Capital management

According to Capital Requirement Regulation (CRR called also “Basel 3”), the Group and the Bank are committed to meet a minimum own funds requirements: Total capital ratio, Tier 1 capital ratio and Common Equity Tier 1 ratio. At the same time, there are other domestic regulations in force (including the Banking Act) and therefore in the calculation of own funds requirements there are also specific solutions concerning CRR interpretations for Polish banks, as pointed out by KNF. It relates, among others, to capital requirements on FX loans for households, that are subject to unconditional 100% risk weight under standardized method, while in another EU countries that burden is significantly lower.

The Bank assumes to maintain the own funds requirements higher than the minimum set by the law and regulatory authorities. Based on that assumption and guidelines and recommendations of Supervisory Authorities, the Group established its capital targets/limits. The definition of the capital targets/limits takes into consideration the recommendations of KNF, Banco de Portugal and European Central Bank (called together as “College of Supervision”).

Capital risk, expressed in the above ratios, is measured and monitored in a regular manner. As for all capital targets, there were determined some minimum ranges for those values. The Capital ratios in a given range causes a need to take appropriate management decisions or actions. Regular monitoring of capital risk relies on classification of capital ratios to the right ranges and then performing the evaluation of trends and drivers influencing the capital adequacy.

For portfolios covered by the IRB decision (RRE and QRRE) the Bank has to maintain own funds requirements at no less than 70% of the respective capital requirements calculated using the Standardized method (to keep “Regulatory floor”).

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 KNF 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 KNF 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 consist 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). That recommendation replaces the previous one, to maintain Bank’s 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.).

As a result of the above decisions and recommendations, and another requirements defined in CRR, as well as KNF 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% (12.82% for the Bank)
• Total Capital Ratio (TCR)  =  12%+1.25%+3.05%  = 16.30 % (16.34% for the Bank)

It need to be emphasized that presented above expected by KNF levels of capital ratios are significantly higher than these required by Basel 3 European regulations.

Despite more stringent local solutions and additional capital requirements imposed by KNF (both on individual basis, as well as regarding all banks, like capital buffers defined in CRR), the Group’s capital ratios are on a satisfactory level.

According to the Banking Act, internal capital (aggregate measure of risk in activity) must be fully covered (secured) by financial resources provided by owners (own funds). That requirements is embedded in the Group capital targets – economic capital buffer and economic capital buffer in stressed conditions. These targets were established by the Group at a levels significant higher than the regulatory minimum.

The Group defined an internal (economic) capital estimation process, that is described as an estimated amount needed to cover all material risks identified in the Group activity and changes in economic environment, taking into account the anticipated level of risk in the future. Internal capital accounts for the effect of diversification / correlation between the types of risk, namely the assumption that the potential loss due to the risk incurred is less than the sum of estimated losses on various types of risk (losses materialisation of risks at the same time is imperfectly correlated).

From the technical standpoint, economic capital is an amount of capital, indispensable to cover all future unexpected economic losses, that might occur over a defined time in the future and estimated with the defined probability, without jeopardizing interest/safety of depositors /creditors of the Group. In estimation of internal/economic capital, stress tests results are also used.

Evaluation of risk types materiality and methodologies of internal capital estimation are regularly reviewed and updated.

In 2016 both economic capital buffers were met with a surplus. Economic capital adequacy – accounting for a coverage of internal capital by own funds – is assessed as satisfactorily  fulfilled.

Internal capital is not used only as a measure for maintaining capital adequacy. As mentioned before, there is a process of capital allocation in place, based on internal capital. The latter enables a calculation of risk-adjusted performance measures, defining a risk limits, allocation and reallocation of internal capital to portfolios and business lines, and in future – usage of internal capital for another purposes as well.