IFRS 16 takes bite out of Danske’s capital ratio

RWAs rise Dkr6.2 billion on accounting switch

Danske Bank's core capital ratio dropped 30 basis points over the first three months of the year, largely because of its implementation of IFRS 16, a new accounting rule.

The Danish lender's Common Equity Tier 1 (CET1) ratio decreased to 16.7% at end-March from 17% at end-2018, as capital fell and risk-weighted assets edged upwards.

Total RWAs climbed Dkr10.3 billion ($1.6 billion) to Dkr758.4 billion quarter-on-quarter. Higher credit RWAs pumped up the total. These increased 2% to Dkr614.7 billion on the quarter. Of this gain, Dkr6.2 billion was because of the switch to IFRS 16 and Dkr3.5 billion was due to foreign exchange movements.

CET1 capital dropped quarter-on-quarter to Dkr126 million from Dkr127 million (0.3%). 

What is it?

IFRS 16 is a new accounting standard for leases that replaced IAS 17 on January 1, 2019. The new standard requires lessees to recognise assets and liabilities for all leases that have a term of 12 months or more, unless the underlying asset has a low value. 

By increasing the amount of leases brought in scope of the balance sheet, lessees' total assets have increased under IFRS 16, which has had a knock-on effect on their RWAs.  

Why it matters

At a stroke of its accountants' pens, Danske Bank found itself the proud owner of Dkr6.2 billion more RWAs at end-March than it did three months earlier. Why? Because a chunk of the value of assets leased to the firm under IAS 17 had not been included on its balance sheet before, and therefore did not need to be capitalised. That's changed under IFRS 16.

Like with the IFRS 9 switchover of 2018, banks' capital requirements have increased under the new standard not because their risks have ratcheted up, but because the complexion of their balance sheets have changed. However, in this instance the capital hit should be one-off, rather than edging up from period to period as with IFRS 9, the capital effects of which are being phased in under European Union rules.

Though the capital drain caused by IFRS 16 may have been slight on day one of the switchover, the new standard will force banks to approach lease agreements differently going forward, in the knowledge that the capital consumption of these items is greater now than it was in the past. 

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