Trim review pumps up Commerzbank’s credit RWAs

Additional RWA increases also expected in coming quarters

Model updates prompted by a supervisory inspection contributed to a €3 billion ($3.3 billion) increase to Commerzbank’s credit risk-weighted assets (RWAs) in the third quarter, sapping its core capital ratio.

The German lender reported credit RWAs of €155.3 billion at end-September, a 2% increase quarter on quarter and 8% year on year, which the bank attributed to the effects of the European Central Bank’s (ECB) targeted review of internal models (Trim).

Over the same period, market RWAs grew by €418 million (4%) to €12.3 billion and operational RWAs fell by €974 million (4%) to €21.9 billion. 

 

Total RWAs for the third quarter stood at €189.5 billion, a €2.7 billion (1%) increase on Q2 and an €11.1 billion hike on the same quarter a year ago.

Common Equity Tier 1 capital nudged up just 1% on the quarter to €24.2 billion. As a result, the bank’s CET1 capital ratio fell to 12.8% from 12.9% the previous quarter.

Who said what

“As we have received the Trim late in the quarter, there are still some technical discussions outstanding. After final clarification, there might be a further small adjustment either up or down … With the still ongoing Trim exercise, part of the future Basel IV impact is effectively front-loaded” – Stephan Engels, chief financial officer at Commerzbank.

What is it?

Trim was launched by the ECB in 2016, to assess whether the models used by banks to calculate their statutory capital requirements are fit for purpose and align with all applicable regulations.   

The review is being conducted in two phases. The first stage focused on credit risk models for small- to medium-sized enterprise and retail portfolios, counterparty credit risk and market risk models. The second stage, currently under way, concerns models for so-called low-default portfolios.  

By the end of the review, ECB supervisors will have completed around 200 on-site investigations at 65 banks. 

Why it matters

At the start of the year, Commerzbank warned investors the Trim assessment may result in higher RWAs. While the uplift does not come as a shock, the bank says technical discussions over the findings of the model audits are still ongoing, meaning there may be further RWA adjustments to come.

On the third-quarter earnings call, Commerzbank executives said the RWA inflation caused by Trim has effectively front-loaded some of the expansion anticipated on implementation of the latest package of Basel III reforms. This was initially pegged at 10%. But with the Trim uplifts already recorded, plus the effect of structural reforms, the bank now says the increase could be smaller.

In other words, Commerzbank is now operating with RWAs close to where it expected them to be once the rule changes were fully in force. This may mean it takes less of a capital hit on the transition to Basel III.

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