Nykredit Capital Markets Day. Ulrik Nødgaard October 31, 2013

Transcription

1 Nykredit Capital Markets Day Ulrik Nødgaard October 31, 2013

2 Agenda 1. Sector performance 2. SIFI 3. Guidelines for the fulfillment of the pillar II add-on 4. Agricultural sector 5. Asset Quality Review/Comprehensive Assessment 6. RWA 7. Supervisory Diamond 2

3 Danish banking sector Danish banking sector, Q2: Number of banks 90 Total assets 3,905 DKK bn. Total assets/gdp largest banks (solo), Q2 : Danske Bank 2,201 DKK bn. Nordea Bank Danmark 584 Nykredit Bank 251 Jyske Bank 247 Sydbank 142 Total 3,424 DKK bn. Share 88 Percent 3

4 Development in Loan Loss Impairments, Q2 Per cent 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 Quarterly impairments as a percentage of loans and guarantees 4

5 Do Large Banks have better credit-management? Per cent 1,8 5 largest banks Rest of sector 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0 Quarterly impairments as a percentage of loans and guarantees 5

6 Development in Coverage Ratio, Q2 Per cent Accumulated impairments (individual) as a percentage of impaired loans and guarantees 6

7 SIFI capital requirements Minimum capital requirements for all Danish banks and mortgage credit institutions 10.5 per cent. of risk-weighted assets (RWA) Including larger proportion of loss-absorbing equity Currently 7 SIFIs identified: Danske Bank, Nykredit, Nordea Bank Denmark, Jyske Bank, BRFkredit, Sydbank and DLR The size of the capital add-on is related to the systemicness of the institution. For example: Danske Bank greatest SIFI-add-on with 3 per cent of RWA Sydbank, BRFkredit and DLR smallest with add-on of 1 per cent of RWA 7

8 Phasing-in of new capital requirements, % af RWA Countercyclical buffer SIFI buffer Conservation buffer 1,875% 2,5% Total 8% T1; 4% CET1 2% Total 8% T1; 5,5% CET1 4% 0,6% 0,5% Total 8% T1; 6,0% CET1 4,5% 0,625% 1,2% 1% Total 8% T1; 6,0% CET1 4,5% 1,25% 1,8% 1,5% Total 8% T1; 6,0% CET1 4,5% 2,4% 2% Total 8% T1; 6,0% CET1 4,5% % 2,5% Total 8% T1; 6,0% CET1 4,5% plus pillar 2 and tougher requirements on capital quality (phasing-in) 8

9 CET1 Coming requirement vs. the current level, 2013.Q2 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Danske Bank - current Requirement - Danske Bank Nykredit - current Requirement - Nykredit Jyske Bank - current Requirement - Jyske Bank Sydbank - current Requirement - Sydbank Min. CET1 requirement SIFI-buffer 1-3% Conservation buffer 2,5% Countercyclical capital buffer 2.5 % Excl. pillar II requirement. Cocos to be allowed in the pillar II add-on. 9

10 Capital ratios, Q2 Per cent 25 Core Tier 1 Total capital ratio

11 Common Equity Tier 1, status 2013.Q2 Per cent 20 Per cent banks below 9.5 pct. 4 banks below 7 pct. 3 banks below4.5 pct. 11

12 Guidelines for the fulfillment of the pillar II add-on For subordinated capital instruments to be allowed in the pillar II add-on instead of CET1 instruments, the instruments must qualify as regulatory capital, either as: Capital instruments that automatically converts into CET1 or is written down if the individual solvency need (pillar II) is breached or the Danish FSA assesses that there is a high risk that an institution in the near future will not fulfill the individual solvency need. Capital instruments that automatically converts into CET1 or is written down (permanent or temporary) if an adequately high level (trigger) of CET1 is breached, so-called Contingent Convertibles or CoCos. Adequately high level of CET1 is translated into a trigger of at least 7 per cent of CET1 12

