(The following statement was released by the rating agency)
Link to Fitch Ratings' Report(s):
https://www.fitchratings.com/site/re/10099324
Fitch Ratings-Moscow/London-December 06: Approaches to determining risk-weighted
assets (RWA) vary significantly between emerging markets and can impede capital
comparisons between banks unless adjustments are made, Fitch Ratings says in a
new report. Leverage and risk-weight calculation (and consideration of the ratio
of RWAs to total assets, or "RWA density") can therefore be an important
adjusting factor when we assess banks' capitalisation.
Differences between two banks' RWA densities may reflect true differences
between the banks' asset composition and risk, which are valid when comparing
their capital positions. But the differences may also reflect different
approaches to calculating RWAs, which could distort comparisons. Our review
highlights that jurisdictions apply differing discretions and options under
Basel standards, determine asset risk charges based on varying credit rating
scales, or apply idiosyncratic country-specific rules. Banks may also use their
own internal risk-based model to calculate RWAs rather than a standardised
approach, exacerbating the lack of comparability.
We analysed key RWA differences in 16 emerging markets, including Brazil, China,
India, Indonesia, Russia, South Africa and the UAE. The average RWA density was
67% at end-2018 but there was significant dispersion around this.
src="https://e.infogram.com/79b41c87-ce67-4e5e-89da-2365b966a53b?src=embed"
title="RWA Density" width="700" height="613" scrolling="no" frameborder="0"
style="border:none;" allowfullscreen="allowfullscreen"> /iframe
Russia had by far the highest RWA density of almost 100%, followed by Georgia
and Belarus, both above 80%. Turkey was also close to this mark. At the other
end of the spectrum was Brazil, with a RWA density of below 50%. Poland, India,
South Africa, Nigeria and Ukraine were also notably below the average.
India uses national ratings for weighting exposures to domestic companies,
without any mapping to an international rating scale. This significantly lowers
risk-weights. For example, local companies rated '??-' and above on the national
scale have a risk-weight of only 20%, while if international ratings were used
or national ratings were properly mapped to international ones, the risk-weight
could be 100%. Indonesia and China also use national ratings, but apply them to
local-currency exposures only.
Different asset compositions largely explain the deviation from the average for
Nigeria, Ukraine, Turkey and to a large extent for Brazil, where about 40% of
assets are low risk-weighted reverse repo exposures backed by sovereign bonds.
Large banks in South Africa use internal risk-based models, explaining the
relatively low average risk-weights. In Poland, the low RWA density is mainly
driven by significant exposures to local-currency domestic government bonds
(about 18% of assets; zero risk-weight) and local-currency mortgages (about 15%;
low risk-weights).
Russia has a very conservative Basel II-based risk-weighting framework, as well
as some specific high risk-weights for certain risky retail loans and
foreign-currency exposures. The gradual transition to a Basel III-based
framework starting in 2020 will result in a lowering of risk-weights as certain
exposures are weighted lower based on individual risk assessment rather than
issuer ratings. However, Fitch assesses capitalisation in Russian banks (as well
as banks in Azerbaijan, Belarus, Georgia, Kazakhstan, Ukraine and Uzbekistan)
based primarily on IFRS statements. Such statements are different from
regulatory accounts and typically include capital ratio calculations based on
less conservative risk weightings.
Georgia and Belarus's high RWA density reflects the high risk-weights imposed on
foreign-currency loans to mitigate high dollarisation risks. In Belarus
risk-weights up to 625% are applied to loans issued at interest rates
significantly above the market rate. In Uzbekistan about 20%-40% of sector loans
are 20%-weighted as legacy problem exposures guaranteed by the government: the
state plans to transfer these loans to the sovereign wealth fund, after which
the density should increase.
Contact:
Anton Lopatin
Director, Financial Institutions - Banks
+7 495 956 7096
Fitch Ratings CIS Limited
Valovaya Street, 26
Moscow 115054
James Watson
Managing Director, Financial Institutions - Banks
+7 495 956 6657
David Prowse
Senior Director, Fitch Wire
+44 20 3530 1250
Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email:
louisa.williams@thefitchgroup.com.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
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