71. Capital Adequacy

Capital adequacy is a process whose objective is to ensure that the level of risk which the Group takes in relation to the development of its business activities may be covered with its capital, taking into account a specific risk tolerance level and 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 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 that is adequate to the scale and profile of the risk relating to the Group’s activities continuously.

The process of managing the Group’s capital adequacy comprises:

  • specifying and pursuing the Group’s capital objectives,
  • identifying and monitoring significant types of risk,
  • assessing internal capital to cover the individual risk types and total internal capital,
  • establishing internal capital adequacy limits,
  • forecasting, monitoring and reporting the level and structure of equity and capital adequacy,
  • managing the structure of the statement of financial position paying attention to optimizing the quality of the Group’s own funds,
  • capital emergency action,
  • allocating own funds and internal capital requirements to business areas and customer segments in the Bank as well as the individual Group companies,
  • assessing the profitability of the individual business areas and customer segments.

The main capital adequacy measures are:

  • total capital ratio,
  • the relation of own funds to internal capital,
  • Tier 1 core capital ratio,
  • Tier 1 capital ratio,
  • 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 taking capital emergency action.

The basic regulations applicable in the capital adequacy assessment process are:

  • the CRR Regulation,
  • the Banking Law,
  • the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (hereinafter referred to as ‘the Act on macroprudential supervision’).

In 2016, the levels of capital ratios were dependent, among other things, on the following supervisory decisions:

  • on 10 October 2016, the Bank received the decision of the Polish Financial Supervision Authority on the identification of the Bank as other systemically important institution (‘O-SII’) on the basis of the assessment of the Bank’s systemic importance in accordance with the Act on macroprudential supervision and on the imposition of a buffer on the Bank of 0.75% of its total risk exposure calculated in accordance with CRR Regulation;
  • on 18 October 2016, the Bank received the decision of the Polish Financial Supervision Authority on the recommendation to comply with an additional own funds requirement in excess of the value arising from the requirements calculated in accordance with the detailed principles set out in the CRR. The PFSA recommended that the Bank should maintain its own funds to cover the additional capital requirement in order to hedge the risk arising from foreign currency mortgage loans to households, at the standalone level of 0.83 p.p., in excess of the total capital ratio, which should comprise at least 75% of Tier1 capital (which corresponds to a capital requirement of 0.62 p.p. in excess of the value of the Tier 1 capital ratio) and at least 56% of Tier 1 core capital (which corresponds to a capital requirement of 0.46 p.p. in excess of the value of the Tier 1 core capital ratio);
  • on 5 December 2016, the Financial Stability Committee passed a resolution on a recommendation concerning maintaining the countercyclical buffer ratio at 0% and also decided to provide the European Systemic Risk Board with appropriate information about this buffer;
  • on 30 December 2016, the Polish Financial Supervision Authority provided the Bank with information about the value of an additional own funds requirement in excess of the value arising from the requirements calculated in accordance with the detailed principles set out in the CRR. The level of the additional capital requirement to hedge the risk arising from foreign currency mortgage loans to households was set at the consolidated level of: 0.79 p.p., for the total capital ratio; 0.59 p.p. for the Tier 1 capital ratio and 0.44 p.p. for the Tier 1 core capital ratio.

In 2016 and in 2015, the Group maintained a secure capital base in excess of the supervisory and regulatory limits.

In accordance with the CRR, for prudential consolidation purposes the Group consists of: PKO Bank Polski SA, the PKO Leasing SA Group, PKO BP BANKOWY PTE SA, PKO Towarzystwo Funduszy Inwestycyjnych SA, the KREDOBANK SA Group, PKO Finance AB, Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o., PKO BP Finat Sp. z o.o. and PKO Bank Hipoteczny SA.

Own funds for capital adequacy purposes

In 2016, the Group’s capital adequacy level remained at a secure level, well above the supervisory limits.

