The cumulative impact of regulation | KPMG | BE

Belgian banks are doing fine at first sight… but will face a problem of profitability in the near future

The cumulative impact of regulation

“The cumulative impact of regulation, tax and a low interest rate environment” report provides valuable insights into the likely impact on capital, liquidity and profitability of Belgian banks.


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A new study of the Belgian banking landscape - performed by KPMG in Belgium - shows that over the past three years, Belgian banks have managed to improve their capital and liquidity ratios. Driven by the disposal of non-core activities, banks have been de-risking their balance sheets. Belgian banks have even managed to restore profitability to a higher level in 2015 compared to the previous post-crisis years, notwithstanding higher costs due to increased regulation and tax burden. But the Belgian banks will have to take corrective measures to maintain this profitability while keeping solvability and liquidity at acceptable levels.

New challenges

The current low interest rate environment combined with additional regulatory reform will give rise to new challenges. Banks may try to restore profitability by increasing their risk profile, by further increasing the price of credit, by cutting costs and/or by generating more fee based income. Some of these actions will however also come at a price for the Belgian economy.

Main conclusions of the report

1. The Belgian banking sector is doing well, but…

At first sight, the outcome is a positive one because capital ratios, liquidity and profitability have improved significantly. These improvements have been achieved through a variety of management actions being de-risking/asset reduction, retention of earnings/new capital raising, reduction of work force, restructuring of physical distribution networks, and better pricing of the credit component in loan origination.

But: the current ROE levels hardly cover the cost of equity (about 9.2%) and are seriously at risk in the longer term. Moreover, the 2015 results of Belgian banks have been positively impacted by one off effects like mortgage repayment penalties, hiding the longer term negative impacts on the Net Interest Income (NII) of these prepayments.

2. The cost of new regulation, high taxes and, last but not least, the interest rate environment will affect the profitability of Belgian banks

Due to a number of new regulations (*), taxes and contributions Belgian banks will face higher costs and increased capital requirements. Moreover, the negative impact on banks’ margins from the ECB’s negative deposit facility, re-enforced in Belgium by not only massive refinancing/repayment operations but also by the minimum savings deposit rate of 0.11% imposed by the Belgian government, indicates clearly that banks will not be able to sustain the current net interest margin in the coming years. The main profitability ratio - return on equity - of the Belgian banking sector drops below 6.3% as from 2019.

Action plan

This leaves the industry no choice but to ponder corrective measures to restore profitability while keeping solvability and liquidity at acceptable levels. On an aggregated level, in KPMG’s view, this will undoubtedly lead to a mix of management actions of which the following is a plausible one:

  •  A transfer from cash and high quality liquid assets towards more illiquid riskier assets generating an extra return; 
  • A structural net cost reduction achieved by amongst others a reduction in work force;
  • Extra non-interest income (fee business);
  • Re-pricing of loans; and 
  • Issuance of new Tier 2 capital and/or change dividend policy.

Needless to say that other scenarios or mixes of actions are possible. Nevertheless KPMG’s analysis shows that it will be almost impossible to comply with the requirements by concentrating too much on only a limited number of management actions.


About the report and the financial model used

This 2016 study is an update of the 2013 “The cumulative impact of regulation” report. As more regulations are moving to the full implementation stage, our objective was to identify and to update the impact of the new regulatory framework and tax environment on the Belgian banking sector - today and in the future. For that purpose, KPMG developed a financial model that estimates the potential effects of the most important new regulations, the bank taxes and contributions and the low interest rate environment combined at a combined level.

For this quantitative analysis, high-level data (balance-sheet, income statement, tax information and Basel III items) have been collected from individual banks and then aggregated in order to produce a consolidated view.
The sample of participating banks represents about 90% of the Belgian banking sector in terms of the size of the balance-sheet. Although crude in its design, the model provides valuable insights into the likely impact of the selected regulations on capital, liquidity and profitability.


(*) Which regulations have been taken into account?

  • Liquidity (Basel 3 (LCR and NSFR) and Asset Encumbrance Ratio (CRD IV and Belgian law));
  • Capital (Basel III - Single Supervisory Mechanism & Supervisory Review and Evaluation Process, (SREP) 2.0 - Single Resolution Mechanism (SRM) & Minimum Requirement for own funds and Eligible Liabilities (MREL))
  • Leverage (Basel III)
  • RWA (Basel IV - Revisions to the Standardized Approach (SA) for credit risk; Fundamental review of the trading book (FRTB); Revised operational risk framework; Review of sovereign risk exposures).
  • Accounting: International Financial Reporting Standards (IFRS) 9
  • Markets in Financial Instruments Directive (MiFID) II
  • Anti-Money Laundering (AML) & Counter Terrorist Financing (CTF)
  • BCBS 239
  • Overall cost of compliance
  • Bank taxes and contributions

Brussels, June 22nd 2016

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