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Rabobank balance sheet reduction plan will depend on 'Basel IV' outcome

Dutch lender Rabobank may review its plan to reduce its balance sheet by €150 billion and may concentrate more on reducing risk-weighted assets, depending on the outcome of the so-called Basel IV supervisory regulations, the bank's executives said Feb. 16.

In December 2015, the bank announced plans to cut 9,000 jobs and reduce its balance sheet by €150 billion before 2020 to help meet new regulatory capital requirements.

"We think we need to consider the overall reduction in the light of developments of Basel IV and focus more on a risk-weighted asset reduction perspective rather than just pure assets," the bank's CEO, Wiebe Draijer, told analysts on a conference call following publication of the bank's 2016 earnings.

Negotiations on Basel IV rules, which build on the original Basel III regulatory framework and would reform how banks must assign capital against loans, were postponed in January. Many European banks oppose the regulations because they fear they will be disproportionately impacted, and European regulators have also voiced concerns about the impact on the continent's lenders.

"We are very curious about what will happen with Basel IV," CFO Bas Brouwers said. "Considering the current situation … I expect in the end the balance sheet reduction will not go as far as the €150 billion that was mentioned as a worst-case scenario."

The bank reduced assets by €13 billion last year through the sale of noncore assets, Draijer said.

Regarding other regulatory changes, Rabobank may opt to issue nonpreferred senior debt to meet minimum requirement for own funds and eligible liabilities rules, or MREL, executives said, once it knows what exactly the requirements are. MREL is a new European bail-in framework designed to prevent taxpayer money being used in the event of bank failures.

Rabobank reported a consolidated 2016 net attributable profit of €749 million, down from €880 million a year ago. Total net profit reached €2.02 billion, down from €2.21 billion in 2015, due to restructuring costs and an impairment on the bank's stake in Achmea BV.

Net interest income fell to €8.74 billion from €9.14 billion due to weak lending and the low interest rate environment, which has been eating into banks' earnings across the board. However, the bank saw a sharp drop in its loan impairment charges as the economy started to pick up and benefited from a generally rosier second half. Loan impairment charges fell to €310 million in 2016 from €1.03 billion the year before.

"We are benefiting here from the economic upturn. When we look at the Netherlands we see a growth in the underlying economy of around 2%, consumer spending going up, exports going up quite strongly," Brouwers said.

"In other areas where we are present in the world we are benefiting from higher economic activity, the U.S., Australia, New Zealand and other parts of Europe," he said. "So you see that this is a global development and not only our Dutch business benefited from the positive momentum."

Rabobank, which is one of the Netherlands' largest mortgage lenders, also benefited from an increase in house prices of 5% last year and more than 200,000 transactions in the housing sector, Brouwers said.

The bank said it had already achieved its 2020 fully loaded common equity Tier 1 ratio target of 14% following the sale in January of new certificates for a nominal amount of €1.5 billion. The issue had increased the bank's capital ratio to a pro forma level of 14.3%. The ratio, a key measure of a bank's financial strength, stood at 13.5% at the end of 2016.