Capital adequacy
Capital adequacy is the state in which the level of risk incurred by the Bank’s Group in connection with its business development can be covered by its capital whose level and structure are adequate to the applicable supervisory requirements, specific risk tolerance level and adopted time horizon. The process of managing capital adequacy comprises, in particular, compliance with the applicable regulations of the supervisory and control authorities, as well as the risk tolerance level determined within the Bank and the Bank’s Group and the capital planning process, including the policy concerning the sources of acquisition of capital.
The objective of capital adequacy management is to ensure an appropriate level and structure of own funds which is adequate to the scale of the Bank’s activities, supervisory requirements and exposure to risk.
The process of managing the Group’s capital adequacy comprises:
- specifying and pursuing the Group’s capital targets;
- identifying and monitoring significant types of risk;
- measuring or estimating internal capital to cover individual risk types of risk and total internal capital;
- determining threshold values for capital adequacy measures;
- forecasting, monitoring and reporting the level and structure of own funds;
- managing the structure of the balance sheet to optimize the quality of the Group’s own funds;
- emergency measures with regard to capital;
- stress-tests;
- forecasting requirements for own funds;
- assessing the profitability of individual business areas and customer segments.
Capital adequacy measures include:
- total capital ratio (TCR);
- the ratio of own funds to internal capital;
- Tier 1 core capital ratio (CET1);
- Tier 1 capital ratio (T1);
- leverage ratio;
- MREL ratio – TREA;
- MREL ratio – TEM.
The objective of monitoring the level of capital adequacy measures is to determine the degree of compliance with supervisory requirements and to identify cases which require emergency measures to be implemented or the preparation of a capital protection plan.
Major regulations applicable in the capital adequacy assessment process include:
- the Polish Banking Law;
- the CRR Regulation;
- the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial system (as amended),
- the Regulation of the Minister of finance, funds and regional policy of 8 June 2021 on the risk management and internal control systems and remuneration policy in banks (effective from 11 June 2021);
- the Regulation of the Minister of finance, funds and regional policy of 27 July 2021 on the detailed method of estimating internal capital and conducting reviews of estimation strategies and procedures and maintaining a permanent level of internal capital by banks (effective from 4 August 2021);
- the Act of 10 June 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution (as amended).
| Minimum levels of the capital ratios maintained by the Group in accordance with Article 92 of the CRR are as follows: | ||
|
8% | |
|
6% | |
|
4.5% | |
| Obligation to maintain a combined buffer above the minimum amounts specified in Art. 92 of the CRR, representing the sum of the applicable buffers | 31.12.2023 | 31.12.2022 |
| Total: | 4.54% | 4.52% |
|
2.5% | 2.5% |
|
0.04% | 0.02% |
|
2%1 | 2%1 |
The combined minimum capital adequacy ratio together with the combined buffer requirement at the end of 2023 was 12.54%, compared to 12.52% at the end of 2022.
On 14 November 2023, the Bank received a letter from the Bank Guarantee Fund (BGF) on the minimum requirement for own funds and eligible liabilities (MREL). The BGF set the target MREL requirement for the Bank based on the consolidated data at the total risk exposure amount (TREA) and the total exposure measure (TEM), which must be fulfilled at the end of 2023. The assumed TREA and TEM levels have been adjusted to exclude PKO Bank Hipoteczny S.A. and Kredobank S.A. from consolidation. At the same time, the BGF exempted PKO Bank Hipoteczny S.A. from the obligation to maintain a minimum level of own funds and eligible liabilities.
The required levels are specified in the table below:
| in % | 31.12.2023 |
|---|---|
| MREL (TREA) | 15.36 |
| MREL (TEM) | 5.91 |
As at 31 December 2023, the MREL ratio in relation to the total „TREA” risk exposure amounted to 16.38% (in accordance with the Act on macro-prudential supervision, Common Equity Tier 1 instruments held by an entity for the purposes of the combined buffer requirement cannot be used to meet this requirement; without this restriction, the ratio was 21.18%). With regard to the total exposure measure „TEM”, the MREL ratio was 9.25%.
The impact of IFRS 9 on own funds and capital adequacy measures is governed by Regulation 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic (Regulation 2020/873). This provision allows to mitigate the impact on the write-offs recorded as of 1 January 2020 on Tier 1 capital.
Such a solution can be applied up to 2024, inclusive, whereas the adjustment ratio allocated to this value decreases gradually. The Bank’s Group decided that in the light of Art. 473a (7a) of the CRR implemented by the aforesaid Regulation, it would apply an option according to which the adjustment mitigating the impact of the introduction of IFRS 9 on own funds would receive a risk weight equal to 100% and the resulting value would be added to the total exposure.
