Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company Financial Statements
Performance improvements benefit ROIC
Rabobank's targets for performance improvement will make
future growth possible. We have already taken several steps to
enhance our effectiveness and efficiency, resulting in an ROIC1
of 6.9% (2016: 5.2%) over the course of 2017. Our cost/income
ratio, including regulatory levies, increased to 71.3% in 2017
(2016: 70.9%). Improvement of this ratio remains a priority.
Several exceptional items affected these figures in 2017 and the
previous year. In calculating the underlying cost/income ratio,
adjustments were made for these items (please see Notes to
the financial results of Rabobank for a specification). In 2017,
the underlying cost/income ratio, including regulatory levies,
stood at 65.3% (2016: 64.8%).
Rabobank is undergoing a major transition to achieve our
performance improvement targets in coming years. We are
addressing this in part through the performance improvement
programme Performance Now, which resulted in a further
reduction in staff costs in 2017.
Dilemma funding digitalisation and innovation
Implementation of new rules and regulations like PSD2,
Basel IV, IFRS9 and privacy regulations (GDPR) present
dilemmas. Adapting costs time, effort and money, but
so does our transition to being a more client-oriented,
innovative and digital organisation. The dilemma here is
that both the transition and the implementation of new
rules and regulations have to be funded even as we aim
to lower our cost-income ratio.
Optimising our funding and liquidity
Rabobank aims to reduce its use of wholesale funding, which
makes the bank less dependent on the financial markets. This is
being realised by optimising the balance sheet structure. Our total
assets declined to EUR 603 billion (2016: EUR 663 billion) as at
31 December 2017. The decrease of the balance sheet is due to
the lower value of derivatives as a result of higher interest rates
and a modest decline in the lending book. In addition to this,
we actively managed down our non-strategic commercial real
estate loan portfolio and held a more efficient liquidity buffer.
1 The ROIC is calculated by dividing the net profit realised after non-
controlling interests by the core capital (actual tier 1 capital plus the
goodwill in the balance sheet at the end of the reporting period)
minus deductions for non-controlling interests in Rabobank's equity.
On the liabilities side, the value of derivatives also decreased.
In addition, in line with the target of the financial framework,
wholesale funding went down by EUR 28.5 billion to EUR 160.4
billion, excluding theTLTRO take-up, which increased from
EUR 2.0 billion to EUR 5.0 billion in 2017.
Rabobank successfully issued its first covered bonds in May
2017, raising EUR 2.5 billion. Over the coming years, we aim
to issue up to EUR 25 billion in covered bonds, which would
further diversify and optimise our funding composition.
The Basel III reform
In December 2017 the Basel Committee finalised the Basel
III reform (also referred to as Basel IV by the industry).This
reform complements the initial phase of the Basel III reforms
announced in 2010 (and implemented in the CRR/CRD IV in
2014) as a response to the global financial crisis.The 2017
reform seeks to restore credibility in the calculation of risk-
weighted assets (RWAs) and improve the comparability of
banks'capital ratios. Main features of the reform:
Revisions to the standardised approaches for calculating
credit risk, market risk, credit value adjustments (CVA) and
operational risk
Constraints on the use of internal model approaches, by
placing limits on certain inputs used to calculate capital
requirements under the internal ratings-based (IRB) approach
for credit risk and by removing the use of internal model
approaches for CVA risk and for operational risk
The introduction of an output floor, which limits the benefits
banks can derive from using internal models to calculate
minimum capital requirements. Banks'calculations of RWAs
generated by internal models cannot, in aggregate, fall below
72.5% of the risk-weighted assets computed by standardised
approaches
Global systematically important banks (G-SIBs) are subject to
higher leverage ratio requirements
Although we endorse the general direction of the Basel
Committee towards strengthening banks'capital buffers, we
are not in favour of the Basel III reform proposals to generically
constrain the use of internal models. Improvement of internal
risk models is key and we remain in favour of a risk sensitive
approach rather than a simplified standardised model that does
not reflect the underlying risks.
The implementation date is set at 1 January 2022 with a phase-in
period of 5 years. National supervisors have the discretion to cap
the increase in a bank's total RWAs, resulting from the application
of the output floor, at 25% during the phase-in period. Any such
cap will be removed on 1 January 2027.
Rabobank Annual Report 2017 - Management report
67