13 Stylized example: MDA-trigger and Pillar II requirement (pillar II met with CET1) MDA 100% 80% 60% 40% 20% 0% Combined buffer No automatic MDA restriction in upper tier of buffer (corresponding to the Pillar II requirement of 1.5 %). Institutions are instead required to prepare a capital conservation plan MDA restrictions starts when breaching 9% CET Pillar II Other restrictions available as well Pillar I Pillar Pillar II II requirement met metwith T1 CET1 CoCo Pillar I % CET1 Pillar II - 1,5 % CET1 Combined buffer % CET1 4th quartile, CET1 [7.9;9[: MDA max 60 % 3rd quartile, CET1 [6.8;7.9[: MDA max 40 % 2nd quartile, CET1 [5.6;6.8[: MDA max 20 % 1st quartile, CET1 [4.5;5.6[: MDA 0 % The combined buffer consists in this example of a capital conservation buffer (2,5 %) and a SIFI-buffer (2 %). 13

14 Robust sector but potential solvency problems in a small group of banks In general, the Danish banking sector is robust However, a small group of banks are on intensified supervision due to potential solvency problems during the next months Market share of challenged banks Now Loans 3.5 per cent 3.2 per cent Total assets 2.5 per cent 2.3 per cent 14

15 Phasing in of LCR for SIFIs and non-sifi institutions Per cent SIFI Non-SIFI

16 SIFI Liquidity and supervision Liquidity requirements (LCR and 152) Danish SIFIs must comply with the LCR requirement from 2015 Current 152 requirement will be kept as a floor through end Institutions who voluntarily comply with 100 per cent LCR requirement from 2015 are excempt from this floor. Review on the position on the LCR requirement for the Danish SIFIs and the presence of the 152 floor awaits the final decision from the European Commission in 2014 on the definition of the LCR Final decision includes clarification on which assets can be used in complying with the LCR requirement The supervision of the SIFIs will be strengthened Increased inspection activity Benchmarking of Danish SIFIs in relation to international SIFIs Increased focus on corporate governance and risk management Increased focus on model specification risk and capital allocation 16

17 Exposure to agriculture Agriculture (incl. forestry and fishing) amounts to 4.2 per cent of the Danish banking sector s total loan book. In 19 banks agriculture make up at least 15 per cent of the loan book. These 19 banks cover 4 per cent of total loans and guarantees of the sector. Developments in agriculture pose a greater credit risk for some (especially smaller) banks that have a relatively large exposure on agriculture. 17

18 Agriculture accounting figures The improved mean operating result conceals a large difference between farms*! Spread in operating results (in DKK) Mean (2012) (2013) (2014) Best third Mean Worst third (estimate) *Only full-time farms; (year) = estimate Source: Knowledge Center for Agriculture, estimate June 2013 The least profitable third have and are estimated to have negativ operating results going forward 18

19 AQR vs. CA AQR: Assets Quality Review in context of EBA supporting the stress test exercise in CA: Comprehensive Assessment in context of establishment of the SSM. Consists of three components: Assessment of risk profile of banks Review of the assets on the balance sheets (AQR) Stress test of the corrected balance sheets AQR based on EBA recapitalization exercise scope: Aims to achieve uniform AQR approach Risk based portfolio selection Review the quality of selected assets (incl. provisioning) EBA standard reporting definitions of forbearance and NPL Performed by the consolidated supervisor involving colleges 19

20 EBA AQR Process vs. Danish Supervisory approach AQR process (tentative) Identification Off-site review On-site review Reporting Scope Process Current knowledge Select portfolios for data collection EBA definitions Collect and review data Review current knowledge Select portfolios for in-depth review Collect and review samples Current knowledge Conclude assessment Group EBA Public DFSA Supervisory apporach AQR s an integrated part of our existing supervisory approach. The aim is to replicate as far as possible the ECBs methodology Samples of exposures: Large corporate and corporate/retail with elevated risk 20

21 AQR - Next steps Further preparation of the exercise with involved authorities including SSM Interaction with included banking groups on data collection based on the common EBA definitions of forbearance and NPL Expected launch Q Off- and on-site review during Q1-Q EBA AQR and stress-test to be completed by October

22 IRB-models and Risk Weights: Is there a problem? EBA: Half of the variation can be explained by roll-out, exposure types etc. Basel: Three quarters of RWA variation reflects variation across banks in actual risk exposure 22

