Capital adequacy

Capital adequacy is a condition, where the level of risk taken on by the group in connection with development of its business activities may be covered by the available capital, taking into account a specific risk tolerance level and time horizon. The management process of capital adequacy in particular covers complying with the applicable regulations of the supervisory and control authorities, as well as the risk tolerance level defined in the bank and the group, and the capital planning process, including the policy for raising capital.

Managing capital adequacy includes:

Capital adequacy measures:

• total capital ratio (TCR),
• Tier 1 capital ratio (T1),
• Common Equity Tier 1 capital ratio (CET1),
• own funds to internal capital ratio,
• leverage ratio,
• MREL in relation to own funds and total liabilities.

Access report: Capital Adequacy and other information subject to disclosure of the PKO Bank Polski Group as at 31 December 2020

By the end of 2020, the total capital ratio of the group amounted to 18.18% (-1.70 p.p. y/y), and the core capital T1 ratio amounted to 16.99% (-1.62 p.p. y/y). The drop in the capital ratios was determined by a decrease in own funds of approx. PLN 0.8 billion with the capital requirements being PLN 1.3 billion higher.

In 2020, there was an increase in the own funds requirement for operational risk by PLN 0.8 billion, mainly due to the growing costs of legal risk related to the portfolio of mortgage loans in convertible currencies. Due to the quarterly shift of data included in the AMA method, the cost level from 3rd quarter of 2020 is included in the requirement at the end of 2020. Starting from 2021, provisions reducing the gross carrying amount of loans (i.e. credit risk related losses) will be included in the AMA method at a constant value from the 3rd quarter of 2020, both by the group and the bank.

The increase in the requirement for market risk is mainly due to the requirement for currency risk in the amount of PLN 1.2 billion, resulting from creation of write-offs for legal risk related to foreign currency loans. The currency position is limited in the first half of 2021.

Own funds dropped mainly as a result of accounting for the group’s net loss for 2020 of PLN 2.6 billion. The loss was partially compensated for by an increase in the fair value of financial assets measured at fair value through other comprehensive income and a positive impact of the IFRS 9 adjustment on own funds. At the end of 2020, the application of the regulations mitigating the impact of the COVID-19 pandemic also had an impact on the level of capital ratios (elimination of the impact of the write-downs set up since 1 January 2020 on the Tier 1 capital and reducing the amount of intangible assets relating to software which reduced own funds), the effect of which was among other things an increase in own funds of approx. PLN +1.6 billion and an impact on the total capital ratio of approx. 89 bp. and on the core capital Tier 1 ratio of approx. 89 bp.

Compared with 31 December 2019, the total capital ratio of PKO Bank Polski on 31 December 2020 dropped to 19.78% (-2.43 p.p. y/y), and the core capital T1 ratio went down to 18.45% (-2.31 p.p. y/y). The drop in capital ratios results mainly from the drop in own funds as a result of accumulating the bank’s net loss incurred in 2020 accompanied by higher capital requirements with respect to market risk (refres to the requirement for currency risk in the amount of PLN 1.2 billion at the end of 2020) and higher capital requeirements due to operational risk (PLN 0.8 billion at the end of 2020) as a result of of costs incurred with respect to legal risk.

In March 2021, the Supervisory Board adopted a new “Dividend policy of PKO Bank Polski and of the PKO Bank Polski Group”, where a repurchase of treasury shares for the purpose of their redemption became an additional tool for the redistribution of capital, while the shares may be repurchased when their book price is higher than the current market price, after the PFSA gives its consent for their repurchase.

The dividend policy assumes that the bank’s intention is to distribute dividend in a stable manner in the long term, pursuant to the principle of prudent management of the bank and the group pursuant to the law and in accordance with the PFSA’s position on the assumptions for dividend policies of commercial banks. The aim of the dividend policy is to optimally shape the capital structure of the bank and the group, in consideration of the return on equity and the cost of capital, as well as respective requirements related to development, while ensuring an appropriate level of capital adequacy ratios.

The bank may (taking into account the position of the PFSA) distribute dividend if it has excess funds over the minimum capital adequacy ratios specified in Article 92.1 of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR) taking into consideration the Regulation of the Minister of Finance dated 18 March 2020 revoking the regulation on the systemic risk buffer, Article 55.4 of the Act on macro-prudential supervision over the financial system and on crisis management in the financial system, and Article 138.1.2a of the Banking Law.

In line with the PFSA’s recommendation, on 26 August 2020 the bank’s Ordinary General Shareholders’ Meeting passed a resolution on retaining the whole net profit earned by the bank in previous years:

• with respect to the profit for 2019 – to earmark PLN 2 155 113 to reserves and to leave PLN 3 832 348 976 in retained earnings,
• to leave profit from prior years of PLN 1 667 651 024 in retained earnings.

On 16 December 2020, the PFSA took a stand on the dividend policy of commercial banks in 2021, considering it necessary for the banks to suspend payment of dividend in the first half of 2021 and not to take other actions, in particular those outside the everyday business and operational activities which could lead to a reduction in the capital base without prior consultations with the supervision authority.

This relates to potential dividend distribution from retained earnings and redemption of treasury shares. The Authority expects that any potential realization of such actions will each time be preceded by prior consultation with the supervision authority and will depend on its positive result. PFSA took into consideration:

• material uncertainty as to the further development of events related to the COVID-19 pandemic,
• the temporary nature of the solutions used by the banks to improve their capital position during the pandemic,
• the maintained prudent supervisory position of the European Union with respect to dividend restrictions and other forms of reducing capital resources,
• a change in the guidelines of the European Banking Oversight Authority extending moratoria.

On 14 January 2021, PKO Bank Polski received an individual recommendation from the PFSA, in which the PFSA recommended that the bank:

• suspend payment of dividend in the first half of 2021 (including also from retained earnings),
• will not undertake in the first half of 2021, without prior consultation with the supervision authority, any other actions outside the scope of everyday business and operational activity, which could lead to reducing the capital base, including redemption of treasury shares.

The bank’s Management Board and Supervisory Board passed resolutions that within their competences they will oversee the realization of the above recommendation of the PFSA.

Pursuant to Article 395 § 2.2 of the Commercial Companies Code the decision on the distribution of profit remains within the competences of the bank’s Ordinary General Shareholders’ Meeting.

The PFSA’s position on commercial banks’ dividend policy in the second half of 2021 will be presented separately after an analysis of the financial position of the banking sector in the first half of the year is performed.

Access the statement: PFSA’s position on dividend policy in 2021