Notes to the consolidated financial statements
Download note47. Capital management
The Group’s capital adequacy is managed on the Bank level. It is aimed to ensure that the Bank's equity level is not lower than the one required by internal and external regulations. The regulations link the required capital level with the scale of operations and risks assumed by the Bank.
Considering the above, the Bank regularly:
- identifies risks material for its business,
- manages material risks;
- determines internal capital to be maintained should the risk materialize,
- calculates and reports capital adequacy measures,
- allocates internal capital to business areas;
- performs stress tests;
- compares its capital needs with the level of equity held;
- integrates the capital adequacy assessment with development of the Bank’s Strategy, financial and sales plans.
The Bank prepares the following cyclical reports to monitor its capital adequacy on an ongoing basis:
- monthly report for the ALCO and the Management Board;
- quarterly report for the ALCO, the Management and Supervisory Board.
In 2016 the solvency ratio, Tier 1 and internal solvency ratio of the Bank were above the required regulatory minimum.
In order to ensure high standards of capital management, compliant with best banking practices, once a year the Bank reviews the applicable policies and procedures.
Equity and solvency ratio
For the purpose of equity calculation, the Group applies methods arising from CRR. The Group’s equity consists of Tier 1 (CET1) and Tier 2 funds recognized on a separate basis (based on CRR provisions, the Bank is exempt from the obligation to determine capital requirements on the consolidated level).
In 2016, Tier 1 funds in the Bank included:
- equity instruments meeting the conditions specified in CRR;
- agio related to the instruments referred to above;
- retained earnings, to include current period gains or annual profit before a formal decision confirming the final financial performance for a given year following an approval of a competent body;
- accumulated other comprehensive income;
- reserve capital;
- general risk reserve;
- unrealized gains and losses measured at fair value (in amounts including transition regulations referred to in Articles 467 and 468 of the CRR);
- other Tier 1 items as determined in CRR;
and included adjustments due to:
- carrying amount of intangible assets;
- prudential filters and
- other items reducing Tier 1 funds as determined in CRR.
In June 2016 the Bank issued subordinated P1 bonds with the par value of PLN 50,000 thousand and maturity date of 8 June 2026. On 23 June 2016, the Bank obtained PFSA’s consent to classify the bonds as Tier 2 instruments (file no. DBK/DBK2/7100/5/4/2016/AN).
At the same time, in July 2016 the Bank prematurely redeemed subordinate BP0721 series bonds with the par value of PLN 47,340 thousand, which, pursuant to PFSA’s decision of 4 October 2011 (file no. DNB/IV/7100/2/5/IL/11) have been classified as Tier 2 funds of the Bank. On 23 June 2016 the Bank obtained PFSA’s consent to early redemption of the above bonds (file no. DBK/DBK2/7100/4/5/2016/AN).
As at 31 December 2016, Tier 2 funds in the Bank included cash obtained from a subordinate loan received in 2014 from Poczta Polska S.A. and two issues of subordinate bonds (carried out in 2012 and 2016, respectively).
The table below presents the equity, solvency ratio and Tier 1 capital as at 31 December 2016 and 31 December 2015.
| Balance as at | Balance as at | |
|---|---|---|
| Equity | 31 December 2016 | 31 December 2015 |
| PLN’000 | PLN’000 | |
| Tier 1 capital | 460 126 | 480 417 |
| Equity instruments paid for | 110 133 | 110 133 |
| Agio | 55 356 | 55 691 |
| Retained earnings, including: | 2 724 | 25 086 |
| - profit (verified profit for the second quarter) | 10 011 | 25 086 |
| - loss (a portion of not recognized current profit) | (7 287) | 0 |
| Accumulated other comprehensive income | (9 273) | 11 908 |
| Adjustments related to unrealized gains/losses on instruments in Tier 1 capital* |
(789) | (8 146) |
| Reserve capital | 252 862 | 225 577 |
| Funds for general banking risk | 124 345 | 114 345 |
| Other intangible assets | (74 749) | (53 362) |
| Additional value adjustments arising from prudent measurement requirements | (483) | (815) |
| Tier 2 capital | 134 715 | 126 138 |
| Equity instruments and subordinated loans classified as Tier 2 capital | 134 715 | 93 000 |
| Adjustments related to instruments in Tier 2 capital in the transition period | 0 | 33 138 |
| Equity | 594 841 | 606 555 |
* The adjustment regards elimination of a portion of the positive valuation due to unrealized gains in the transition period.
| Balance as at | Balance as at | |
|---|---|---|
| Capital requirements | 31 December 2016 | 31 December 2015 |
| PLN’000 | PLN’000 | |
| Capital requirements for credit risk, counterparty credit risk, dilution risk and risk related to supply of instruments for deferred settlement, including for exposures |
288 913 | 293 382 |
| with 0% risk weight | 0 | 0 |
| with 20% risk weight | 3 336 | 4 128 |
| with 35% risk weight | 41 643 | 43 364 |
| with 50% risk weight | 488 | 2 535 |
| with 75% risk weight | 170 588 | 176 316 |
| with 100% risk weight | 60 275 | 57 036 |
| with 150% risk weight | 4 189 | 5 454 |
| with 250% risk weight | 8 371 | 4 540 |
| other risk weights | 0 | 0 |
| due to payments to central counterparty fund in case of default | 23 | 9 |
| Credit valuation adjustment (CVA) | 12 | 51 |
| Capital requirement for currency risk | 0 | 1 201 |
| Capital requirement for operational risk | 42 319 | 41 270 |
| Total capital requirement | 331 244 | 335 904 |
| Solvency ratio | 14,4% | 14,4% |
| Tier 1 | 11,1% | 11,4% |
In these consolidated financial statements, the Group has changed presentation of exposure arising from contribution to the central counterparty fund for the case of default and of the exposure to credit risk with weight of 100% and 250% compared to the consolidated financial statements for the year ended 31 December 2015. The changes involved:
- separate presentation of the exposure arising from contribution to the central counterparty fund for the case of default (in the financial statements for 2015, it was presented as an item of credit risk capital requirement with 4% risk weight);
- adjusting the value of the capital requirement for credit risk with 100% and 250% weight as a result of adjustments of assets (deferred tax and inventories).
The above changes did not affect the solvency ratio or Tier 1 compared to the consolidated financial statements for the year ended 31 December 2015.