banks will maintain capital levels that fulfil both amounts, as the supervisor expects credit institutions to continue to meet P2G, even though failing to do so will not trigger MDA restrictions. And banks will want to hold a management buffer as well to ensure they can continue to make profit distributions. This is consistent with the 2016 SREP results, where the overall common equity Tier 1 (CET1) demand for 2017, at 10.1% of risk-weighted assets, was broadly the same as the previous year, although there were changes for individual banks due to changes in risk profile. We believe that dividing Pillar 2 into P2R and P2G will increase the supervisor's flexibility in setting overall capital requirements. Increasing the P2G requirement would be an effective means of ensuring a gradual strengthening of capitalisation at weak banks that are particularly vulnerable to losses in stress scenarios without triggering any abrupt payments restriction. The European Banking Authority calls for appropriate disclosure for Pillar 2, noting that banks must disclose the results of their additional SREP capital requirements if their regulator demands it. The ECB's position is that it does not prevent or dissuade banks from disclosing capital requirements that are relevant to MDA. Banks have been disclosing P2R because failure to meet this requirement triggers mandatory CET1 distribution restrictions. Five banks were in breach of P2R in the 2016 SREP outcome based on 2Q16 capital, although their names have not been disclosed. Unless the affected banks have subsequently rebuilt their capital buffers, these banks will be restricted in making CET1 distributions including coupons to Additional Tier 1 investors. Most banks have not yet disclosed their 2017 P2G amounts, although at least three have decided to publish their P2G ratios. Banca Carige has a guidance of 2.25% compared with the aggregate P2G of 2.1%. KBC Group and OP Financial Group have a guidance of 1.0%, probably reflecting the ECB's conclusion that they are less exposed to stress losses. There is uncertainty about why some banks have disclosed P2G. Banca Carige did not give a reason, KBC said in its press release that the P2G "might affect dividend policy and hence is relevant for shareholders", while OP Financial Group said that failure to meet P2G would not affect its profit distribution. Nevertheless, we believe more banks will disclose P2G as the SREP process evolves and there is greater consistency and transparency in disclosure. Contact: Monsur Hussain Senior Director Financial Institutions +44 20 3530 1793 Fitch Ratings Limited 30 North Colonnade London E14 5GN Christian Scarafia Senior Director Financial Institutions +44 20 3530 1012 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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