71. Capital adequacy

PKO Annual
Report Online

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;
  • stress-tests;
  •  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
  • total capital ratio (TCR)
  • Tier 1 capital ratio (T1)
  • Tier 1 core capital ratio (CET1)

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
Total: 3,51% 6,51%
  • conservation buffer
2,5% 2,5%
  • countercyclical buffer
0,01% 0,01%
  • systemic risk buffer
0%1 3%2
  • due to identifying the Bank as another systemically important institution (“O-SII”)
1%3 1%3
1On 19 March 2020, in connection with the COVID-19, the Regulation of the Minister of Finance cancelling the systemic risk buffer came into effect.
2 he buffer is calculated for the exposure within the territory of the Republic of Poland. Due to the fact that the Group also conducts foreign activities, the systemic risk buffer specific to the Group was 2.88% as at the end of December 2019.
3 of total exposure to the risks calculated in accordance with the CRR.

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
  • for the total capital ratio:
0.24 p.p. 0.36 p.p.
  • for the Tier 1 capital ratio:
0.18 p.p. 0.27 p.p.
  • for the Tier 1 core capital ratio:
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:

in % 31.12.2021 31.12.2022 31.12.2023
MREL (TLOF) 10,06 11,35 12,65
MREL (TRE)  15,99 18,06 20,12


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).

operational risk
  • in accordance with the AMA approach – with respect to the Bank’s activities, taking into account the branch in Germany and excluding the branch in the Czech Republic;
  • in accordance with the BIA approach – with respect to the activities of the branch in the Czech Republic and entities of the Group subject to the prudential consolidation.
market risk
  • currency risk – calculated under the core approach;
  • commodity risk – calculated under the simplified approach;
  • equity instruments risk – calculated under the simplified approach;
  • specific risk of debt instruments – calculated under the core approach;
  • general risk of debt instruments – calculated under the duration-based approach;
  • other types of risk, other than delta risk (non-delta risk) calculated under the scenario approach in the case of options for which the Bank uses its own valuation models and under the delta plus approach for other options.
Other risks
  • settlement risk and delivery risk – calculated under the approach specified in Title V, “Own funds requirements for settlement risk” of the CRR Regulation;
  • counterparty credit risk – calculated under the approach set out in Chapter 6, “Counterparty credit risk” of Title II, “Capital requirements for credit risk” of the CRR Regulation;
  • credit valuation adjustment risk – calculated under the approach specified in Title VI, “Own funds requirements for credit valuation adjustment risk” of the CRR Regulation;
  • exceeding the large exposures limit – calculated under the approach set out in paragraphs 395-401 of the CRR Regulation;
  • for exposures to a central counterparty, a requirement for transactions and contributions made to the default fund of a qualifying central counterparty is calculated.

31.12.2020 31.12.2019
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
securitization items 67
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%
1 In 2020, there was an increase in the own funds requirement for operational risk by PLN 786 million, 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 3Q2020 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 by the Group at a constant value from 3Q2020.
2 The increase in the requirement for market risk is mainly due to the requirement for currency risk in the amount of PLN 1,167 million, resulting from the double write-offs for legal risk related to foreign currency loans. The currency position was limited in the first half of 2021.


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 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)

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
Dividend income 15 14
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).

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