Capital adequacy is a process which objective is to ensure that, for a given level of risk tolerance, the level of risk assumed by the Bank associated with development of its business activity may be covered with capital held within given time horizon. The process of managing capital adequacy comprises in particular compliance with prevailing supervisory standards and risk tolerance level determined within the Bank, the process of capital planning, inclusive of policy regarding capital acquiring sources.
The objective of capital adequacy management is to continuously maintain capital on a level that is adequate to the risk scale and profile of the Group's activities.
The process of managing the Group’s capital adequacy comprises:
- identifying and monitoring of all of significant risks,
- assessing internal capital to cover the individual risk types and total internal capital,
- monitoring, reporting, forecasting and limiting of capital adequacy,
- performing internal capital allocations to business segments, client segments and entities of the Group in connection with profitability analyses,
- using tools affecting the capital adequacy level (including: tools affecting the level of equity, the scale of equity item reductions and the level of the loan portfolio).
The fundamental regulation applicable in the capital adequacy assessment process as at 31 December 2014 is the Regulation (EU) No. 575/2013 of the European Parliament and of the Council as of 26 June 2013 on prudential requirements for credit institutions and investment firms, amending the Regulation (EU) No. 648/2012, hereinafter called ‘CRR Regulation’. The CRR Regulation constitutes a part of so-called CRD IV/CRR package, which apart from the Regulation comprises CRD IV Directive – Directive 2013/36/EU of the European Parliament and of the Council as of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (hereinafter called ‘CRD Directive’). In contrast to the CRR Regulation which is directly applicable, the CRD Directive must be implemented within the national law. As at 31 December 2014 the Banking Law has not been amended yet and the work on amending the Act implementing CRD IV regulation is currently ongoing. In case of conflict between provisions of the CRR Regulation and national regulations, precedence is given to the CRR Regulation.
In accordance with the CRR Regulation for the purposes of capital adequacy a prudential consolidation is applied, which unlike the consolidation consistent with International Financial Reporting Standards, comprises Bank’s subsidiaries being institutions and financial institutions. Non-financial and insurance entities are excluded from prudential consolidation.
In accordance with the CRR Regulation, for the purpose of prudential consolidation the Group comprises: PKO Bank Polski SA, PKO Leasing SA, PKO BP Faktoring SA, PKO BP BANKOWY PTE SA, PKO Towarzystwo Funduszy Inwestycyjnych SA, KREDOBANK SA, PKO Finance AB, Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. and PKO Bank Hipoteczny SA.
As at 31 December 2014 capital adequacy measures were calculated in accordance with the provisions of the CRR Regulation, including i.a. as regards the scope of consolidation taking into account known to the Bank and planned to implement national options. As at 31 December 2014 the Bank meets requirements relating to capital adequacy measures defined within the CRR Regulation.
The level of capital adequacy of the Group in 2014 remained on a safe level, significantly above the supervisory limits.
As at 31 December 2013 all capital adequacy measures were calculated in accordance with the provisions of the Banking Law, Resolution of the Polish Financial Supervision Authority No. 76/2010 of 10 March 2010 on the scope and detailed procedures for determining capital requirements for particular risks and Resolution of the Polish Financial Supervision Authority No. 325/2011 of 20 December 2011 on decreasing own funds. The scope of consolidation which has been taken into account in capital adequacy as at 31 December 2013 included all subsidiaries of the
PKO Bank Polski SA Group.
70.1. Own funds for capital adequacy purposes
Own funds of the Group for the purposes of capital adequacy were calculated as at 31 December 2014 in accordance with the provisions of the CRR Regulation.
Own funds of the Group comprise Tier 1 basic funds and Tier 2 supplementary funds. No elements of additional Tier 1 capital are identified within the Group.
The Tier 1 basic funds (so-called Common Equity Tier 1 or CET1) comprise:
- principal funds comprising: share capital, other reserves (reserve capital, reserves),
- other comprehensive income (excluding of gains and losses on cash flow hedges, and in respect of unrealised gains and losses on instruments classified to available for sale portfolio only losses of 80% of their carrying amount are recognised),
- general banking risk fund,
- retained earnings (undistributed profits from previous years),
- net profit prior to approval and net profit for the current reporting period, calculated based on appropriate accounting standards, decreased by any expected charges and dividends, in amounts not exceeding amounts audited by certified auditor, whereas the term for inclusion of the above-mentioned net profit within Bank’s own funds is its approval by the General Shareholders’ Meeting, or prior to the approval by GSM, obtaining consent from the PFSA to its inclusion within own funds.
