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Evolution of Pillar 2 Approach Increased Harmonisation and Formalisation of Additional Capital Requirements

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Evolution of Pillar 2 Approach Increased Harmonisation and Formalisation of Additional Capital Requirements Evolution of Pillar 2 approach Increased harmonisation and formalisation of additional capital requirements 2001 2016 “The supervisory authority may choose to work with the bank “[…] the proposal […] distinguishes between Pillar 2 capital in determining the appropriate levels of capital. A trigger ratio requirements and guidance: can be set, which is deemed to be the minimum required by • The former are mandatory requirements that are imposed the bank based on its risk profile. In addition, a target ratio by supervisors to address risks not covered or not may be established that would provide a warning that the bank sufficiently covered by Pillar 1 and buffer capital is operating too close to the trigger ratio. The trigger ratio requirements; should be reviewed periodically to ensure that it continues to • Capital guidance refers instead to the possibility for reflect the bank's risk profile. In the event a bank has no competent authorities to communicate to an institution their unusual risk characteristics, there should be a presumption expectations for such institution to hold capital in excess of that the adequate trigger ratio is the minimum ratio required Pillar 1 capital requirement, Pillar 2 capital requirements under Pillar 1.” and combined buffers requirements in order to cope with forward looking and remote situations.” Source: Basel Committee on Banking Supervision: Consultative Document, Pillar 2 (Supervisory Review Source: European Commission FAQ CRR/CRD IV and BRRD/SRM amendments, November 2016 Process), January 2001 1 Recap – current SREP framework Split into requirement and guidance further formalises Pillar 2 add-on SREP 20163 CET1 phase-in impact 1% to 6.8%² P2G MDA restriction trigger point P2G G-SIB 0.25% to 3%¹ P2G D-SII Buffer SRB Buffer Countercyclical Capital Up to 2.5%¹ Buffer Capital Conservation Conservation Buffer Buffer Capital Conservation 2.5%¹ Buffer P2R P2R OCR P2R 1.5% to 3.7% (Overall Capital Requirements) 10.8% to 19.7% TSCR Pillar 1 (Total SREP Pillar 1 (minimum Pillar 1 8% Capital (minimum (minimum requirement) Requirements) requirement) requirement) 9.5% to 11.7% Source: ECB, SSM SREP Methodology Booklet, 2016 edition; Lloyds Bank analysis 2017 Fully loaded Note 1: Phased-in latest by 2019 Note 2: Phased down by 2019. Estimated as difference between 2015 SREP and 2016 SREP Note 3: Based on a sample of 30 European banks, including KBC, Belfius, Danske, Nykredit, BNPP, Credit Ag, BPCE, SocGen, DB, Intesa, UniCredit, AIB, BoI, ABN AMRO, ING Group, Rabobank, DNB, Sabadell, Santander, 2 BBVA, Caixabank, Nordea, SEB, Handelsbanken, Swedbank, Barclays, HSBC, Lloyds, RBS, StanChart Illustration: SREP requirements of selected European banks Current CET1 requirements reflect jurisdiction and business model 30 P2G CBR P2R Pillar 1 CET1 rao 25 20 (%) 15 10 5 0 DB BoI AIB SEB RBS KBC DNB BPCE HSBC BNPP BBVA Intesa Lloyds Belfius Danske Nordea SocGen Barclays Sabadell Nykredit Credit Ag Unicredit StanChart Rabobank Caixabank Santander Swedbank ING Group ABN AMRO Handeslbanken 4.3% 6.4% 2.9% 2.5% 1.3% 1.7% 2.0% 4.9% 1.8% 3.8% 3.9% 4.0% 6.8% 1.5% 1.6% 9.0% 9.0% 1.8% 2.8% 2.3% 4.4% 2.4% 3.2% 6.9% 3.9% 2.8% 7.0% 7.5% 4.8% 5.6% 12 7 18 21 30 27 24 9 25 16 14 13 6 29 28 1 1 25 19 23 11 22 17 5 15 20 4 3 10 8 Average implied buffer over requirement = 4.1% Source: Company FY2016 reporting, Lloyds Bank analysis Note: Analysis on a phase-in basis. DB and UniCredit respectively include €8bn and €13bn pro forma rights issue 3 12.8 0.40 12.8 Evolving regulation has led to significant increase in capital levels 7.00 Since 2008, European banks have doubled their Tier 1 capital ratios 5.70 5.45 Evolution of Tier 1 ratios (%) for 30 European Banks (2008 to 2016, quarterly data points) Ranking by Tier 1 ratio volatility 29.0 Swedbank, 5.6% 2008 2016 Total SHB, 4.9% CAGR average average increase AIB, 4.9% Nordea, 3.6% 8.34% 16.81% x2.0 10.5% DNB, 3.0% Danske, 3.0% 24.0 KBC, 3.0% SEB, 2.8% Lloyds, 2.7% RBS, 2.7% Nykredit, 2.6% 19.0 Intesa, 2.5% BoI, 2.4% ING Group, 2.2% 1.12 (%) DB, 2.1% Credit Ag, 1.9% 1.88 14.0 StanChart, 1.8% Rabobank, 1.8% ABN AMRO, 1.8% HSBC, 1.7% BNPP, 1.7% Barclays, 1.7% 9.0 SocGen, 1.7% Unicredit, 1.7% Sabadell, 1.6% BBVA, 1.6% Belfius, 1.5% 4.0 BPCE, 1.5% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Santander, 