49. Capital adequacy

One of the main tasks of the balance sheet management is to ensure an appropriate level of capital. Within the framework of the capital management policy of mBank Group, mBank prepares the guidelines for the most effective planning and use of capital basis which:

  • are compliant with external and internal regulations in force,
  • guarantee a continuity of financial targets achievement, which render an appropriate rate of return for shareholders,
  • ensure the maintenance of a strong capital basis being a fundamental support for business development.

The capital management policy in mBank Group is based on:

  • maintenance of an optimal level and structure of own funds with the application of available methods and means, like among others retention of net profit, subordinated loan or issue of shares,
  • effective use of existing capital, among others through application of a set of measures of effective use of the capital, limitation of activities that do not provide an expected rate of return and development of products with lower capital absorption.

Effective use of capital is an integral part of the capital management policy oriented at reaching an optimal rate of return on capital and as a result forming a stable fundament of reinforcement of the capital basis in future periods. This enables to maintain the Common Equity Tier 1 capital ratio (calculated as a quotient of Common Equity Tier 1 capital to the total risk exposure amount) and the total capital ratio (calculated as a quotient of own funds to the total risk exposure amount) at least on the level required by the supervision authority.

The strategic goals of mBank Group are aimed at maintaining the consolidated total capital ratio as well as the consolidated Common Equity Tier 1 capital ratio above the level required by the supervision authority. It allows to maintain safe business development meeting the supervisory requirements in the long perspective.

Capital ratios / Capital adequacy ratio

Till the 31 December 2013 the calculation of the consolidated capital adequacy ratio, the consolidated own funds and the consolidated total capital requirement in mBank Group was made according to the following regulations:

  • Banking Act of 29 August 1997 (Dz.U. from the year 2002 No 72, item 665) with further amendments,
  • Resolution No. 325/2011 of the KNF of 20 December 2011 (Dz. Urz. KNF from 2011 No 13 item 49),
  • Resolution No. 76/2010 of the KNF of 10 March 2010 (Dz. Urz. KNF from 2010 No 2 item 11) with further amendments,
  • Resolution No. 258/2011 of the KNF of 4 October 2011 (Dz. Urz. KNF from 2011 No 11 item 42),
  • Resolution No. 208/2011 of the KNF of 22 August 2011 (Dz. Urz. KNF from 2011 No 9 item 34) with further amendments,
  • Resolution No. 384/2008 of the KNF of 17 December 2008 (Dz. Urz. KNF from 2008 No 8 item 38) with further amendments,
  • Resolution No. 387/2008 of the KNF of 17 December 2008 (Dz. Urz. KNF from 2008 No 8 item 41).

Beginning from 1 January 2014 the calculation of the consolidated capital ratios, the consolidated own funds and the consolidated total risk exposure amount in mBank Group is made according to Regulation (UE) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (hereinafter referred to as CRR Regulation) and other Commission (UE) implementing regulations to the CRR Regulation.

Entities included in prudential consolidation according to the rules of the CRR Regulation are taken into account in the process of calculation own funds and own funds requirements.

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

  • implementation of changes in calculation process of own funds and own funds requirements as a result of entry into force the CRR Regulation,
  • including in Tier 2 capital an amount of PLN 500 million from the subordinated bonds issue on the basis of the KNF consent from 14 February 2014,
  • including in Common Equity Tier 1 capital the net profit of mBank Group for the year 2013, reduced by every foreseeable charges, as a result of decision of the General Meeting regarding net profit division for the year 2013,
  • including in Common Equity Tier 1 capital the verified net profit of mBank Group for the 1st half of 2014, reduced by every foreseeable charges, on the basis of the KNF permission from 9 October 2014,
  • expansion of the application of the advanced internal rating based approach (AIRB approach) to calculation of own funds requirement for credit and counterparty credit risk resulting from supervisory AIRB decisions obtained in 2014,
  • expansion of mBank Group business activity.

Detailed information on calculation of the consolidated total capital ratio, the consolidated Common Equity Tier 1 ratio, the consolidated own funds and the consolidated total risk exposure amount of mBank Group were described in document Disclosures regarding capital adequacy of the mBank Group as at 31 December 2014, published on the mBank website.

The consolidated total capital ratio of mBank Group as of 31 December 2014 amounted to 14.66%. Additionally the consolidated Common Equity Tier 1 capital ratio of mBank Group amounted to 12.24%.