Tier 1 basic funds are reduced by the following items:
- losses for the current financial year,
- intangible assets stated at carrying amount less any associated deferred income tax liability (the deducted amount includes goodwill taken into account in measurement of the Bank’s significant investments),
- additional value adjustments of assets measured at fair value (AVA),
- deferred income tax assets based on future profitability and not arising from temporary differences,
- deferred income tax assets based on future profitability and arising from temporary differences which exceed 10% of Tier 1 basic funds (without considering deductions due to equity exposures and deferred income tax assets),
- the Bank’s significant direct and indirect equity exposures to financial institutions, lending institutions, domestic banks, foreign banks and insurance companies, expressed as shares or other Tier 1 basic funds instruments of these entities (apart from exposures constituting structural positions), which total amount exceeds 10% of Tier 1 basic funds (without considering deductions due to equity exposures and deferred income tax assets),
- the amount by which the sum of:
a) deferred income tax assets based on future profitability and arising from temporary differences, up to 10% of Tier 1 basic funds (without considering deductions due to equity exposures and deferred tax assets) and
b)the Bank’s equity exposures to financial institutions, lending institutions, domestic banks, foreign banks and insurance companies, expressed as Tier 1 basic funds instruments of these entities, up to 10% of Tier basic funds (without considering deductions due to equity exposures and deferred income tax assets)
exceeds the equivalent of 15% of the Tier 1 basic funds (without considering deductions due to equity exposures and deferred income tax assets). The amount below the threshold in subject does not reduce own funds and is included within risk weighted assets.
Tier 2 supplementary funds comprise subordinated liabilities, which meet the CRR Regulation requirements and in case of which the Bank obtained consent from the PFSA to their inclusion within own funds.
Tier 2 supplementary funds are reduced by the Group’s equity exposures to financial institutions, lending institutions, domestic banks, foreign banks and insurance companies in the form of Tier 2 supplementary funds instruments of these entities.
If the value of deductions would decrease in Tier 2 supplementary funds below nil, the value of excess of these deductions above the value of the Tier 2 supplementary funds is subtracted from the Tier 1 basic funds.
As at 31 December 2014 in the Group’s own funds calculated for the purposes of capital adequacy the Bank’s net profit for the period from 1 January 2014 to 30 June 2014, in the amount of PLN 1 004 300 thousand after deducting any expected charges and dividends, on the basis of decision of the Polish Financial Supervision Authority, dated on 29 September 2014 has been included. Profit was included in Tier 1 basic funds of the Bank.
Information on the structure of the Group’s own funds included in prudential consolidation, set out for purposes of capital adequacy as at 31 December 2014, according to the CRR Regulation, is presented in the table below:
| GROUP'S OWN FUNDS | 31.12.2014 |
|---|---|
| Basic funds (Tier 1) | 22,348,472 |
| Share capital | 1,250,000 |
| Other reserves | 22,126,506 |
| Other comprehensive income | (290,466) |
| General banking risk fund | 1,070,000 |
| Retained earnings | 1,175,718 |
| Deferred income tax assets, dependent on future profitability, not derived from temporary differences | (11,576) |
| Goodwill | (1,102,497) |
| Other intangible assets | (1,833,506) |
| Additional valuation adjustments of assets measured at fair value | (35,707) |
| Supplementary funds (Tier 2) | 2,394,713 |
| Subordinated liabilities classified as supplementary funds | 2,394,713 |
| TOTAL OWN FUNDS | 24,743,185 |
As at 31 December 2013 own funds for the purposes of capital adequacy are calculated in accordance with the provisions of the Banking Law and Resolution of the Polish Financial Supervision Authority No. 325/2011 of 20 December 2011 on deductions from own funds (Official Journal of PFSA of 30 December 2011 No. 13, item 49).
