Integrated Report 2021

Own funds and capital ratios

The calculation of the capital adequacy of the Bank and the Group as at 31 December 2021 has been performed applying the provisions of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013. (CRR) on prudential requirements for credit institutions and investment firms, as amended by Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019.(CRR2) in relation to leverage ratio, net stable funding ratio, own funds and minimum eligible liabilities requirements, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements.

On the 12th of December 2017, the European Parliament and the Council of the EU adopted Regulation No 2017/2395 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for treating as large exposures certain exposures to public sector entities denominated in the domestic currency of any Member State. This Regulation entered into force on the day following its publication in the Official Journal of the European Union and applies from 1 January 2018. The European Parliament and the Council (EU) recognized that the application of IFRS 9 could lead to a sudden increase in the allowance for expected credit losses and, consequently, a decrease in Common Equity Tier 1 capital.

The Group, after analyzing the requirements of Regulation No. 2017/2395, decided to apply the transitional provisions provided by this Regulation, which means that for the purposes of assessing the capital adequacy of the Bank and the Group, the full impact of the implementation of IFRS 9 will not be taken into account. As a result of adjusting the calculation of the regulatory capital requirements, it was estimated that taking into account the full impact of the implementation of IFRS 9 on the Bank’s total capital ratio would reduce its value by 25 basis points as estimated at the date of implementation of IFRS 9.

On 27 June 2020, Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020, amending Regulations (EU) No 272/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic, entered into force, allowing, inter alia, a reduction in risk weights for a portion of SME loans, a temporary partial exclusion from the calculation of Common Equity Tier 1 items of the amount of unrealised gains and losses measured at fair value through other comprehensive income in relation to the COVID-19 pandemic.

As of December 31, 2021, the adjustment related to the temporary partial exclusion from the calculation of Common Equity Tier 1 capital items of the amount of unrealized gains and losses measured at fair value through other comprehensive income in connection with the COVID-19 pandemic was PLN 367,167 thousand.

On 23 December 2020, Commission Delegated Regulation (EU) 2020/2176 of 12 November 2020, amending Delegated Regulations (EU) No 241/2014 with regard to the deduction of software assets from Common Equity Tier 1 items, entered into force.

As at 31 December 2021, the adjustment in Common Equity Tier 1 capital related to other intangible assets amounted to PLN 367,295 thousand.

Pursuant to the Resolution of the Annual General Meeting of the Bank dated 24 March 2021, the entire profit of the Bank for 2020, in the amount of PLN 731,060 thousand, was allocated to reserve capital.

On 28 December 2020, the Bank received the decision of the Polish Financial Supervision Authority to approve the inclusion of subordinated loan in the amount of PLN 2,300,000,000 (two billion three hundred million) as an instrument in the Bank’s Tier II capital. The subordinated loan agreement was signed by the Bank with BNP Paribas SA on 7 December 2020 to meet the minimum requirement of the level of own funds and eligible liabilities (MREL).

The Bank’s total capital ratio at December 31, 2021 was 17.77%, a decrease of 1.69 p.p. compared to December 2020. The Bank’s Common Equity Tier 1 (CET I) capital ratio and Tier 1 capital ratio at December 31, 2021 were identical at 12.96% (decrease by 1.20 p.p. from year-end 2020).

Total own funds at 31 December 2021 decreased by PLN 260,023 thousand compared to 31 December 2020.

Total risk exposure as at 31 December 2021 amounted to PLN 87,410,438 thousand and increased by PLN 6,264,632 thousand compared to 31 December 2020.

in PLN’000 31.12.2021 31.12.2020 change
PLN’000
change
%
Tier I capital
– share capital 147,519 147,419 100 0.1%
– supplementary capital 7,259,316 7,259,316 0 0.0%
– reserve capital 4 120,622 3,425,961 694,661 20.3%
– funds for general banking risk 627,154 627,154 0 0.0%
– intangible assets (376,874) (422,569) 45,696 (10.8%)
– other components of equity included in Tier I capital (447,774) 449,041 (896,815) (199.7%)
Total Tier I capital 11,329,963 11,486,322 (156,359) (1.4%)
Tier II capital
– subordinated liabilities classified as Tier II capital 4,198,911 4,302,575 (103,664) (2.4%)
Total own funds 15,528,874 15,788,897 (260,023) (1.6%)
Risk exposure due to:
– credit risk 77,832,976 71,778,684 6,054,292 8.4%
– market risk 1,345,487 1,265,023 80,464 6.4%
– operational risk 8,202,110 7,994,887 207,223 2.6%
– CVA adjustment 29,865 107,211 (77,346) (72.1%)
Total risk exposure 87,410,438 81,145,805 6,264,633 7.7%
         
