November 20, 2014 / 5:08 PM / 3 years ago

Fitch: Southern Europe Banks Reduce DTA Capital Disadvantage

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Extending Southern European Banks’ Tax Credits here LONDON, November 20 (Fitch) Disclosure of the recent European bank stress test results show how Spanish, Portuguese, Italian and Greek banks have reduced their deferred tax assets (DTA) deductions. This neutralises a disadvantage arising from tax regimes where accounting losses take longer to crystallise as a tax relief, Fitch Ratings says. Generous phase-in rules for the DTA deduction and recent tax credit legislation minimised the effect of DTA deductions and boosted the stress test capital for banks in these countries. DTAs constitute the most significant new adjustment to common equity for European banks under Basel III. Southern European banks have reported significant DTAs, arising in particular from temporary differences for loan impairment. This is largely because their tax regimes do not allow for immediate tax relief like in the UK, France and Germany. Basel III restricts the inclusion of DTAs in capital, but allows the deduction to be phased in over 10 years until 2023. Banks in many EU countries have taken advantage of this relief to reduce their deductions of DTAs under the stress tests. In contrast, in the UK, DTA deductions from regulatory capital have been taken in full in the first year of implementation of CRDIV, the European legislation that implements Basel III. Without both the introduction of specific tax credit legislation and the long-term phasing in of DTAs, more banks would have failed the stress test. The legislative changes allow some DTAs to be converted into tax credits, which mean they no longer have to be deducted from capital. We estimate that common equity Tier 1 (CET1) ratios based on the adverse scenario would have benefited on average by 200bp in Spain, 190bp in Portugal and 250bp in Italy. But the actual benefit was capped by the phase-in rules, which had already limited DTA deductions. The legislation enhancing DTA quality was passed too late in Greece to be considered in the EU stress tests. As a result DTA deductions comprise 149% of CET1, although Greek banks benefited from transitional relief to offset this. DTA adjustments before phase-in were still significant in Portugal at 15% of CET1 and Spain at 11%, even after the legislative changes. Italian banks' deductions were lower at only 3%. The deferred tax rules are the most important incremental component of Basel III CET 1 capital deductions. The EBA stress test results published on 26 October showed DTAs comprised on average 28% of Basel III fully loaded CET 1 capital deductions. This would be 58% excluding goodwill and other intangibles, the largest adjustment and already included in the previous regime. Hence the phase-in and quality of these assets are key to a bank's health. US banks also have substantial DTAs due to the delay in the tax deductibility of loan impairment charges, the US worldwide tax system and the high corporate tax rate. DTAs are already limited for regulatory capital purposes, but Basel III will be more restrictive and increase DTA deductions for some banks. For further details on DTAs in bank capital, see "Extending Southern European Banks' Tax Credits" published today on Contact: John Boulton Director Credit Policy +44 20 3530 1673 Bridget Gandy Managing Director Financial Institutions +44 20 530 1095 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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