Information on the structure of the Group’s own funds set out for purposes of capital adequacy as at 31 December 2013 is presented in the table below:
| GROUP'S OWN FUNDS | 31.12.2013 |
|---|---|
| Basic funds (Tier 1) | 19,611,274 |
| Share capital | 1,250,000 |
| Reserve capital | 16,760,686 |
| Other reserves | 3,469,107 |
| General banking risk fund | 1,070,000 |
| Undistributed profits from previous years | (306,230) |
| Unrealised losses on debt and equity instruments and other receivables classified as available for sale | (141,815) |
| Assets valuation adjustments in trading portfolio | (5,656) |
| Intangible assets, of which: | (2,230,222) |
| Equity exposures | (121,930) |
| Negative currency translation differences from foreign operations | (134,175) |
| Non-controlling interest | 1,509 |
| Supplementary funds (Tier 2) | 1,539,670 |
| Subordinated liabilities classified as supplementary funds | 1,600,700 |
| Unrealised gains on debt and equity instruments classified as available for sale (up to 80% of their values before tax) | 56,145 |
| Positive currency translation differences from foreign operations | 4,755 |
| Equity exposures | (121,930) |
| Short-term equity (Tier 3) | 154,112 |
| TOTAL OWN FUNDS | 21,305,056 |
70.2. Requirements as regards own funds (Pillar 1)
In accordance with the CRR Regulation on prudential requirements for credit institutions and investment firms being in force since 1 January 2014, the Group calculates requirements in respect of own funds for the following risk types:
- in respect of credit risk – using the standardised method,
- in respect of operational risk for the Bank – using the advanced measurement approach (AMA), and for the Group entities carrying financial entities - the basic index approach (BIA),
- in respect of market risk - using basic methods.
The Group calculates requirements as regards own funds on account of credit risk according to the following formula:
- in case of statement of financial position items – a product of a carrying amount, a risk weight of the exposure calculated according to the standardised method of the requirement as regards own funds in respect of credit risk and 8% (considering recognised collaterals),
- in case of off-balance sheet liabilities granted– a product of value of liability (considering value of provisions for the liability),
a risk weight of the product, a risk weight of off-balance sheet exposure calculated according to the standardised method of credit risk requirement and 8% (considering recognised collaterals), - in case of off-balance sheet transactions (derivative instruments) – a product of risk weight of the off-balance sheet exposure calculated according to the standardised method of the requirement as regards own funds in respect of credit risk, equivalent in the statement of financial position of off-balance sheet transactions and 8% (the value of the equivalent in the statement of financial position is calculated in accordance with the mark-to-market method).
The total requirement in respect of Group’s own funds comprises the sum of capital requirements for:
- credit risk, including credit risk of the instruments from the banking book, counterparty credit risk,
- market risk,
- risk of credit valuation adjustment (CVA),
- settlement and delivery risk,
- operational risk,
- other types of own funds requirements in respect of:
a) currency risk,
b) commodity price risk,
c) exceeding the exposure concentration limit and large exposure limit.
The table below presents the Group’s own funds requirements as regards particular types of risk. Data as at 31 December 2014 were calculated pursuant to the CRR Regulation, which is mentioned above. Whereas data as at 31 December 2013 were calculated in accordance with the Resolution No. 76/2010 of the Polish Financial Supervision Authority dated 10 March 2010 on scope and detailed principles of setting capital requirements in connection with the individual risk types.
| Capital requirements | 31.12.2014 | 31.12.2013 |
|---|---|---|
| Credit risk | 13,882,607 | 11,593,995 |
| Market risk | 585,337 | 327,321 |
| Credit valuation adjustment risk | 42,375 | - |
| Settlement/delivery risk | 68 | - |
| Operational risk | 759,212 | 630,884 |
| Total capital requirements | 15,269,599 | 12,552,200 |
| Capital adequacy ratio | 12.96% | 13.58% |
The increase in own funds capital requirement in respect of credit risk in 2014 compared to 2013 by approx. PLN 2.3 billion is mainly due to an inclusion of Nordea Bank Polska SA portfolio and a significant growth of loan portfolio.
The increase in own funds requirement in respect of market risk in 2014 compared to 2013 by approx. 79% to the level of PLN 585 million results mainly from an inclusion of corporate bonds portfolio and corporate bonds guarantees of Nordea Bank Polska SA.
