71. Capital adequacy
Capital adequacy is the state in which the level of risk incurred by the Bank’s Group in connection with its business development can be covered by its capital whose level and structure are adequate to the applicable supervisory requirements, specific risk tolerance level and adopted time horizon. The process of managing capital adequacy comprises, in particular, compliance with the applicable regulations of the supervisory and control authorities, as well as the risk tolerance level determined within the Bank and the Bank’s Group and the capital planning process, including the policy concerning the sources of acquisition of capital.
The objective of capital adequacy management is to maintain own funds at a level which is adequate to the scale and profile of the risk relating to the Group’s activities at all times.
The process of managing the Group’s capital adequacy comprises:
- specifying and pursuing the Group’s capital targets;
- identifying and monitoring significant types of risk;
- measuring or estimating internal capital to cover individual risk types and total internal capital;
- determining threshold values for capital adequacy measures,
- forecasting, monitoring and reporting the level and structure of own funds;
- managing the structure of the balance sheet to optimize the quality of the Bank’s own funds;
- emergency measures with regard to capital;
- forecasting requirements for own funds;
- assessing the profitability of individual business areas and customer segments.
Capital adequacy measures include:
- total capital ratio (TCR);
- the ratio of own funds to internal capital;
- Tier 1 core capital ratio (CET1);
- Tier 1 capital ratio (T1);
- leverage ratio.
The objective of monitoring the level of capital adequacy measures is to determine the degree of compliance with supervisory standards and to identify cases which require emergency measures to be implemented or the preparation of a capital protection plan.
Major regulations applicable in the capital adequacy assessment process include:
- the Polish Banking Law;
- the CRR Regulation;
- the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (as amended), (the Act on macroprudential supervision);
- the Regulation of the Minister of Development and Finance of 6 March 2017 on the risk management and internal control systems, remuneration policy and the detailed procedure for estimating the internal capital in banks.
|Minimum level of capital ratios maintained by the Group in accordance with Art. 92 of the CRR Regulation|
|Obligation to maintain a combined buffer above the minimum amounts specified in Article 92 of the CRR, representing the sum of the applicable buffers||31.12.2020||31.12.2019|
|Discretionary capital requirement (“domiar kapitałowy”) (an additional capital requirement in order to hedge the risk resulting from mortgage-secured loans and advances to households)||31.12.2020||31.12.2019|
||0.24 p.p.||0.36 p.p.|
||0.18 p.p.||0.27 p.p.|
||0.14 p.p.||0.20 p.p.|
Irrespective of the above buffers, to meet the requirements for distributing 100% of the profit, the Polish Financial Supervision Authority determined an add-on in respect of the Bank’s sensitivity to an adverse macroeconomic scenario, of 0.10 p.p.
On 26 October 2020, the Group received a letter from the Bank Guarantee Fund (“the Fund”) on the results of the update and feasibility assessment of the mandatory restructuring plans, which presented the target requirement, developed based on the current methodology, for the minimum level of own funds and eligible liabilities (MREL) and interim goals (the so-called destination path) on a consolidated and stand-alone basis. The destination path developed by the Fund to reach the required MREL level is based on data as at 31 December 2021, and assumes a straight-line increase in the requirement over the projection period. On the consolidated basis, the MREL goals in relation to total own funds and liabilities (TLOF) an in relation to total risk exposure (TRE) are as follows:
According to the Fund’s text of communication, the Bank is obliged to meet the MREL requirement from 1 January 2024.
The impact of IFRS 9 on own funds and capital adequacy measures is governed by Regulation 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any Member State. According to this regulation, banks are allowed to apply transitional provisions in respect of own funds and increase the common equity capital Tier 1 connected with the implementation of a new impairment model over the subsequent 5 years from 1 January 2018, whereas the adjustment ratio decreases gradually.
Moreover, on 27 June 2020, Regulation 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulation (UE) No. 575/2013 and (UE) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic came into effect. This provision allows to mitigate the impact on the write-offs recorded as of 1 January 2020 on Tier 1 capital.