1.3% NordicsDanske GER/NEDNykredit FRA/BELCredit Ag SPA/ITAIntesa UK/IREAIB Caixabank, 1.2% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Source: Lloyds Bank, Bloomberg, company disclosure Note: Standard deviation used as an indication of volatility. Tier 1 ratios data has not been modified to correct the “upward trend / drift effect” in Tier 1 ratios that could potentially adds bias to the resulting volatilities (i.e. 8.43 higher volatilities would indicate the best performing banks that have increased the most their Tier 1 ratio over the period). Based on a sample of 30 European banks, including KBC, Belfius, Danske, Nykredit, BNPP, Credit 8.60 Ag, BPCE, SocGen, DB, Intesa, UniCredit, AIB, BoI, ABN AMRO, ING Group, Rabobank, DNB, Sabadell, Santander, BBVA, Caixabank, Nordea, SEB, Handelsbanken, Swedbank, Barclays, HSBC, Lloyds, RBS, StanChart 4 12.8 0.40 12.8 Are required Pillar 2 buffers an indicator for volatility? 7.00 P2R not significantly correlated to volatility measures, other than capital levels 5.70 CET1 capital ratio Tier 1 capital ratio Total capital ratio 5.45 12 Correlation 6 Correlation 6 Correlation coefficient (ρ) 57% coefficient (ρ) 61% coefficient (ρ) 47% 11 5 5 10 4 4 9 8 3 3 7 2 2 Volatility of Tier 1ratio Tier of Volatility Volatility of CET1ratio Volatility 6 1 1 5 capital ratio Total of Volatility 4 0 0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1.12 Level of Pillar 2 Requirement (P2R) Level of Pillar 2 Requirement (P2R) Level of Pillar 2 Requirement (P2R) Share price Net income RWA 1.88 20 5 160 Correlation Correlation 13% Correlation coefficient (ρ) 32% coefficient (ρ) 13% coefficient (ρ) 10% 18 5 140 16 4 120 14 4 100 12 3 10 3 80 8 2 of RWA Volatility 60 6 2 Volatility of Netincome Volatility Volatility of Share price Volatility 40 4 1 20 2 1 0 0 0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Level of Pillar 2 Requirement (P2R) Level of Pillar 2 Requirement (P2R) Level of Pillar 2 Requirement (P2R) 8.43 8.60 Source: Lloyds Bank, Bloomberg, company disclosure. Note: Volatilities calculated as standard deviation of quarterly reports since 2008, except for share price volatility calculated as the standard deviation over a two year period. Based on a sample of 30 European banks, including KBC, Belfius, Danske, Nykredit, BNPP, Credit Ag, BPCE, SocGen, DB, Intesa, UniCredit, AIB, BoI, ABN AMRO, ING Group, Rabobank, DNB, Sabadell, Santander, BBVA, 5 Caixabank, Nordea, SEB, Handelsbanken, Swedbank, Barclays, HSBC, Lloyds, RBS, StanChart Illustration of market impact of Pillar 2 framework (I) Impact of revised SREP framework on AT1 investment decision Perception of increased non-payment risk CET1 headroom over CBR within top 5 factors for all investors ? In light of the ECB/EBA's recent clarification that Pillar 2 should ? Where would you rank CET1 headroom over MDA and loss form part of minimum capital requirements plus buffers, in your absorption as a determining factor when making investment view, has MDA related coupon restriction risk increased? choice in AT1? Top 1 11% Top 3 32% Yes: 100% Top 5 58% Outside top 5 Not a factor 0% Increased awareness of Pillar 2 importance Non-SREP issuers favoured for AT1 issuance ? Do you factor Pillar 2 requirements into CET1 buffer analysis? ? Which Jurisdictions would you feel comfortable buying AT1 from (Top 10)? Belgium, 4% Switzerland, 19% No, 11% Spain, 4% Italy, 4% France, 6% Netherlands, 8% UK, 17% Yes, 89% Denmark, 10% Norway, 13% Sweden, 13% Source: Lloyds Bank AT1 investor survey, March 2016 6 12.8 0.40 12.8 Illustration of market impact of Pillar 2 framework (II) 7.00 Current AT1 yields exhibit observable relationship with MDA headroom 5.70 EUR AT1: phase-in USD AT1: phase-in GBP AT1: phase-in 5.45 Correlation Correlation Correlation 9 9 9 coefficient (ρ) -29% coefficient (ρ) -27% coefficient (ρ) -8% 8 8 8 7 7 7 6 6 6 AT1 Yield (%) Yield AT1 AT1 Yield (%) Yield AT1 AT1 Yield (%) Yield AT1 5 5 5 4 4 4 3 3 3 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 1.12 Distance to MDA Trigger Distance to MDA Trigger Distance to MDA Trigger EUR AT1: fully-loaded USD AT1: fully-loaded GBP AT1: fully-loaded 1.88 9 Correlation 9 Correlation 13% 9 Correlation coefficient (ρ) -40% coefficient (ρ) -31% coefficient (ρ) -28% 8 8 8 7 7 7 6 6 6 AT1 Yield (%) Yield AT1 AT1 Yield (%) Yield AT1 AT1 Yield (%) Yield AT1 5 5 5 4 4 4 3 3 3 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Distance to MDA Trigger Distance to MDA Trigger Distance to MDA Trigger 8.43 8.60 Source: Lloyds Bank, Bloomberg, company disclosure.
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