Own Funds

In accordance with the CRR Regulation, consolidated own funds consist of consolidated Common Equity Tier 1 capital, consolidated Additional Tier 1 capital and consolidated Tier 2 capital, however items that could be treated as Additional Tier I capital are not identified in the mBank Group.

Common Equity Tier 1 capital contains:

  • capital instruments and the related share premium accounts,
  • retained earnings,
  • accumulated other comprehensive income,
  • funds for general banking risk,
  • independently reviewed interim profits net of any foreseeable charge or dividend,
  • items deducted from a Common Equity Tier 1 capital (including: additional value adjustments, intangible assets, fair value gains and losses arising from the institution's own credit risk related to derivative liabilities, negative amount resulting from the calculation of expected loss amounts, direct and indirect holdings by an institution of own CET1 instruments, net impairment losses, regulatory adjustments relating to unrealised gains and losses).

Tier 2 capital contains:

  • capital instruments and the related share premium accounts (including subordinated liabilities),
  • amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from Tier 2 capital (including liabilities resulting from securities of unspecified maturity).

The consolidated own funds of mBank Group as of 31 December 2014 amounted to PLN 9 750 540 thousand.

Total risk exposure amount

The total risk exposure amount contains:

  • risk weighted exposure amounts for credit risk, counterparty credit risk, dilution risk and free deliveries,
  • risk exposure amount for market risk, including position risk, foreign exchange risk and commodities risk,
  • risk exposure amount for operational risk,
  • risk exposure amount for credit valuation adjustment,
  • other risk exposure amounts, including supervisory floor and regulatory floor.

In 2014 mBank Group obtained consent to the application of AIRB approach to the calculation of own funds requirement relating to credit risk for further credit portfolios and as a result the coverage of the credit portfolio by AIRB approach increased to 82% till the end of 2014.

As at 31 December 2014 the AIRB approach was applied to the calculation of own funds requirements relating to credit and counterparty credit risk for the following portfolios:

  • mBank corporate portfolio,
  • mBank retail mortgage loan portfolio,
  • mBank real estate-related specialised lending exposures (IRB slotting approach),
  • mBank retail non-mortgage exposures (conditional consent),
  • mLeasing S.A. credit exposure (conditional consent),
  • mBank Hipoteczny SA specialized lending exposures (IRB slotting approach).

In case of portfolios with conditional consent to the application of AIRB approach, mBank Group applies supervisory floor, which means that where the own funds requirement for credit risk calculated under AIRB approach is lower than the own funds requirement for credit risk calculated under standardised approach, it is necessary to supplement it up to the level of the own funds requirement for credit risk calculated under standardised approach.

With regard to conditional consent to the application of AIRB approach to the calculation of own funds requirement for credit risk for mLeasing credit exposures, high significance conditions specified by the bank supervision have been met, awaiting formal confirmation by the bank supervision. In case of mBank retail non-mortgage exposures Bank is obliged to include the supervisory floor in its calculations till high significance conditions are met, that is before 31 October 2015. Fulfilment of the conditions has to be confirmed by the bank supervision.

Moreover, mBank Group applied regulatory floor in calculation of consolidated total risk exposure amount and capital ratios as at 31 December 2014 in accordance with provisions of the CRR Regulation. It means that when total risk exposure amount (AIRB driven) is lower than 80% of the comparable total risk exposure amount (standardized driven), the Bank includes the difference in the calculation.

The total risk exposure amount of mBank Group as at 31 December 2014 amounted to PLN 66 499 897 thousand, including PLN 56 601 711 thousand of risk exposure amount for credit risk.

Internal capital

The ICAAP process (Internal Capital Adequacy Assessment Process) was prepared and implemented in mBank Group to adjust the own funds to the level and type of business risk.

The internal capital is the amount of capital estimated for mBank Group to cover all material risks identified in the activity of mBank Group. The internal capital is the total sum of the economic capital to cover the kinds of risk included in the process of the economic capital calculation and the capital required to cover other kinds of risk (including difficult to measure kinds of risk).

Due to the fact that both, the total capital requirement of mBank Group calculated according to the CRR Regulation and the internal capital estimated for mBank Group according to the Resolution No. 258/2011 are lower than consolidated own funds, the consolidated own funds as at 31 December 2014 were maintained on the level consistent with the requirements of the CRR Regulation.
The internal capital of mBank Group as at 31 December 2014 amounted to PLN 4 353 360 thousand.