Such a solution can be applied up to 2024, inclusive, whereas the adjustment ratio allocated to this value decreases gradually. The Bank decided that in the light of Art. 473a (7a) of the CRR implemented by the aforesaid Regulation, it would apply an option according to which the adjustment mitigating the impact of the introduction of IFRS 9 on own funds would receive a risk weight equal to 100 % and the resulting value would be added to the total exposure. In respect of the data for December 2019, an adjusting coefficient was used to adjust the specific risk which reduces the exposure value calculated in accordance with Art. 473a (7b) of the CRR.
The impact of implementing the new definition of default would result in a reduction in capital ratios of no more than 10 bps.
Own funds for capital adequacy purposes
In 2020 and 2019, the Group’s capital adequacy level remained at a safe level, well above the supervisory limits. The minimum capital requirements were complied with throughout the period.
Requirements relating to own funds (Pillar I)
The Group calculates own funds requirements for the following types of risk:
|credit risk||under the standard approach, using the following formulas with regard to:
balance sheet exposures – the product of a carrying amount (accounting for adjustments for specific credit risk), the risk weight of the exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral),
off-balance sheet liabilities granted – the product of the amount of a liability (accounting for adjustments for specific credit risk), the risk weight of the product, the risk weight of off-balance sheet exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral);
off-balance sheet transactions (derivative instruments) – the product of the risk weight of an off-balance sheet transaction calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (the value of the equivalent in the statement of financial position is calculated in accordance with the mark-to-market method).
|Equity||39 911||41 578||41 578|
|capital: share capital, supplementary capital, other reserves, and general risk reserve||34 976||34 986||34 986|
|retained earnings||6 142||2 101||2 101|
|net profit or loss for the year||(2 557)||4 031||4 031|
|other comprehensive income and non-controlling interests||1 350||460||460|
|Exclusions from equity:||76||4 015||4 015|
|deconsolidation – adjustments due to prudential consolidation||(279)||(267)||(267)|
|net profit or loss for the year||–||4 050||4 050|
|cash flow hedges||355||232||232|
|Other fund reductions:||2 671||2 909||2 914|
|goodwill||961||1 109||1 109|
|other intangible assets||1 264||1 711||1 711|
|additional asset adjustments (AVA, DVA)||379||89||94|
|Temporary reversal of IFRS 9 impact||1 652||926||1 030|
|Net profit or loss for the year||–||4 050||1 038|
|Tier 1 capital||38 816||39 630||36 717|
|Tier 2 capital (subordinated debt)||2 700||2 700||2 700|
|Equity||41 516||42 330||39 417|
|Requirements for own||18 273||17 034||17 120|
|Credit risk||14 985||15 749||15 835|
|Operational risk1||1 629||843||843|
|Market risk2||1 631||419||419|
|Credit valuation adjustment risk||28||23||23|
|Total capital ratio||18,18%||19,88%||18,42%|
|Tier 1 capital ratio||16,99%||18,61%||17,16%|
Pursuant to Art. 26 (2) of CRR, an institution may include interim or year-end profits in CET1 after the Bank has taken a formal decision confirming the final profit or loss of the institution for the year, or before it has taken the formal decision, only with the competent authority’s prior permission. In May 2020, the European Banking Authority (EBA) published, in a single rulebook Q&A, its position regarding the inclusion of annual and interim profits in the capital adequacy data (Q&A 2018_3822 and Q&A 2018_4085). According to this position, once the Bank has formally met the criteria for including its profit for a given period in the Tier 1 capital, this profit should be included retrospectively (as at the date of the profit, and not the date of meeting the criteria), and own funds should be adjusted accordingly as at the date related to the profit. Therefore, the column for the “restated” data presents own funds, capital adequacy requirements and capital ratios taking into account the distribution of profit for 2019 performed by the General Shareholders Meeting of the Bank.
According to the CRR Regulations for capital adequacy purposes, prudential consolidation is used, which, unlike consolidation in accordance with IFRS, includes only subsidiaries that meet the definition of an institution, financial institution or any ancillary services enterprise. In addition, pursuant to Article 19 Paragraph 1 of the CRR, prudential consolidation may exclude entities whose total value of assets and off-balance sheet items are less than EUR 10 million.
