Inside the RWA mines | FT Alphaville

Inside the RWA mines

We’re shocked (shocked!) that Commerzbank has rolled out a €1bn capital increase now that European bank equity isn’t a total disaster area. Having not done it when it was.

By executing this transaction Commerzbank intends to take advantage of a favourable market opportunity to further improve its capital structure…

The cash call is wrapped inside in a hybrid debt buyback. But whatever – this was needed, and inevitable at some point.

In the meantime though the German bank still sticks out among its European peers for the sheer scale of its efforts to cut risk-weighted assets (the other bit of a bank’s capital ratio). Commerzbank says it’ll either outright sell or more likely tweak the risk on these RWAs to the tune of €15bn in the first half. Big number.

So, some interesting colour from Nomura’s analysts Chintan Joshi and Omar Keenan who were following the bank’s earnings call on Thursday (MSB = Mittelstandbank, a corporate banking unit, ABF = Asset-based finance):

RWA mitigations – in MSB there was a lot of progress made on RWAs. The effects of adding collateral into systems was EUR 5bn alone and CBK staff are getting better at this. There is a team of 200 people working on this, and previously CBK in moving from Basel 1 to Basel 2 was also a laggard in taking advantage of capital efficiencies. Second, there were better ratings in MSB. Third, the bank adjusts the model parameters once a year. Germany experienced a low recovery rate historically because the average equity in German companies used to be 17%. However, this is now 28% on average and implies higher recovery rates. This reduces LGD and risk RWAs…

ABF losses – CBK assess that it is difficult to pin down a deleveraging loss number, but EUR 100m per quarter would be reasonable. It was discussed that of the RWA 15bn reduction planned for H1 that roughly a third would come from actual asset run-downs. Against EUR 200m losses in H1 we calculate that would imply deleveraging losses of 4% of RWAs. This would be consistent with CBK’s message that it is looking towards a capital optimisation rather than a value maximisation strategy…

Which gels with the general mix of bank recap measures recently reported by the EBA.

And elsewhere in RWA reductions… some €37bn reduced (tweaked, shifted or sold) at Credit Agricole in the fourth quarter, according to results out on Thursday.

Related links:
Commerzbank turns to synthetic securitisation – Euroweek
It’s a capital ratio of two halves – FT Alphaville