2019 Financial
and Social Report

Capital management and planning

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:

  • meeting the requirements specified in external regulations (regulatory capital adequacy) and
  • ensuring the solvency in normal and stressed conditions (economic capital adequacy/internal capital). Completing that goal, Bank strives to achieve internal long-term capital limits (targets), defined in Risk Strategy.

Capital allocation purpose is to create value for shareholders by maximizing the return on risk in business activity, taking into account established risk appetite.

In a scope of capital management process, there is also a capital planning process. The goal of capital planning is to designate the own funds (capital base that is risk-taking capacity) and capital usage (regulatory capital requirements and economic capital) in a way to ensure that capital targets/limits shall be met, given forecasted business strategy and risk profile – in normal and stressed macroeconomic conditions.

Regulatory capital adequacy

The Group is obliged by law to meet minimum own funds requirements, set in art. 92 of the EU Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, amending EU Regulation No. 648/2012 (CRR). At the same time, the following levels, recommendations and buffers were included in capital limits/targets setting:

  • Pillar II RRE FX buffer – KNF recommendation to maintain additional own funds for the coverage of additional capital requirements in order to secure the risk resulting from FX mortgage loans granted to households, in line with art. 138.1.2a of Banking Act. A value of that buffer is defined for particular banks by KNF every year as a result of Supervisory review and Evaluation process (SREP) and relates to risk that is in KNF’s opinion – inadequately covered by minimum own funds requirements, set in CRR art. 92. At present, the buffer was set by KNF in recommendations issued in November 2019 in the level of 4.96 pp (Bank) and 4.87 pp (Group) as for Total Capital Ratio (TCR), which corresponds to capital requirements over Tier 1 ratio of 3.72 pp in Bank and of 3.65 pp in Group, and which corresponds to capital requirements over CET 1 ratio of 2.78 pp in Bank and 2.73 pp in Group *;
  • Combined buffer – defined in Act on macro prudential supervision over the financial system and crisis management – that consists of:
    • Capital conservation buffer at the level of 2.5%;
    • Other systemically important institution buffer (OSII) – at the level of 0%, and the value is set by KNF every year **;
    • Systemic risk buffer at the level of 3% in force from the beginning of 2018;
    • Countercyclical buffer at the 0% level.

In accordance to binding legal requirements and recommendations of Polish Financial Supervisory Authority (KNF), the Bank defined minimum levels of capital ratios, being at the same time capital targets/limits. These are OCR (overall capital requirements) as for particular capital ratios.

(*) That recommendation replaces the previous one from 2018, to maintain own funds for the coverage of additional capital requirements at the level of 6.41 pp (Bank) and 6.27 pp (Group) as for TCR, which should have consisted of at least 4.81 pp (Bank) and 4.70 pp (Group) as for Tier 1 capital and which should have consisted of at least 3.57 pp (Bank) and 3.51 pp (Group) as for CET1 capital
(**) In August 2019 KNF informed the Bank was not identified as other systemically important institution in 2019

The below table presents these levels as at 31 December 2019. The Bank will inform on each change of required capital levels in accordance with regulations.

Minimum levels of capital ratios 31.12.2019
CET1 ratio Bank Group
Minimum 4.50% 4.50%
Pillar II RRE FX 2.78% 2.73%
TSCR CET1 (Total SREP Capital Requirements) 7.28% 7.23%
Capital Conservation Buffer 2.50% 2.50%
OSII Buffer 0.00% 0.00%
Systemic risk buffer 3.00% 3.00%
Countercyclical capital buffer 0.00% 0.00%
Combined buffer 5.50% 5.50%
OCR CET1 (Overall Capital Requirements CET1) 12.78% 12.73%
T1 ratio Bank Group
Minimum 6.00% 6.00%
Pillar II RRE FX 3.72% 3.65%
TSCR T1 (Total SREP Capital Requirements) 9.72% 9.65%
Capital Conservation Buffer 2.50% 2.50%
OSII Buffer 0.00% 0.00%
Systemic risk buffer 3.00% 3.00%
Countercyclical capital buffer 0.00% 0.00%
Combined buffer 5.50% 5.50%
OCR T1 (Overall Capital Requirements T1) 15.22% 15.15%
TCR ratio Bank Group
Minimum 8.00% 8.00%
Pillar II RRE FX 4.96% 4.87%
TSCR TCR (Total SREP Capital Requirements) 12.96% 12.87%
Capital Conservation Buffer 2.50% 2.50%
OSII Buffer 0.00% 0.00%
Systemic risk buffer 3.00% 3.00%
Countercyclical capital buffer 0.00% 0.00%
Combined buffer 5.50% 5.50%
OCR TCR (Overall Capital Requirements TCR) 18.46% 18.37%

Capital risk, expressed in the above capital targets/limits, is measured and monitored in a regular manner. As for all capital targets, there are determined some minimum ranges for those values. Capital ratios in a given range cause a need to take an appropriate management decision or action. 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 capital adequacy.

Own funds capital requirements

The Group is during a project of an implementation of internal ratings based method (IRB) for calculation of own funds requirements for credit risk and calculates its own funds minimum requirements using the IRB and standardise method for credit risk and standardise methods for other risk types.

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.

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. In July 2017 the Bank received the decision of Competent Authorities (ECB cooperating with KNF) on approval the material changes to IRB LGD models and revoking the “Regulatory floor”.