As at 31 December 2016, the Group’s own funds calculated, for capital adequacy purposes, included the Bank’s net profit for 2015 (in the amount of PLN 2 571 million) and undistributed profits from previous years (in the amount of PLN 1 250 million). This amount increased the Group’s other reserves (the reserve capital and other reserves).

Additionally, after receiving adequate approvals from PFSA, the Group included in its Tier 1 capital the Bank’s net profit generated for three quarters of 2016 (reduced by expected financial burdens) in the amount of PLN 1 589 million.

Requirements as regard 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:

statement of financial position items - a product of a carrying amount (considering value of adjustments for specific credit risk), a risk weight of the exposure calculated according to the standardized method of credit risk requirement as regards own funds and 8% (considering recognised collaterals),

off-balance sheet liabilities granted - a product of value of liability (considering value of adjustments for specific credit risk), a risk weight of the product, a risk weight of off-balance sheet exposure calculated according to the standardized method of credit risk requirement for own funds and 8% (considering recognised collaterals),

off-balance sheet transactions (derivative instruments) – a product of risk weight of the off-balance sheet transaction calculated according to the standardized method of credit risk requirement for own funds, equivalent in the statement of financial position of off-balance sheet transaction 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, excluding the Bank’s branch in Germany,
  • in accordance with the BIA approach – with respect to the activities of the Bank’s branch in Germany

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 risk

 


  • 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 set out in Title VI, ‘Own funds requirements for credit valuation adjustment risk’ in of the CRR Regulation,
  • exceeding a large exposure limit – calculated under the approach set out in Articles   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.

31.12.2016

31.12.2015

Total own funds

30 872,9

27 091,4

Tier I capital

28 349,9

24 608,3

Tier I capital before regulatory adjustments and reductions, of which:

32 059,3

27 828

Share capital

1 250,0

1 250,0

Other reserves

27 969,5

24 118,5

General banking risk fund

1 070,0

1 070,0

Retained earnings

1 769,8

1 390,1

(-) Goodwill

(1 159,9)

(1 102,4)

(-) Other intangible assets

(1 821,3)

(1 690,8)

Accumulated other comprehensive income

(709,4)

(135,8)

Deferred income tax assets, dependent on future profitability,
not derived from temporary differences

(1,0)

(2,0)

Adjustments in Tier I basic capital due to prudential filters

30,7

(14,4)

Other adjustments in transitional period in Tier I basic capital

(48,5)

(274,9)

Tier II capital

2 523,0

2 483,1

Equity instruments and subordinated loans qualificated as Tier II capital

2 523,0

2 483,1

Requirements as regard own funds

15 625,7

14 836,8

Credit risk

14 271,1

13 658,3

Operational risk

656,4

662,5

Market risk

651,1

484,5

Credit valuation adjustment risk

47,1

31,5

Settlement/delivery risk

-

-

Total capital adequacy ratio

15,81%

14,61%

Tier 1 capital ratio

14,51%

13,27%

Internal capital (Pillar II)

In 2016, the Group calculated internal capital in accordance with external regulations:

  • the CRR Regulation,
  • the Banking Act,
  • the Resolution No. 258/2011 of the PFSA,
  • The Act on Macro-prudential supervision,

and the internal regulations of the Bank and the Group.

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 Bank regularly monitors the significance of the individual risk types relating to the Bank's activities and other Group entities.

The estimation of internal capital is aimed at determining the minimum level of own funds which ensures the safety of operations, taking into account changes in the profile and scale of the operations as well as adverse stress conditions.

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 2016, 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.

Disclosures (Pillar III)

The Group annually announces information, in particular, about risk management and capital adequacy in accordance with: the CRR regulation and the implementing acts thereto, the Banking Act, the Act on Macro-Prudential Supervision, Recommendation M relating to operational risk management in banks and Recommendation P relating to liquidity risk issued by the Polish Financial Supervision Authority.

Details of the scope of information disclosed, the method of its verification and publication are presented in 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).