According to Article 468 of the CRR (as amended by the aforementioned Regulation 2020/873), banks were allowed to apply until the end of 2022 the provisional treatment of unrealized gains and losses measured at fair value through other comprehensive income in connection with the COVID-19 pandemic. This approach enabled excluding from the calculation of the Group’s common equity position the portion of the unrealized gains and losses accumulated from 31 December 2019 included in the balance sheet under “changes in fair value of debt instruments measured at fair value through OCI”, corresponding to exposures to central governments, regional governments or local authorities, and to public sector entities, excluding those financial assets that are impaired due to credit risk.
The Bank’s Group has decided to apply the above provisional treatment from December 2021 data onwards and has notified the Polish Financial Supervision Authority about its decision.
In addition, from the November 2021 data onwards, the Group has decided to avail itself of the option indicated in the European Banking Authority’s guidance set out in the Single Rulebook QA No. 2015_1887. According to the EBA’s response, deferred tax assets related to gains or losses on cash flow hedges (which are not included in own funds according to Article 33 of the CRR) do not have to be included either in deferred tax assets included in deductions from own funds according to Articles 36 and 48 of the CRR.
Own funds for capital adequacy purposes
In 2023 and 2022, the Group’s capital adequacy level remained at a safe level, well above the supervisory limits. The minimum capital requirements were satisfied over the entire period.
Requirements relating to own funds (Pillar I)
The Group calculates own funds requirements for the following types of risk:
| CREDIT RISK | under the standard approach, using the following formulas with regard to:
BALANCE SHEET EXPOSURES – the product of a carrying amount (accounting for adjustments for specific credit risk), the risk weight of the exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral), OFF-BALANCE SHEET LIABILITIES GRANTED – the product of the amount of a liability (accounting for adjustments for specific credit risk), the risk weight of the product, the risk weight of off-balance sheet exposure calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8% (accounting for the recognizable collateral), OFF-BALANCE SHEET TRANSACTIONS (DERIVATIVE INSTRUMENTS) – the product of the risk weight of an off-balance sheet transaction calculated according to the standardized approach in calculating the own funds requirement with regard to credit risk and 8%. |
| OPERATIONAL RISK |
|
| MARKET RISK |
|
| OTHER RISK |
|
| Capital adequacy | 31.12.2023 | 31.12.2022 (restated)4 |
31.12.2022 (published) |
| Equity | 45,227 | 35,707 | 35,435 |
| capital: share capital, supplementary capital, other reserves, and general risk reserve | 32,318 | 32,496 | 32,496 |
| retained earnings | 10,810 | 8,920 | 8,651 |
| net profit or loss for the year | 5,502 | 3,312 | 3,333 |
| other comprehensive income and non-controlling interests | (3,403) | (9,021) | (9,045) |
| Exclusions from equity: | 3,534 | (1,987) | (2,154) |
| deconsolidation – adjustments due to prudential consolidation | (109) | (107) | (224) |
| net profit or loss for the year | 5,505 | 3,340 | 3,290 |
| unappropriated profit for the prior year | – | ||
| cash flow hedges | (1,862) | (5,220) | (5,220) |
| Other fund reductions: | 3,036 | 3,209 | 3,404 |
| goodwill | 961 | 961 | 961 |
| other intangible assets | 1,587 | 1,508 | 1,508 |
| securitization items | – | 12 | 12 |
| additional asset adjustments (AVA, DVA, NPE, exceedance of the thresholds set out in Article 48 CRR)1 | 488 | 728 | 923 |
| Provisional treatment of unrealized gains and losses on securities measured at fair value through OCI according to Art. 468 of the CRR | – | 1,357 | 1,357 |
| Temporary reversal of IFRS 9 impact | 1,373 | 2,075 | 1,651 |
| Current period profit/loss, included by permission from the PFSA/after approval of profit distribution by AGM | 1,697 | 3,258 | 946 |
| Tier 1 | 41,727 | 41,175 | 38,139 |
| Tier 2 (subordinated debt) | 2,080 | 2,584 | 2,584 |
| Own funds | 43,807 | 43,759 | 40,723 |
| Requirements for own funds | 18,787 | 18,359 | 18,328 |
| Credit risk | 16,470 | 15,625 | 15,594 |
| Operational risk2 | 2,163 | 2,358 | 2,358 |
| Market risk3 | 125 | 339 | 339 |
| Credit valuation adjustment risk | 29 | 37 | 37 |
| Settlement/delivery risk | – | ||
| Total capital ratio | 18.65 | 19.07 | 17.78 |
| Tier 1 capital ratio | 17.77 | 17.94 | 16.65 |
2 In 2023, there was a decrease in the own funds requirement for operational risk mainly due to the implementation of individual scaling of the legal risk costs of mortgage loans in CHF in the AMA approach in accordance with the PFSA decision obtained on 22 February 2023. The purpose of the change is to ensure that the historically incurred costs of the portfolio of mortgage loans in CHF are taken into account in the AMA model at an appropriate scale in relation to the risks that the Group may potentially still incur as a result.