The own funds requirement in respect of operational risk for the Bank was calculated in accordance with the advanced AMA approach and the own funds requirement in respect of operational risk for Group entities concluded financial operations was calculated in accordance with the basic index approach (BIA). There was an increase in the requirement from PLN 631 million (as at 31 December 2013) to PLN 759 million (as at 31 December 2014), particularly due to including the acquisition of Nordea Bank Polska SA.
70.3. Capital requirements for insurance companies
The PKO Bank Polski SA Group comprises an insurance company, PKO Życie TU S.A., which, as an entity covered with separate supervision of UKNF, including capital requirements compliance assessment, is excluded from the prudential consolidation.
In accordance with the Act as of 22 May 2003 on Insurance Activity (with subsequent amendments) an insurance company is obliged to possess own funds in the amount not lower than the required solvency margin and not lower than the guarantee fund. The guarantee fund is equal to the value higher of:
- one third of the solvency margin,
- the minimum amount of the guarantee fund.
The principles on calculation of the required solvency margin and the minimum amount of the guarantee fund is determined by the Regulation of the Minister of Finance as of 28 November 2003 on calculation of the required solvency margin and the minimum amount of the guarantee fund for insurance classes and groups (with subsequent amendments).
| CAPITAL ADEQUACY OF PKO ŻYCIE TU | 31.12.2014 |
|---|---|
| Own funds | 73,962 |
| Solvency margin | 51,479 |
| Guarantee fund: | 17,160 |
| Minimum amount of the guarantee fund | 15,403 |
| One third of solvency margin | 17,160 |
| Surplus/deficit of own funds to cover the solvency margin | 22,483 |
| Surplus/deficit of own funds to cover the guarantee fund | 56,802 |
70.4. Internal capital (Pillar 2)
The Group calculates internal capital in accordance with:
- the CRR Regulation,
- the CRD Directive,
- the resolution No 258/2011 of the Polish Financial Supervision Authority of 4 October 2011 on detailed principles for functioning of risk management system and internal control system and detailed terms of estimating internal capital by banks and reviewing the process of estimating and maintaining internal capital and the principles for determining the variable salary components policy for persons holding managerial positions in the Bank.
Internal capital is the amount of capital estimated by the Group that is necessary to cover all of the identified significant risks characteristic of the Group’s activities and the effect of changes in the business environment, taking account of the anticipated risk level.
The internal capital in the PKO Bank Polski SA Group is intended to cover each of the significant risk types:
- credit risk (including default and concentration risk),
- currency risk,
- interest rate risk,
- liquidity risk,
- operational risk,
- business risk (taking into consideration strategy risk).
Materialisation of macroeconomic changes risk, model risk, compliance risk and loss of reputation risk is reflected in the estimates of internal capital for covering the types of risk: credit, interest rate, currency, operational and business.
The Bank regularly monitors the significance of the individual risk types relating to the activities of the Bank and other Group entities.
The internal capital for covering the individual risk types is determined using the methods specified in the internal regulations. In the event of performing internal capital estimates based on statistical models, the annual forecast horizon is adopted and a 99.9% confidence level. The total internal capital of each entity of the Group is the sum of internal capital amount necessary to cover all of the significant risks for the entity. The total internal capital of the Group is the sum of internal capital amount of the Bank and all Group entities. The correlation coefficient for different types of risk and different Group entities used in the internal capital calculation is equal to 1.
In 2014, the relation of the Group’s own funds to its internal capital remained on a level exceeding both the threshold set by the law and the Group’s internal limits.
70.5. Disclosures (Pillar 3)
The Group annually announces information, in particular, on the risk management and the capital adequacy, in accordance with:
- the CRR Regulation,
- Implementing acts to the CRR Regulation in the national legislation acts transposing the provisions of the CRD Directive,
- the Recommendation M relating to operational risk management in banks, issued by the Polish Financial Supervision Authority,
- the resolution No. 385/2008 of the Polish Financial Supervision Authority dated 17 December 2008, on the detailed principles and methods for banks to disclose qualitative and quantitative information concerning capital adequacy and the scope of the information to be announced.
Details of the scope of information disclosed, the method of its verification and publication are presented in the PKO Bank Polski SA Capital Adequacy Information Policies and other information to be published, which are available on the Bank’s website (www.pkobp.pl).