Despite More Netting Data, Full Picture Elusive For Wholesale Banks

Despite more wholesale banks in the U.S. and Europe providing netting difference between U.S. GAAP and IFRS, the full picture remains elusive, according to a Citi Research report.

Citi revealed a substantial gulf between the netting on U.S. GAAP and IFRS balance sheets, based on data from a limited number of banks. However, despite more data emerging from more banks, Kinner Lakhani and the team at Citi Research feel the picture remains elusive.

Wholesale banks’ enhanced netting difference data

Citi analysts point out IFRS balance sheets are, on average, based on c.60 percent of gross derivative assets, while derivatives on U.S. GAAP balance sheets net down to 6 percent.  However, when viewed on a fully-netted basis, there is little difference of –c.6 percent for IFRS as against c.5 percent for U.S. GAAP.

Einhorn’s FOF Re-positions Portfolio, Makes New Seed Investment In Year Marked By “Speculative Exuberance”

david einhorn, reading, valuewalk, internet, investment research, Greenlight Capital, hedge funds, Greenlight Masters, famous hedge fund owners, big value investors, websites, books, reading financials, investment analysis, shortselling, investment conferences, shorting, short biasIt has not just been rough year for David Einhorn's own fund. Einhorn's Greenlight Masters fund of hedge funds was down 3% net for the first half of 2020, matching the S&P 500's return for those six months. In his August letter to investors, which was reviewed by ValueWalk, the Greenlight Masters team noted that Read More

Citi’s first quarter analysis highlighted that there was a significant gulf between the netting on U.S. GAAP and IFRS balance sheets. Citi analysts relied on only two banks for their IFRS data while performing their first quarter analysis.

However, armed with more data, Citi analysts tried to get a better picture. For the purpose of analyzing U.S. GAAP, the analysts considered a gross assets size of $12.0 trillion of U.S. wholesale banks including Credit Suisse Group AG (NYSE:CS), as the later follows U.S. GAAP. For the current quarter, the analysts have considered IFRS data for a larger number of banks totaling $13.4 trillion of gross balance sheet assets of Barclays PLC (NYSE:BCS) (LON:BARC), BNP Paribas SA (OTCMKTS:BNPQY) (EPA:BNP), Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB), HSBC Holdings plc (NYSE:HBC) (LON:HSBA) and UBS AG (NYSE:UBS).

The analysts conclude on a fully netted basis, IFRS total assets are only 66 percent of reported assets. The following graph highlights the differences between reported, gross, and net total balance sheets.

Wholesale banks

As can be deduced from the above graph, when compared to reported balance sheets, U.S. GAAP banks fully gross balance sheets are significantly greater than IFRS banks. U.S. GAAP balance sheets are now 64 percent greater than reported, while IFRS only 22 percent greater.

Citi analysts point out that these figures are similar to those computed on the first quarter data, though the U.S. banks appear to have slightly reduced leverage, as in the first quarter, the gross was 69 percent greater than reported.

Wholesale banks look better on reported basis due to enahnced collateralization

As reported earlier, Barclays PLC (NYSE:BCS) (LON:BARC) revealed its plans to raise $12 billion through rights issue and contingent capital, to plug its capital shortfall.

Kinner Lakhani and the team at Citi Research feel Barclays’ capital raising moves prompted by U.K. regulators made markets nervous with regard to potential regulatory changes. Despite debate over the right definition of leverage still lingering, the analysts feel the new disclosure improves the understanding on how banks deal with assets they can net.

Citing an example of how netted assets help explain regulatory leverage exposures, the analysts point out Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB)’s balance sheet is larger on a reported basis than on a regulatory basis, due to an enhanced proportion of collateralized business.