ECB proposal implies Danish Compromise could stay
* What has been announced. The European bank regulator (the ECB
SSM*) yesterday put out a draft regulation, 'Draft regulation of the ECB
on the exercise of options and discretions available in Union law'. The
aim is to reduce national discretions in order to create a more homogenous
set of bank rules across Europe. Although the draft is not entirely clear,
our first read is that the proposal implies that EU Banks could avoid a
capital deduction of insurance holdings. If we are right, EU Banks could
continue** to use the so called 'Danish compromise', which allow insurance
holdings to be risk weighted (at 100 - 370%). The compromise was, initially,
set to be phased out, starting 2019. The consultative period runs to 16
December 2015, and we expect banks to welcome the allowance of the
Danish compromise.
* Names most impacted. The announcement explains a c4% rally in CASA
(OP, TP EUR15.1). Other banc-assurance groups that could be impacted
include; Natixis (OP, TP EUR7.1), Soc Gen (OP, TP EUR58.2), KBC (N, TP
EUR60.9) and Caixa (N, TP EUR3.7). We estimate the impact of the
proposal and believe that it will enable banks to maintain 20 - 250bps of
CET1 (which under the original rule, would have been deducted from 2019).
CASA could benefit the most (avoid a 250bp deduction), Caixa (85bp), KBC
(30bp), Natixis (c20bp) and Societe Generale (c20bp), 2015E.
* Has the ECB changed tack – we do not think so. Although, the SSM
voted to keep the Danish compromise (Reuters, 19 October, 2015), we do
not believe the ECB has changed tack on bank regulation. We believe (part
of the reason) to allow risk weighting of insurance is that it was too difficult to
change national laws (Danish compromise and DTA's are part of the CRR,
adopted in EU, June 2013). That said, even if regulatory headwinds continue,
the worst outcome could be avoided and EU Banks are, at c1.0x TBV,
2016E, already priced for regulatory risk.