Internal capital

The Group defines internal capital according to Polish Banking Act, as the estimated amount needed to cover all identified, material risks found in the Bank’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. The Bank defined an internal (economic) capital estimation process. To this end, as for measureable risk types, mathematic and statistic models and methods are used.

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 2019, 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.

Capital adequacy evaluation

Capital adequacy evolution of the Group and the Bank during 2019 was as follows:

Capital adequacy measures 31.12.2019 31.12.2018 31.12.2019 31.12.2018
(PLN million) Group Group Bank Bank
Risk-weighted assets 48 124.6 36 635.5 47 267.6 36 012.8
Own Funds requirements, including: 3 850.0 2 930.8 3 781.4 2 880.9
  • Credit risk and counterparty credit risk
3 495.2 2 593.9 3 455.8 2 570.6
  • Market risk
24.2 20.3 24.2 20.3
  • Operational risk
326.9 313.1 297.7 286.4
  • Credit Valuation Adjustment CVA
3.6 3.5 3.7 3.6
Own Funds, including: 9 668.5 7 943.0 9 454.5 7 738.5
  • Common Equity Tier 1 Capital
8 138.5 7 243.0 7 924.5 7 038.5
  • Tier 2 Capital
1 530.0 700.0 1 530.0 700.0
Total Capital Ratio (TCR) 20.09% 21.68% 20.00% 21.49%
Minimum required level 18.37% 19.15% 18.46% 19.29%
Surplus(+) / Deficit(-) of TCR ratio (pp) +1.72 +2.53 +1.54 +2.20
Tier 1 Capital ratio (T1) 16.91% 19.77% 16.77% 19.54%
Minimum required level 15.15% 15.58% 15.22% 15.69%
Surplus(+) / Deficit(-) of T1 ratio (pp) +1.76 +4.19 +1.55 +3.86
Common Equity Tier 1 Capital ratio (CET1) 16.91% 19.77% 16.77% 19.54%
Minimum required level 12.73% 12.89% 12.78% 12.97%
Surplus(+) / Deficit(-) of CET1 ratio (pp) +4.18 +6.88 +3.99 +6.57
Leverage ratio 8.11% 8.78% 7.94% 8.57%

As at 2019 end, capital adequacy in Bank Millennium Group remained on very high and safe level. Total Capital Ratio stayed at year end at 20.09% level for the Group (20.00% for the Bank) and Common Equity Tier 1 Capital ratio (equals T1 ratio) was at 16.91% for the Group (16.77% for the Bank). Therefore, minimum capital levels required by KNF for Bank and Group were achieved with a surplus.

TCR of the Group decreased during one year period by ca 1.6 pp (by 1.5 pp for the Bank). It was caused by a faster risk-weighted assets than own funds growth. In 2019, risk-weighted assets of the Group went up by ca PLN 11.5 billion (i.e. by 31%), mainly as a result of Euro Bank takeover. The Group’s Own Funds raised by ca PLN 1.7 billion in 2019, mainly as a result of retention of net earnings (total net earnings for 2018 and net earnings for first half of 2019), and subordinated debt issue.

Bank Millennium has a dividend policy of distributing from 35% to 50% of net profit, subject to regulatory recommendations. In December 2019 KNF sent the individual dividend policy recommendation, in which it set the following additional buffers for dividend distribution (above the minimum required as at 2019 end for TCR): + 1.5% to pay 75%; + additional Stress test add-on to pay 100%. That add-on was measured as the Bank’s sensitivity to an adverse macroeconomic scenario and was set at 3.01% on the top of TCR, including regulatory adjustments. KNF kept also additional criteria for banks with FX mortgage portfolio (K1 based on FX mortgage share in total portfolio and K2 based on share of 2007-2008 vintages in total FX mortgage portfolio).

Capital ratios at the end of 2019 would allow paying dividend if not additional K1 and K2 criteria for banks with FX mortgage loan portfolio. Taking above into account and to provide a reliable capital support for growth a business activity, the Management Board of the Bank will submit to AGM a proposal of full retention of 2019 net profit in Bank’s own funds. Assuming acceptance of this proposal by AGM, positive impact on T1 and TCR ratio will be approximately 0.4-0.5 pp (to levels 17.4% and 20.6% for Group, respectively).

Leverage ratio stood at the safe level of 8%-9%, with small periodic changes and exceeds almost three times a value deemed as safe (3%).

In a long perspective, capital adequacy level of Bank and Group is evaluated as satisfactory.

The Bank received a letter from „BFG regarding the minimum level of own funds and liabilities subject to write down or conversion (MREL). In accordance with the regulation, the MREL requirement should be achieved by January 1, 2023 and maintained at all times from that date. BFG has determined a linear path to reach the required target. The MREL limit for the Bank was set on the basis of data as at December 31, 2018 and the value of required buffers valid as at January 1, 2019. As at December 31, 2019, the Bank fulfils the MREL limits set up by BFG. In order to fulfil and maintain required MREL limits, the Group may issue MREL eligible instruments that could cause increase of financing costs for the Group.

More information about capital management and adequacy is presented in a separate report titled “Capital Adequacy, Risk and Remuneration Policy Report of Bank Millennium Capital Group for 2019”.

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