3 The decrease in the value of the market risk-related requirement as at the end of 2023 relative to 31 December 2022 was mainly due to a decrease in the currency risk-related requirement, which did not occur at the end of 2023 compared to PLN 135 million at the end of December 2022.
4 Figures as at 31 December 2022 have been restated due to the implementation of IFRS 17 “Insurance Contracts” (see Note “IFRS 17 Insurance Contracts”) and in connection with the retroactive accounting of profit for 2022.
Pursuant to Art. 26 (2) of CRR, an institution may include interim or year-end profits in CET1 after a formal decision was taken confirming the final profit or loss of the institution for the year, or before it has taken the formal decision, only with the competent authority’s prior permission.
In line with the European Banking Authority’s (EBA) guidance in the single rulebook QA setting out the EBA’s position on when to recognise annual and interim profits in capital adequacy data (QA 2018_3822, QA 2018_4085 and QA 2013_208), from the point at which the institution formally meets the criteria to include the profit for the period in Tier 1 capital, it is considered that the profit should be included on a retrospective date (the date of the profit rather than the date the criterion is met) and an adjustment to own funds should be made to the date to which the profit relates.
As the Bank’s Annual General Meeting approved the distribution of the Bank’s profit on 21 June 2023 and the formal distribution of profits of some of the other prudentially consolidated entities of the Bank Group was completed by the end of June 2023, the above guidelines apply to the Group’s own funds for the figures as at 31 December 2022.
If the transitional arrangements for the partial reversal of the impact of IFRS 9 under Article 473a of the CRR had not been applied, the Group’s Tier 1 capital would have amounted to PLN 40,354 million, the total capital would have amounted to PLN 42,434 million, the Tier 1 capital ratio would have been 17.28%, the total capital ratio would have been 18.18% and the leverage ratio 7.57%.
According to CRR Regulation, prudential consolidation is used for capital adequacy purposes, which unlike consolidation in accordance with IFRS, covers only subsidiaries that meet the definition of an institution, financial institution or any ancillary services enterprise. In addition, pursuant to Article 19 (1) of the CRR, prudential consolidation may exclude entities whose total value of assets and off-balance sheet items is less than EUR 10 million.
Other subsidiaries, not consolidated under the acquisition accounting method for the purposes of prudential consolidation are measured using the equity method.
For the purposes of prudential consolidation, the Group consists of following entities:
- PKO Bank Polski S.A.
- PKO Leasing S.A. Group;
- PKO BP BANKOWY PTE S.A.
- PKO Towarzystwo Funduszy Inwestycyjnych S.A.
- KREDOBANK S.A. Group;
- PKO Finance AB
- PKO BP Finat sp. z o.o.
- PKO Bank Hipoteczny S.A.
- Bankowe Towarzystwo Kapitałowe S.A. Group.
- Non-financial and insurance entities are excluded from the prudential consolidation.
Internal capital (Pillar II)
In 2023, the Group calculated internal capital in accordance with the commonly binding legal regulations:
- the CRR Regulation;
- the Polish Banking Law;
- the Regulation of the Minister of finance, funds and regional policy of 8 June 2021 on the risk management and internal control systems and remuneration policy in banks (effective from 11 June 2021);
- the Regulation of the Minister of finance, funds and regional policy of 27 July 2021 on the detailed method of estimating internal capital and conducting reviews of estimation strategies and procedures and maintaining a permanent level of internal capital by banks (effective from 4 August 2021);
- the Act on macro-prudential supervision;
and the internal regulations of the Bank and the Group.
Internal capital constitutes an estimated amount of capital necessary to cover all material types of risk arising from the Group’s operations. The purpose of estimating the internal capital is to determine own funds at a level ensuring operational safety, taking into account changes in the profile and scale of the activities conducted and adverse stress conditions, and enabling more effective management of the Group aimed at improving the profitability of operations and profitability of the capital invested.
The internal capital for covering significant risk types is determined using the methods specified in the internal regulations.
The ratio of the Group’s own funds to its internal capital remained at a level exceeding both the statutory limit and the Group’s internal limit.
Disclosures (Pillar III)
The Group publishes quarterly information in particular concerning risk management and capital adequacy in accordance with: the CRR Regulation and the executive acts to the CRR, guidelines of the European Banking Authority, including guidelines concerning disclosure requirements pursuant to section eight of the CRR Regulation (“EBA guidelines”), the Act on macro-prudential supervision, the Polish Banking Law Act, Recommendations M, P, R and Z issued by the Polish Financial Supervision Authority as part of the Report, “Capital adequacy and other information to be published by the Powszechna Kasa Oszczędności Bank Polski Spółka Akcyjna Group. The last report was prepared as at 31 December 2023.
Details of the scope of information disclosed, the method of its verification and publication are presented in PKO Bank Polski SA Capital Adequacy Information Policies and other information to be published, which are available on the Bank’s website (www.pkobp.pl).