Capital management
Capital management process
Group’s capital management is based on the high-level document „Capital Management and Planning Framework”, approved by the Bank’s Management Board and Supervisory Board.
Group’s capital management relates to two areas: capital adequacy management and capital allocation. For both areas, management goals were set.
The goal of capital adequacy management is: (a) ensuring the solvency of the Group in the normal and stressed conditions (economic capital adequacy) and (b) meeting the requirements specified in external regulations (regulatory capital adequacy).
Capital allocation purpose is to create value for shareholders by maximizing the return on risk in business activity, taking into account established risk appetite.
Own Funds requirements
Group is obliged by law to meet minimum own funds requirements, set in art. 92 of Regulation of European Parliament and Council no 575/2013 on prudential requirements for credit institutions and investment firms (CRR) and Polish Banking Act. At the same time, maintaining regulatory capital adequacy on a higher level than required minimum is one of a goal of capital management. Calculating own funds requirements, local solutions and interpretations are used (issued by Polish Financial Supervisory Authority – PFSA). During 2016 the Group complied with requirements specified in external regulations.
Group calculates its own funds requirements using standard methodologies, and is implementing at the same time a project of an implementation of internal ratings based method (IRB) for calculation of own funds requirements for credit risk and obtaining of approval decisions from Regulatory Authorities on that matter.
In the end of 2012, Banco de Portugal (consolidating Regulator) with cooperation of Polish Financial Supervision Authority (PFSA) granted an approval to the use of IRB approach as to following loan portfolios: (i) Retail exposures to individual persons secured by residential real estate collateral (RRE), (ii) Qualifying revolving retail exposures (QRRE). According to the mentioned approval, minimum own funds requirements calculated using the IRB approach should be temporarily maintained at no less than 80% (“Regulatory floor”) of the respective capital requirements calculated using the Standardized approach.
During 2014, the Bank submitted to Regulatory Authorities an IRB approval pack regarding the remaining loan portfolios under the IRB roll-out plan – “other retail” and “corporate” portfolios. The Bank also submitted to Regulatory Authorities an IRB roll-out for the remaining portfolios – “other retail” and “corporate” portfolios.
In the end of 2014, the Bank received another decision by Regulatory Authorities regarding the IRB process. According to its content, for the RRE and QRRE loan portfolios, the minimum own funds requirements calculated using the IRB approach had to be temporarily maintained at no less than 70% (“Regulatory floor”) of the respective capital requirements calculated using the Standardized approach until the Bank fulfils further defined conditions.
Capital buffers and required capital +
Bank, similarly to other banks in Poland, is obliged to maintain the capital conservation buffer of 1,25% from 2016.
Bank received in October 2016 the decision of Polish Financial Supervision Authority, regarding identification of the Bank as other systematically important institution and imposing on the Bank and on the Group the other systematically important institution buffer in the equivalent of 0.25% of total amount of the risk exposure (only on common equity Tier 1 capital).
In October and December 2016, Bank and Group received from Polish Financial Supervision Authority a recommendation to maintain own funds for the coverage of additional capital requirements at the level of 3.09 p.p. (Bank) and 3.05 p.p. (Group) in order to secure the risk resulting from FX mortgage loans granted to households, which should consists of at least 75% of Tier 1 capital (which corresponds to 2.32 p.p. in Bank and 2.29 p.p. in Group), and should consists of at least 56% of common equity Tier 1 capital (which corresponds to 1.73 p.p. in Bank and 1.71 p.p. in Group)[1].
As a result of the above decisions and recommendations, and another requirements defined in CRR, as well as PFSA recommendation for Polish banks (TCR of 12% and Tier 1 Capital Ratio of 9% as the expected minimum base in Poland), Group has to comply with the following minimum capital ratios:
Tier 1 Capital Ratio (T1) = 9%+1.25%+0.25%+2.29% = 12.79%
Total Capital Ratio (TCR) = 12%+1.25%+3.05% = 16.30%
It need to be emphasized that presented above expected by PFSA levels of capital ratios are significantly higher than these required by CRR (European regulation)
[1] That recommendation replaces the previous one from October 2015, to maintain own funds for the coverage of additional capital requirements at the level of 3.83 p.p., which should have consisted of at least 75% of Tier 1 capital (which corresponded to 2.87 p.p.).
Capital adequacy +
Data on regulatory capital adequacy (own funds requirements and capital ratios) are shown in the below table.
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| Bank Millennium Group – capital adequacy
(PLN million) |
31.12.2016 | 31.12.2015 |
|---|---|---|
| IRB with regulatory floor1) | IRB with regulatory floor1) | |
| Risk-weighted assets (RWA) | 36 730.6 | 37 129.6 |
| Own funds requirements, including: | 2 938.4 | 2 970.4 |
| – Credit risk and counterparty credit risk | 2 621.8 | 2 650.4 |
| – Market risk | 23.4 | 29.1 |
| – Operational risk | 279.0 | 271.1 |
| – Credit Valuation Adjustment CVA | 14.3 | 19.8 |
| Own Funds including: | 6 390.7 | 6 208.9 |
| Common Equity Tier 1 Capital, including: | 6 356.8 | 6 071.0 |
| – paid up capital instruments | 1 213.1 | 1 213.1 |
| – share premium | 1 147.5 | 1 147.5 |
| – recognised part of current profit | 430.9 | 451.9 |
| – other retained earnings | 4 064.4 | 3 517.8 |
| – recognised part of revaluation reserve | (41.4) | 78.2 |
| – regulatory adjustments | (457.7) | (337.5) |
| Tier II Capital, including: | 33.9 | 137.9 |
| – subordinated debt | 128.7 | 252.1 |
| – regulatory adjustments | (94.8) | (114.2) |
| Total Capital Ratio (TCR) | 17.40% | 16.72% |
| Common Equity Tier 1 Capital ratio (CET1 ratio)2) | 17.31% | 16.35% |
1) Risk-weighted assets and own funds requirements are calculated with 70% „Regulatory floor”
2) Common Equity Tier 1 Capital ratio is equal to Tier 1 Capital ratio
The capital adequacy, measured by Total Capital Ratio and Common Equity Tier 1 Capital ratio, improved in 2016 (yearly increase by 0.68 p.p. and 0.96 p.p., respectively).
Capital levels expected by PFSA have been achieved with a surplus (4.52 p.p. for CET1/T1 capital ratio and 1.10 p.p. for TCR).
Total risk-weighted assets went down by ca. 1%, what was influenced by reduction of risk exposure in almost all risk categories (rise of operational risk capital requirements is effect of higher last 3-years average of profits and is not connected to increase of operational risk level itself). Own Funds raised by almost 3% in effect from retaining the net earnings reported since November 2015 to June 2016.
Internal capital
Group defines internal capital according to Polish Banking Act, as the estimated amount needed to cover all identified, material risks found in Group’s activity and changes in economic environment, taking into account the anticipated level of risk in the future.
Internal capital is used in capital management in following processes: economic capital adequacy management and capital allocation.
Maintaining economic capital adequacy means a coverage (provision) of internal capital (that is an aggregated risk measure) by available financial resources (own funds). An obligation to banks to have in place that sort of risk coverage stems from Banking Act. It was mirrored in the Group’s capital targets/limits: economic capital buffer and economic capital buffer in stressed conditions.
In 2016, both above capital targets were met with a surplus. A surplus of own funds over internal capital supports a further increase of banking activity, in particular in areas with a higher risk-adjusted return.
At the same time internal capital is utilised in capital allocation process, to assign an internal capital to products/business lines, calculating risk-adjusted performance measures, setting risk limits and internal capital reallocation.