 

 
Capital adequacy 31.12.2014 31.12.2013
Common Equity Tier 1 Capital 8 142 307 8 358 690
Total Own Funds 9 750 540 11 399 535
Risk weighted exposure amounts for credit, counterparty credit, dilution risk and free deliveries: 56 601 709 51 714 063
 - under standardised approach 12 987 808 21 457 712
 - under AIRB approach 43 613 901 30 256 351
Settlement / delivery risk exposure amount - -
Total risk exposure amount for position, foreign exchange and commodities risks 1 002 193 856 387
Total risk exposure amount for operational risks 6 413 869 6 055 263
Additional risk exposure amount due to fixed overheads - -
Total risk exposure amount for credit valuation adjustments 266 810 -
Total risk exposure amount for large exposures in the trading book - -
Other risk exposure amounts 2 215 316 196 612
Total risk exposure amount 66 499 897 58 822 325
Comon Equity Tier 1 capital ratio 12,24% 14,21%
Total capital ratio 14,66% 19,38%
Internal capital 4 353 360 4 111 126
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OWN FUNDS 31.12.2014 31.12.2013
Own funds 9 750 540 11 399 535
TIER 1 CAPITAL 8 142 307 8 358 690
Common Equity Tier 1 Capital 8 142 307 8 358 690
Capital instruments eligible as CET1 Capital 3 522 891 3 512 338
Paid up capital instruments 168 840 168 696
Share premium 3 355 063 3 343 642
(-) Own CET1 instruments (1 012) -
Retained earnings 303 925 268 403
Previous years retained earnings 79 623 -
Profit or loss eligible 224 302 268 403
Accumulated other comprehensive income 549 523 -
Other reserves 4 391 421 4 202 609
Funds for general banking risk 1 041 953 989 953
Adjustments to CET1 due to prudential filters (124 299) (26 487)
Fair value gains and losses arising from the institution's own credit risk related to
derivative liabilities
(3 777) -
(-) Value adjustments due to the requirements for prudent valuation (120 522) (26 487)
(-) Intangible assets (424 832) (455 345)
(-) Other intangible assets gross amount (456 522) (455 345)
Deferred tax liabilities associated to other intangible assets 31 690 -
(-) IRB shortfall of credit risk adjustments to expected losses (288 660) (115 705)
Other transitional adjustments to CET1 Capital (559 059) -
CET1 capital elements or deductions - other (270 556) (17 076)
Additional Tier 1 capital - -
TIER 2 CAPITAL 1 608 233 3 040 845
Capital instruments and subordinated loans eligible as T2 capital 722 058 2 860 834
Tier 2 capital elements or deductions - other - 180 011
Transitional adjustments due to grandfathered T2 capital instruments and subordinated loans 886 175 -
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Credit risk 31.12.2014 31.12.2013
Risk weighted exposure amounts for credit risk, counterparty credit risk, dilution risk and free deliveries 56 601 709 51 714 063
Standardised approach 12 987 808 21 457 712
SA exposure classes excluding securitisation positionsSecuritisation 12 987 808 21 457 712
Central governments or central banks 53 236 71 473
Regional governments or local authorities 387 324 437 107
Public sector entities 39 287 31 425
Multilateral Development Banks - -
International Organisations - -
Institutions 1 595 957 1 136 852
Corporates 5 118 708 7 090 542
Retail 1 080 009 7 274 961
Secured by mortgages on immovable property 3 555 432 4 286 870
Exposures in default 444 814 838 460
Items associated with particular high risk 15 695 55 285
Covered bonds - -
Claims on institutions and corporates with a short-term credit assessment - -
Collective investments undertakings (CIU) - -
Equity 654 245 -
Other items 43 101 234 737
AIRB approach 43 613 901 30 256 351
AIRB approaches when neither own estimates of LGD nor Conversion Factors are used - -
AIRB approaches when own estimates of LGD and/or Conversion Factors are used 40 679 145 27 748 059
Central governments and central banks - -
Institutions - -
Corporates - SME 4 325 250 8 065 590
Corporates - Specialised Lending 4 998 130 2 338 277
Corporates - Other 15 020 128 7 932 618
Retail - Secured by real estate SME - -
Retail - Secured by real estate non-SME 9 031 991 9 411 574
Retail - Qualifying revolving - -
Retail - Other SME 2 148 907 -
Retail - Other non-SME 5 154 740 -
Equity AIRB - -
Securitisation positions IRB - -
Other non credit-obligation assets 2 934 755 2 508 292
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