23 Average Risk weight for Commercial exposures, IRB institutions The risk weight for unsecured commercial exposures under the standard approach is 100 per cent Use of mapping of risk weights allowed for exposures with external rating 23

24 Average Risk weights for mortgage backed Retail exposures The risk weight for exposures secured by mortgages on residential properties is 35 per cent under the standardized approach 24

25 Low RW on mortgages reflect low historical losses Per cent 3,00 Mortgage-credit institutions Banks 2,50 2,00 1,50 1,00 0, , Annual impairment losses as a percentage of loans and guarantees 25

26 Approaches for dealing with IRB uncertainties Adressing outliers Greater transparency Floors (Basel I floors ) Leverage ratio 26

27 Adressing outliers - Danske Bank Several analyses indicated that Danske Bank s corporate RWs were low A Danish analysis of RWs and IRB parameters across Danish IRB banks A Nordic analysis of RWs and IRB parameters across Nordic IRB banks The Low Default Portfolio (LDP) analysis performed by the EBA concerning large corporate customers External analyses based on Pillar III reports 27

28 Adressing outliers - Danske Bank The orders required the bank to increase both its risk weighted assets and its solvency need Before the orders After the orders RWA 797 bn DKK Approx. 900 bn DKK Solvency ratio 21.6 % 19.1 % Pillar I requirement 64 bn DKK 72 bn DKK While the impact was significant the bank has a substantial capital buffer both before and after the orders The pillar II requirement was reduced from 10.2 to 9.0 percentage points 28

29 Expert committee on the causes of the financial crisis in Denmark The expert committee was set up by the Minister for Business and Growth on January The committee published a report on September which supports the initiatives taken since the outbreak of the financial crisis by the Danish FSA and other Danish authorities provides 18 recommendations to the government The committee consisted of Professor Jesper Rangvid (Chairman), Professor Anders Grosen, Professor Finn Østrup, Professor Peter Møgelvang-Hansen, Former bank CEO Peter Schütze and Former central bank governor Jens Thomsen. Representatives from the Danish central bank, the Ministry of Finance, the Ministry of Economic Affairs and the Interior and the Ministry for Business and Growth. A summary of the report can be found at 29

30 Enhanced surveillance, executive orders, increased capital needs if one breaches the boundaries 30 The Supervisory Diamond for banks Sum of large exposures < 125 per cent Excess liquidity coverage > 50 per cent Funding-ratio < 1 Lending growth < 20 per cent Commercial property exposure < 25 per cent

31 The Supervisory Diamond - sum of large exposures, revision Table Effect on sum of large exposures for banks since introduction of the supervisory diamond in Q2 Sector mean Sum of large exposures Q Q Q Q2 36 Limit < 125 The Committee on the causes of the financial crisis recommends: The Committee has found that an important reason why many financial institutions have become distressed is that they are exposed to large loan commitments, particularly in the commercial property sector. The Committee notes that the same factors applied during the previous banking crisis in the early 1990's. Against this background, the Committee recommends that the FSA tightens up the Supervisory Diamond limits for large exposures. FSA will also consider whether there is a need to adjust the calculation method, in order to reflect the underlying risk better A revised Supervisory Diamond will be implemented during

32 Towards a new normal in mortgage financing? Per cent 80 Fraction of interest-only loans Per cent 80 Fraction of F1 loans

33 Supervisory diamond mortgage-credit institutions The Committee on the causes of the financial crisis recommends the introduction of a Supervisory Diamond for mortgage-credit institutions: The Committee is concerned whether the mortgage credit institutions' own initiatives in terms of reducing the increased risks following the extensive use of loans with a refinancing risk and interest-only loans are sufficient to ensure a robust sector in the future. The Committee therefore recommends that the FSA prepares a "Supervisory Diamond" that is particularly aimed at mortgage credit institutions. The Committee finds that such a Supervisory Diamond should include landmarks that reflect the risks of an institution, including, e.g. limits on the share of mortgage credit loans with frequent refinancing (more than every two years) issued by an institution and limits on the share of interest-only loans to selected customer groups that constitute a significant share of the property value. The FSA will present a model during the first half of