The objective of capital adequacy management is to maintain capital in a continuous manner on a level adequate to the risk scale and profile of the Group’s activities.
Capital adequacy* is a process which objective is to ensure that the level of risk, which is assumed by the PKO Bank Polski SA Group associated with development of its business activity, may be covered with capital held, taking into account given risk tolerance level and time horizon. The process of capital adequacy management comprises in particular compliance with prevailing regulations of supervisory authorities and risk tolerance level determined within the Bank as well as the process of capital planning, including policy of capital acquiring sources.
The objective of capital adequacy management is to maintain capital in a continuous manner on a level 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 particular risk types and total internal capital,
- monitoring, reporting, forecasting and limiting of capital adequacy,
- performing internal capital allocations to business areas, client segments and the Group entities in connection with profitability analyses,
- using tools affecting the capital adequacy level (including: tools affecting the level of own funds, the scale of own funds 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’.
As at 31 December 2014 the Bank meets requirements relating to capital adequacy measures defined within the CRR Regulation.
The level of the PKO Bank Polski SA Group’s capital adequacy in 2014 remained at a safe level, significantly above the supervisory limits.
Capital adequacy of the PKO Bank Polski SA Group (in PLN million)
As at 31 December 2014 compared with 31 December 2013, the Group’s capital adequacy ratio decreased by 0.62 pp. to the level of 12.96%.
As at 31 December 2014 in the Group’s own funds calculated for the purposes of capital adequacy the Bank’s net profit for 2013 in the amount of PLN 937 500 thousand after deducting dividends approved and the Bank’s net profit generated from 1 January 2014 to 30 June 2014 in the amount of PLN 1 004 300 thousand, after deducting expected charges and dividends (on the basis of decision No. DBK/DBK4/7105/7/5/2014 of the Polish Financial Supervision Authority, dated on 29 September 2014).
The Group calculates capital requirements in accordance with the Resolution No. 76/2010 of the Polish Financial Supervision Authority of 10 March 2010 on the scope and detailed procedures of determining capital requirements for particular types of risk (Official Journal of the PFSA No. 2, item 11 of 9 April 2010 with subsequent amendments): in respect of credit risk – using the standardised approach, in respect of the operational risk for the Bank– using the advanced measurement approach (AMA) and for the Group entities - basic indicator approach (BIA) in respect of market risk – the basic methods.
The total requirements in respect of the Group’s own funds comprises the sum of the capital requirements for:
- credit risk – including credit risk of instruments from the banking book, counterparty credit risk and risk of credit valuation adjustment (CVA),
- position risk – including equity securities price risk, specific risk of debt instruments, general interest rate risk
- operational risk,
- other types of requirements of the own funds in respect of:
a) currency risk,
b) settlement risk,
c) commodity price risk,
d) exceeding the exposure concentration limit and large exposure limit.
Until 31 December 2013, the Group calculated requirements in respect of the own funds 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 (Official Journal of the PFSA No. 2, item 11 of 9 April 2011 with subsequent amendments).
Capital requirements of the PKO Bank Polski SA Group (in PLN million)
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 (as a result of the legal merger) 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.
A significant increase in the loan portfolio (statement of financial position and off-balance sheet exposures) of approximately 3.8% contributed to an increase in the requirenment of the own funds in respect of credit risk in 2014 compared to the end of 2013.
An increase in the requirement of own funds in respect of market risk by 39% to the level of PLN 495 million is mainly due to the increase in liabilities from underwriting corporate bonds with a decline in the value of corporate bonds (a total increase in bonds requirement by approximately 77%).
The own funds requirement in respect of operational risk for the Bank was calculated in accordance with the AMA approach, and the requirement in respect of operational risk for the Group entities conducting financial activities was calculated using the basic index approach (BIA). There was an increase in the requirement from PLN 631 million (as at 31 Decmeber 2013) to PLN 759 million (as at 31 December 2014) mainly due to recognition of the merger.
*Own funds for the purposes of capital adequacy are calculated in accordance with the provisions of the Banking Act and Resolution of the Polish Financial Supervision Authority No. 325/2011 of 20 December 2011 on deductions of basic funds, their amount, scope and conditions of their deduction from bank's basic funds, other statement of financial position items included in supplementary funds, their amount, scope and conditions of their inclusion in bank’s supplementary funds, deductions from supplementary funds, their amount, scope and conditions of their deduction from supplementary funds and the scope and manner of treating the activity of banks that are members of conglomerates in calculating own funds (Official Journal of the PFSA No. 13, item 49 of 30 December 2011)