Capital adequacy ratios of the Bank 31.12.2021 31.12.2020 change
Total Capital Ratio (TCR) 17.77% 19.46% (1.69 p.p.)
Tier I Capital Ratio 12.96% 14.16% (1.20 p.p.)

Pursuant to the Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management in the financial sector (Journal of Laws 2015, item 1513, as amended), a capital conservation buffer of 2.5% was introduced starting from 1 January 2019.

At the same time, the Ordinance of the Minister of Development and Finance of 1 September 2017 on the systemic risk buffer (Journal of Laws 2017, item 1776) stipulates that a systemic risk buffer of 3% is introduced as of 1 January 2019.

On 19 March 2020, the Regulation of the Minister of Finance (Journal of Laws of 2020, item 473) of 18 March 2020 on the system risk buffer entered into force – reduction of the buffer from 3% to 0%.

The Financial Supervision Commission, in a communication dated 8 November 2021, announced that, based on the provisions of the Act of 5 August 2015 on macroprudential supervision of the financial system and crisis management in the financial system and after taking into account the opinion of the Financial Stability Committee, confirmed the identification of ten banks as other systemically important institutions (O-SIIs).

As a result of the review, the Commission concluded that there were no grounds for revoking or amending the Commission’s decision of 4 October 2016, as amended by the Commission’s decision of 19 December 2017, to impose on the Bank (on a consolidated and individual basis) an Other Systemically Important Institution buffer equivalent to 0.25% of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013.

As a result of the changes described above, the minimum levels of solvency ratios under the law and administrative decisions issued by the FSA as at the reporting date of 31 December 2021 on a separate basis are as follows:

Minimum level of the capital adequacy ratios of the Bank 31.12.2021
Common Equity Tier I (CET I) capital ratio 7.25%
Tier I capital ratio 8.75%
Total capital ratio (TCR) 10.75%

Minimum requirement for own funds and eligible liabilities (MREL)

On 22 November 2021, the Bank received a letter from the Bank Guarantee Fund (hereinafter: BFG) regarding the joint decision of the resolution authorities, i.e. the Single Resolution Board (SRB), the Central Bank of Hungary, Finanstilsynet, the Bank of England and the BFG, on the minimum level of own funds and eligible liabilities (hereinafter: MREL).

The joint decision indicates that the group restructuring plan provides for a single point of entry (SPE) strategy for the mandatory restructuring. The Group’s preferred tool for forced restructuring is the open bank bail-in.

The MREL requirement set at the individual level by the BFG, in consultation with the SRB, for the Bank is:

  • 15.90% of the total risk exposure amount (TREA) calculated in accordance with Article 92(3) and (4) of Regulation (EU) No 575/2013 (hereinafter: MREL-TREA) and
  • 5.91% of the total exposure measure (TEM) calculated in accordance with Article 429 and Article 429a of Regulation (EU) No 575/2013 (hereinafter: MREL-TEM)

The Bank is required to meet the MREL requirement by December 31, 2023.

The BFG, in consultation with the SRB, has set interim targets for the Bank to meet by the end of each calendar year during the period of reaching the MREL target:

  • in relation to TREA are: 11.95% at the end of 2021 and 13.92% at the end of 2022,
  • in relation to TEM are: 3.00% at the end of 2021 and 4.46% at the end of 2022,

The entire MREL requirement should be met in the form of own funds and liabilities meeting the criteria set out in Article 98 of the Bank Guarantee Fund Act, which transposes Article 45f(2) of the BRRD2. According to the decision, the portion of MREL corresponding to the Recapitalization Amount (RCA) will be met in the form of AT1, T2 instruments and other subordinated eligible liabilities acquired directly or indirectly by the parent company.

The Bank meets the defined MREL requirements as of December 31, 2021.

MREL requirements Minimum regulatory levels for the Bank execution
TREA 11.95% 17.91%
TEM 3.00% 11.19%

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