Capital Adequacy and Equity Capital

Equity and its profitability

Equity of the PKO Bank Polski SA Group increased by 7.6% per annum and accounted for 11.4% of liabilities as at the end of 2016.

Equity and total capital ratio of the PKO Bank Polski SA Group (in PLN million)

 31.12.201631.12.2015Change (in PLN million)Change (%)
Equity, including:32 56930 2652 3047.6%
Share capital1 2501 25000.0%
Reserve capital24 49120 7113 77918.2%
The general banking risk fund1 0701 07000.0%
Other reserve capital3 6083 536712.0%
Financial assets available for sale-347171-518x
Share in other comprehensive income of the associated entities-10-14x
Cash flow hedges-109-58-5188.0%
Actuarial gains and losses-11-132-16.0%
FX differences arising from transaltion of the result of foreign entities-222-217-52.3%
Undistributed profits-191 222-1 241x
Net profit for the year2 8742 61026510.1%
Non-controlling interests-16-182-11.5%
Own funds
30 87327 0913 78214.0%
Capital adequacy ratio
15.81%14.61% 1.2 p.p.

Significant reinforcement of the capital base (an increase in average equity of 9.2% y/y), with the profit dynamics of 10.1% y/y translated into increase of the return on equity ratio (ROE) to the level of 9.1 p.p.

ROE PKO Bank Polski Group/risk-free rate*

*risk-free rate calculated as an average yearly return from 10-year State Treasury Bonds.

The capital adequacy measures

The level of the PKO Bank Polski SA Group’s capital adequacy in 2016 remained at a safe level, significantly above the supervisory limits. On 31 December 2016 the capital adequacy measures have been calculated based on the provisions of the CRR Regulation.

In 2016 PKO Bank Polski SA Group continued efforts to provide adequate capital buffer, as well strengthen its capital position.

As at 31 December 2016 compared with 31 December 2015, the Group’s capital ratio increased by 1.2 p.p. to the level of 15.81%, basic capital ratio Tier 1 by 1.2 p.p. to the level of 14.51%.

Capital adequacy ratios of PKO Bank Polski SA Group

Capital requirements of PKO Bank Polski SA Group (in PLN billion)

The increase in the adequacy ratios in 2016 was mainly determined by an increase in own funds of approx. PLN 3.8 billion as a result of retaining all profit of 2015, and allocating part of the 2016 profit of PLN 1.6 billion to own funds, upon the consent of the Financial Supervision Authority.

The increase in the own funds requirement in respect of risk in 2016 of approx. PLN 0.8 billion compared with 31 December 2015 had an impact on the development of business activity of the PKO Bank Polski Group and the acquisition of RLPL by PKO Leasing SA.

Capital adequacy is a process whose objective is to ensure that the level of risk which the Group takes in connection with 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 material 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 balance sheet 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:

  • Regulation of the European Parliament and Council (EU) No. 575/2013 dated 26 June 2013 on prudential requirements for credit institutions and investment firms amending Regulation (EU) No. 648/2012 (CRR Regulation),
  • the Act of 29 August 1997 on 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 another 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 Article 92(3) of Regulation (EU) No 575/2013,
  • 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 sent information to the Bank on the level of the additional requirement in respect of own funds exceeding the value following from the requirements calculated in accordance with the detailed principles specified in CRR. The amount of the additional capital requirement to secure the risk in respect of foreign currency mortgage loans to households, at the consolidated level: 0.79 p.p., for the total capital ratio; 0.59 p.p. for the Tier I capital ratio and 0.44 p.p. for the Tier I core capital ratio.

Pursuant to the CRR, the Group calculates requirements relating to own funds in respect of the following types of risk:

  • credit risk – standardized approach,
  • operational risk: of the Bank – in accordance with the basic indicator approach (BIA) in respect of the operations of the Bank’s branch in the Federal Republic of Germany and the advanced measurement approach (AMA) in respect of the remaining operations conducted by the Bank, and for Group companies covered by prudential consolidation – in accordance with BIA,
  • market risk – basic indicator approach.

The total requirement in respect of Bank’s own funds comprises the sum of the own funds capital requirements in respect of:

  • credit risk, including counterparty credit risk,
  • market risk,
  • risk of credit valuation adjustment (CVA),
  • the risk in relation to exposures to a central counterparty (CCP),
  • settlement and delivery risk,
  • operational risk.

Capital adequacy of PKO Bank Polski SA

Own funds in total 30 873 27 091
Tier I capital 28 350 24 608
Tier I capital before regulatory adjustments and reductions, of which:32 05927 829
Share Capital1 2501 250
Other reserves27 97024 119
General banking risk fund1 0701 070
Retained earnings1 7701 390
(-) Goodwill(1 160)(1 102)
(-) Other intangible assets(1 821)(1 691)
Accumulated other comprehensive income(709)(136)
Deferred tax assets which depend on future profitability but are not related to temporary timing differences(1)(2)
Adjustments in Tier I basic capital due to prudential filters31(14)
Other adjustments in transitional period in Tier I basic capital(49)(275)
Tier II capital 2 523 2 483
Equity instruments and subordinated loans qualificated as Tier II capital2 5232 483
Requirements as regard own funds 15 626 14 837
Credit risk14 27113 658
Operational risk656663
Market risk651485
Credit valuation adjustment risk4732
Total capital adequacy ratio15.81%14.61%
Tier 1 capital ratio14.51%13.27%

In 2016 PKO Bank Polski SA Group maintained a safe capital base which exceeded the supervisory and regulatory limits.

Own funds for the purposes of capital adequacy are calculated in accordance with the provisions of the Banking Act and Resolution 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.