Event
The Basel Committee published an interim impact study assessing the capital impact of the revised market risk framework proposed in the Fundamental Review of the Trading Book (FRTB). New rules are expected to be implemented by 2019.
 
The analysis covered 44 global banks (mainly European and US), including the 3 Singapore banks (no other banks in ASEAN), 9 Japan banks (none from Greater China) and 1 India bank.

Impact
Average 41% inflation on market RWA - The proposed market risk framework increases the aggregate capital requirement for market risk by +41% on average (18% median). There is a wide range between the 25th percentile (around 36% impact on market RWA) and the 75th percentile (+70% impact). In other words, there are banks that will be materially impacted and banks that will be hardly impacted by the revised market risk framework.
 
Different impact on internally modelled and standardised market RWA – To make things more complicated, banks model market RWA either with (i) internally based or (i) standardized models. Market RWA inflation based on internally modelled market risk would increase by +54% (range of -32% to +72%) and by +128% for standardised with a wide range of 62% to +195%. The message here is the same: there are banks that will be materially impacted and banks that will be hardly impacted.
 
Potential impact on banks – likely small for Singapore banks
By assuming that the Singapore banks fall into the 25th percentile range in the impact study, the potential CET1 ratio impact may not be material. Under a worst case scenario, the CET1 ratio impact from the FRTB could be 0.3 to 0.5% based on MER estimates.
 
Outlook
MER remains overweight Singapore banks. MER rates DBS, UOB and OCBC all with Outperform.
Its 12month target price for DBS is $20, $22 for UOB and $10 for OCBC.

Source: Macquarie Research - 20 Nov 2015