Financial and
ESG report 2020

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: (a) meeting the requirements specified in external regulations (regulatory capital adequacy) and (b) ensuring the solvency in normal and stressed conditions (economic capital adequacy/internal capital). Completing that goal, the Group 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 tolerance.

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 Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (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 and December 2020 in the level of 3.41 p.p. (Bank) and 3.35 p.p. (Group) as for Total Capital Ratio (TCR), which corresponds to capital requirements over Tier 1 ratio of 2.56 p.p. in Bank and of 2.52 p.p. in Group, and which corresponds to capital requirements over CET 1 ratio of 1.91 p.p. in Bank and 1.88 p.p. in Group1
  • 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 0.25%, and the value is set by KNF every year2;
    • Systemic risk buffer at the level of 0% in force from March 2020, in line with Regulation of Ministry of Development and Finance;
    • Countercyclical buffer at the 0% level.

In accordance to binding legal requirements and recommendations of Polish Financial Supervisory Authority (KNF), the Group 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.

1That recommendation replaces the previous one from 2019, to maintain own funds for the coverage of additional capital requirements at the level of 4.96 p.p. (Bank) and 4.87 p.p. (Group) as for TCR, which should have consisted of at least 3.72 p.p. (Bank) and 3.65 p.p. (Group) as for Tier 1 capital and which should have consisted of at least 2.78 p.p. (Bank) and 2.73 p.p. (Group) as for CET1 capital

2In November 2020 KNF issued the decision on identification the Bank as other systemically important institution and imposing OSII Buffer

The below table presents these levels as at 31 December 2020. The Bank will inform on each change of required capital levels in accordance with regulations.

Capital ratio 31.12.2020
CET1 ratio Bank Group
Minimum 4.50% 4.50%
Pillar II RRE FX 1.91% 1.88%
TSCR CET1 (Total SREP Capital Requirements) 6.41% 6.38%
Capital Conservation Buffer 2.50% 2.50%
OSII Buffer 0.25% 0.25%
Systemic risk buffer 0.00% 0.00%
Countercyclical capital buffer 0.00% 0.00%
Combined buffer 2.75% 2.75%
OCR CET1 (Overall Capital Requirements CET1) 9.16% 9.13%
T1 ratio Bank Group
Minimum 6.00% 6.00%
Pillar II RRE FX 2.56% 2.52%
TSCR T1 (Total SREP Capital Requirements) 8.56% 8.52%
Capital Conservation Buffer 2.50% 2.50%
OSII Buffer 0.25% 0.25%
Systemic risk buffer 0.00% 0.00%
Countercyclical capital buffer 0.00% 0.00%
Combined buffer 2.75% 2.75%
OCR T1 (Overall Capital Requirements T1) 11.31% 11.27%
TCR ratio Bank Group
Minimum 8.00% 8.00%
Pillar II RRE FX 3.41% 3.35%
TSCR TCR (Total SREP Capital Requirements) 11.41% 11.35%
Capital Conservation Buffer 2.50% 2.50%
OSII Buffer 0.25% 0.25%
Systemic risk buffer 0.00% 0.00%
Countercyclical capital buffer 0.00% 0.00%
Combined buffer 2.75% 2.75%
OCR TCR (Overall Capital Requirements TCR) 14.16% 14.10%

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 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 (KNF) 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 2020, 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 utilized 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 – current state, evaluation and trends

Capital adequacy of the Group over the last three years was as follows*:

Capital adequacy 31.12.2020 31.12.2019 31.12.2018
Risk-weighted assets 51 138.0 48 124.6 36 635.5
Own Funds requirements, including: 4 091.0 3 849.97 2 930.8
  • Credit risk and counterparty credit risk
3 677.0 3 495.2 2 593.9
  • Market risk
26.7 24.2 20.3
  • Operational risk
382.6 326.9 313.1
  • Credit Valuation Adjustment CVA
4.8 3.6 3.5
Own Funds, including: 9 969.0 9 668.5 7 943.0
Common Equity Tier 1 Capital 8 439.0 8 138.5 7 243.0
Tier 2 Capital 1 530.0 1 530.0 700.0
Total Capital Ratio (TCR) 19.49% 20.09% 21.68%
Minimum required level 14.10% 18.37% 19.15%
Surplus(+) / Deficit(-) of TCR capital adequacy (p.p.) +5.39 +1.72 +2.53
Tier 1 Capital ratio (T1) 16.50% 16.91% 19.77%
Minimum required level 11.27% 15.15% 15.58%
Surplus(+) / Deficit(-) of T1 capital adequacy (p.p.) +5.23 +1.76 +4.19
Common Equity Tier 1 Capital ratio (CET1) 16.50% 16.91% 19.77%
Minimum required level 9.13% 12.73% 12.89%
Surplus(+) / Deficit(-) of CET1 capital adequacy (p.p.) +7.37 +4.18 +6.88
Leverage ratio 8.30% 8.11% 8.78%
*The Group uses transitional arrangements for IFRS 9. As at 31.12.2020, if IFRS 9 transitional arrangements had not been applied, capital ratios were as follows:
TCR: 19.16%
T1: 16.16%
CET1: 16.16%
Leverage ratio: 8.13%

 

As at 2020 end, capital adequacy, measured by Common Equity Tier 1 Capital ratio and Total Capital Ratio, decreased in one year period by ca 0.4 p.p. and by ca 0.6 p.p. respectively.

In 2020, risk-weighted assets (RWA) went up by ca PLN 3 billion (by 6.3%). The main driver of the RWA growth was credit risk RWA (by PLN 2.29 billion, almost 76% share in total yearly growth), what resulted mostly from increase of loan portfolio. The second material driver was an operational risk RWA rise (by ca PLN 696 million, above 23% share in total yearly growth), what stems from including in calculation higher financial results from the last three years.

Own Funds raised by ca PLN 300 million in 2020 (by 3.7%), mainly as a result of retention of net earnings (net earnings for the second half of 2019 amounted to ca PLN 227 million), and as result of few another factors, of which the increase of revaluation reserve was the most important.

Minimum capital levels required by KNF were achieved with a surplus.

Leverage ratio stood at the safe level of 8-9%, with a small quarterly changes and it significantly exceeds a value deemed as safe (3%).

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

MREL requirements

According to the announcement of the Bank Guarantee Fund, the mid-term MREL targets set for the end of 2020 are not considered obligatory by the Fund, and in the next planning cycle the Fund will apply both the extended target date, i.e. January 1, 2024, as well as indicate the date of meeting the first binding mid-term target – January 1, 2022. The Bank expects to receive updated MREL requirements in the 2nd quarter of 2021.

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.

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