12.3. Capital adequacy

Maintaining an adequate level of capital is one of the main tasks of managing the balance sheet of a bank. The Management Board of mBank ensures consistency of the capital and risk management process by means of a system of strategies, policies, procedures and limits for the management of particular risks which constitute the ICAAP architecture. Furthermore, in line with the Capital Management Policy applicable at mBank, mBank maintains an optimum level and structure of own funds, guaranteeing maintenance of the capital adequacy ratio at a level higher than the statutory minimum, at the same time covering all significant risks identified in  the Bank’s operations. mBank’s capital targets are being set based on the regulatory requirements and simulated capital needs to cover unfavourable changes in the external environment and within the Bank.

The Capital Management Policy at mBank is based on two main pillars:

  • Maintenance of an optimal level and structure of own funds, with the use of available methods
    and means (retained net profit, issue of shares, subordinated loans, etc.).
  • Effective use of the existing capital by applying a system of capital utilisation measures resulting in reduction of the activity that is not generating the expected return and development of products with lower capital absorption.

The capital ratios of mBank Group in H1 2014 were driven by the following factors:

  • addition of PLN 500 million to own funds: it is the Group’s subordinated debt resulting from the issue of subordinated bonds (nominal value of PLN 500 million, maturity in 2023) approved by the PFSA on February 14, 2014;
  • increase in the Group’s consolidated own funds as a result of a decision of the General Meeting on the division of 2013 net profit;
  • expansion of the application of the internal rating-based method to cover the calculation of the credit risk and counterparty credit risk requirement following the approval of the PFSA and BaFin in H1 2014:
    • exposures of the subsidiary mLeasing to companies and retail exposures;
    • exposures of the Bank under specialised lending in the scope of income-generating real properties (IRB slotting approach);
    • exposures of mBank Hipoteczny under specialised lending in the scope of income-generating real properties for additional sub-portfolios (IRB slotting approach);
    • implementation of modifications to the calculation of capital requirements and the calculation of own funds of the Group following the entry into force of the provisions of Regulation No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, as amended (CRR).

In H2 2014 the capital ratios of mBank Group were driven by the following factors:

  • increase in the Group’s consolidated own funds following the approval of the PFSA for the Bank’s application for addition of a part of the 2014 net profit amounting to PLN 224.3 million;
  • expansion of the application of the internal rating-based method to cover the calculation of the credit risk and counterparty credit risk requirement on account of retail non-mortgage-backed exposures following the approval of the PFSA and BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht, Federal Financial Supervisory Authority) in H2 2014.

Additionally, in the capital adequacy assessment process the following factors are taken into consideration:

Capital buffers

In mBank, risk appetite covers all significant risks and key risk concentrations embedded in its business strategy by setting appropriate capital buffers for risk resulting from potential materialization of selected risk factors related to existing portfolios and planned business as well as addresses expected new regulatory requirements and potential negative macroeconomic changes.

Stress tests

The integrated stress tests are conducted assuming scenario of unfavourable economic conditions that may adversely affect the Bank's financial situation in at least a full 2 year time horizon (for liquidity risk in 1 year horizon). The risk scenario, ie. the most plausible (in at least a full 2 year time horizon) scenario of negative deviations from the base scenario, expressed in terms of macroeconomic and financial ratios is common for all risk types and is aligned with the corresponding scenario accepted at the consolidating entity group level.

Additionally, once a year, the Bank carries out supplementary stress tests using much more severe risk scenarios and/or events. The Group and the Bank carries out so called reverse stress tests, the goal of which is to identify events potentially leading to unviability of the Group and the Bank.

The Group and the Bank take part in regulatory stress tests conducted annually by the PFSA, in order to determine the impact of assumed macroeconomic stress scenarios on the Group’s balance sheet and P&L as well as on external supervisory norms.

Extended information on the rules of determining risk appetite taking into consideration capital buffers and stress tests is included in the IFRS Consolidated Financial Statements 2014 of mBank S.A. Group.