Financial News: Tax Shadow Of EUR90B Hangs Over Europe's Banks

13th Jul 2010 15:09

By Liam Vaughan Of FINANCIAL NEWS European banks could be forced to take billions of pounds in writedowns over the next five years because of overly-optimistic calculations on future profitability contained within their accounts. According to research from KPMG published Tuesday, the 15 largest European banks held a combined EUR90 billion ($113 billion) of deferred tax assets, a recognised asset in a company's accounts, on their balance sheets at December 31, 2009. Deferred tax assets, or DTAs, arise when a company reports a loss but cannot record the loss for tax purposes until the future. Instead, it will record a DTA and the tax relief on this will be realised over time and be based on an estimation of future profits - the higher the profit, the greater the level of tax relief that can be recorded as an asset. However, according to KPMG, if the projections of future profitability upon which they were calculated turn out to have been too optimistic there is a risk that banks will have to write down a chunk of the value of these DTAs. KPMG said in its "Focus on Transparency" report: "Against a backdrop of combined profits of only EUR43 billion in 2009 and a loss of EUR25 billion in 2008, the implication is that the sector expects a sustained improvement in profitability?.recent profit history suggests recovering those profits will be a challenge for the banks." The outlook for the European banking sector has deteriorated in recent months as income from flow businesses has dried up, the bounce back in M&A and equity capital markets has failed to materialise, margins in retail banking remain squeezed and the spectre of heightened regulation lingers. According to Colin Martin at KPMG, the total value of DTA's on bank balance sheets rocketed during the financial crisis, as loss-making banks incorporated potential future tax benefits into their accounts. KPMG calculates banks will need to make a combined EUR300 billion of future taxable profits to realise the EUR90 billion of deferred tax assets. Banks don't uniformly disclose how many years of future profits they used to support their deferred tax assets but Commerzbank AG (CBK.XE), UBS (UBS) and Royal Bank of Scotland Group PLC (RBS) based their DTAs on a five to eight year time-frame. Martin said: "If profit forecasts are cut, then DTAs are no longer justifiable and banks will need to take writedowns which will affect the reported bottom line and hit regulatory capital." In 2009, 13 of the 15 banks recognised deferred tax assets exceeding EUR2 billion. The highest amounts were held by Banco Santander (STD), UniCredit (UCG.MI) and BNP Paribas (BNP.FR) who had recognised deferred tax assets of EUR15.8 billion, EUR10.2 billion and EUR10.1 billion respectively. Barclays PLC (BCS) and Standard Chartered PLC (STAN.LN) are at the lower end of the scale, with less than EUR4 billion of DTAs each. As well as hitting income, writing down the value of DTAs would also have implications for regulatory capital requirements. Presently, banks can count DTAs within their reported tier-one capital. Any substantial write-down in their value would hit tier-one capital ratios, and potentially force banks to raise additional capital to make up for the shortfall. A bigger concern is that DTAs may no longer be recognised for capital purposes under the forthcoming Basel III requirements. "The impact on regulatory capital could be very significant for some banks," KPMG said. Web site: www.efinancialnews.com (END) Dow Jones Newswires July 13, 2010 10:09 ET (14:09 GMT)