Other subsidiaries, not consolidated under the full method for the purposes of prudential consolidation are measured using the equity method.
For the purposes of prudential consolidation, the Group consists of following entities:
- PKO Bank Polski S.A.,
- Grupa Kapitałowa PKO Leasing S.A.,
- PKO BP BANKOWY PTE S.A.,
- PKO Towarzystwo Funduszy Inwestycyjnych S.A.,
- Grupa Kapitałowa KREDOBANK S.A.,
- PKO Finance AB,
- PKO BP Finat sp. z o.o.,
- PKO Bank Hipoteczny S.A.,
- Grupa Kapitałowa Bankowe Towarzystwo Kapitałowe S.A.
Non-financial and insurance entities are excluded from the prudential consolidation.
Consolidated income statement in accordance with the CRR (prudential consolidation)
|INCOME STATEMENT IN ACCORDANCE WITH THE CRR||2020||2019|
|Net interest income/(expense)||10 312||10 251|
|Interest income||11 780||12 746|
|Interest expense||(1 468)||(2 495)|
|Net fee and commission income||3 752||3 160|
|Fee and commission income||4 804||4 245|
|Fee and commission expense||(1 052)||(1 085)|
|Other net income||158||1 066|
|Gains/(losses) on financial transactions||(112)||180|
|Foreign exchange gains/ (losses)||196||473|
|Gains/(losses) on derecognition of financial instruments||165||143|
|Net other operating income and expense||(106)||256|
|Result on business activities||14 222||14 477|
|Net expected credit losses||(2 178)||(1 148)|
|Net impairment allowances on non-financial assets||(395)||(111)|
|Cost of the legal risk of mortgage loans in convertible currencies||(6 552)||(451)|
|Operating expenses||(5 871)||(6 028)|
|Tax on certain financial institutions||(1 047)||(1 014)|
|Share in profits and losses of subsidiaries, associates and joint ventures||122||82|
|Profit / (loss) before tax||(1 699)||5 807|
|Income tax expense||(851)||(1 757)|
|Net profit / (loss) (including non-controlling shareholders)||(2 550)||4 050|
|Profit (loss) attributable to non-controlling shareholders||–||–|
|Net profit / (loss) attributable to equity holders of the parent company||(2 550)||4 050|
Internal Capital (Pillar II)
In 2020, the Group calculated internal capital in accordance with the commonly binding legal regulations:
- the CRR Regulation;
- the Polish Banking Law;
- the Regulation of the Minister of Development and Finance of 6 March 2017 on the risk management and internal control systems, remuneration policy and the detailed procedure for estimating the internal capital in banks;
- The Act on macro-prudential supervision;
and the internal regulations of the Bank and the Group.
Internal capital constitutes an estimated amount of capital necessary to cover all material types of risk arising from the Group’s operations. The purpose of estimating the internal capital is to determine own funds at a level ensuring operational safety, taking into account changes in the profile and scale of the activities conducted and adverse stress conditions, and enabling more effective management of the Bank aimed at improving the profitability of operations and profitability of the capital invested.
The internal capital for covering significant risk types is determined using the methods specified in the internal regulations.
The relation of the Group’s own funds to its internal capital remained at a level exceeding both the threshold set by the law and the Group’s internal limit.
Disclosures (Pillar III)
The Group publishes annual information in particular concerning risk management and capital adequacy in accordance with: the CRR Regulation and the executive acts to the CRR, guidelines of the European Banking Authority, including guidelines concerning disclosure requirements pursuant to section eight of the CRR Regulation (“EBA guidelines”), the Act on Macro-prudential supervision, the Polish Banking Law Act, the Recommendation H, M and P issued by the Polish Financial Supervision Authority as part of the Report, “Capital adequacy and other information to be published by the Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Group”.
Details of the scope of information disclosed, the method of its verification and publication are presented in PKO Bank Polski S.A. Capital Adequacy Information Policies and other information to be published, which are available on the Bank’s website (www.pkobp.pl).