Note 13 - Capital adequacy

The Ministry of Finance adopted on 22 August 2014 amendments to regulations on capital requirements taking effect on 30 September 2014. The amendments bring Norwegian legislation into line with the EU’s new capital requirements framework (CRR/CRD IV). This framework is for the present not incorporated into the EEA agreement, although its most important provisions have been incorporated in the Financial Institutions Act and the Securities Trading Act. The adjusted legislation entered into force on 1 July 2013, and requires a gradual increase in minimum requirements on Common Equity Tier 1 (CET1) capital in the period to 1 July 2016.

As of 30 September 2014 the capital conservation buffer requirement is 2.5 per cent and the systemic risk requirement is 3 per cent. The systemic risk buffer rose by 1 percentage point as from 1 July 2014. These requirements are additional to the requirement of 4.5 per cent CET1 capital, so that the overall minimum requirement on CET1 capital is 10 per cent. On 30 June 2015 a countercyclical buffer requirement of 1 percentage point will become effective, bringing the overall minimum CET1 requirement to 11 per cent.

Norwegian authorities have chosen to continue the Basel 1 floor as a floor for risk weighted assets.

SpareBank 1 SMN utilises the Internal Rating Based Approach (IRB) for credit risk. Use of IRB imposes wide-ranging requirements on the bank’s organisational set-up, competence, risk models and risk management systems. In June 2013 the bank applied for approval to switch to Advanced IRB for those portfolios currently reported under the IRB Foundation Approach.

The most central changes in connection with the new rules

  • Deductions in own funds will primarily reduce CET1 capital, whereas previously CET1 capital and supplementary capital were reduced equally on a 50-50 basis
  • Changes in deductions in respect of assets in other financial institutions. A distinction is drawn between significant and non-significant assets, and deductions are to be made in the same asset class as that to which the owned asset belongs. The limit for deductions in respect of assets in other financial institutions is raised from 2 per cent of the other institution’s own funds to 10 per cent ownership. The deductions are limited to 10 per cent of own CET1 capital, and all assets below 10 per cent are part of risk weighted assets. The previous capital adequacy reserve no longer applies
  • Deferred tax benefit related to temporary differences within 10 per cent own CET1 capital will now not be deductible, but will instead be risk weighted at 250 per cent. Deferred tax benefit above 10 per cent will be deductible from CET1 capital
  • The sum of deferred tax benefit and significant assets that are deducted from CET1 capital cannot constitute more than 17.65 per cent of own CET1 capital
  • Introduction of Additional Value Adjustments (AVA deductions) – requirement for prudent valuation
  • Introduction of Credit Value Adjustments (CVA) for derivative positions
  • Changes in rules governing risk weighting of exposures to covered bonds and rated institutions, will now be risk weighted based on the institution’s own rating

In connection with changed requirements on conditions governing hybrid capital, hybrid capital not meeting the new requirements over time will not be eligible as other core capital. The bonds will subject to a stepwise reduction of 30 per cent in 2015 and 10 per cent thereafter. As at 30 September 2014 SpareBank 1 SMN held hybrid capital worth NOK 450m that will be subject to stepwise reduction. Finanstilsynet may require the hybrid capital to be written down in proportion to equity capital if the bank’s CET1 capital ratio falls below 5.125 per cent.

As from the second quarter 2013 the measurement of operational risk switched from the Basic Indicator Approach to the Standardised Approach. At group level the Basic Indicator Approach still applies to subsidiaries.

Capital adequacy figures are stated in accordance with the new reporting requirements as from 30 September2014. Comparatives have not been restated.

 

Parent Bank   Group
31 Dec 2013 30 Sep 2013 30 Sep 2014 (NOKm) 30 Sep 2014 30 Sep 2013 31 Dec 2013
2,597   2,597 2,597 Equity capital certificates   2,597 2,597   2,597
  -0 -0   -0  - Own holding of ECCs -0   -0 -0
  895 895 895 Premium fund 895 895 895
2,496   1,889 2,496 Dividend equalisation fund   2,496 1,889   2,496
3,276   2,944 3,276 Savings bank's reserve   3,276 2,944   3,276
  227 - - Recommended dividends - - 227
  124 - - Provision for gifts - - 124
  195 106 195 Unrealised gains reserve 206 123 206
  - 38   -65 Other equity and minority interest   1,282 1,312   1,354
  - - - Minority interests 69 65   67
  -   1,089 1,194 Net profit   1,407 1,038 -
9,811   9,557 10,588 Total book equity 12,228 10,863   11,242
-447   -447   -447 Deferred taxes, goodwill and other intangible assets   -565   -589   -582
  - - - Part of reserve for unrealised gains, associated companies 131 57   98
-352 - - Deduction for allocated dividends and gifts - -   -361
-401   -399 - 50 % deduction for subordinated capital in other financial institutions -   -90   -106
-240   -234 - 50 % deduction for expected losses on IRB, net of write-downs -   -210   -214
  - - - 50 % capital adequacy reserve -   -554   -595
  - - - Minority interests recognised in other equity capital   -69 - -
  - - - Minority interests eligible for inclusion in CET1 capital 34 - -
-109   -109   -28 Surplus financing of pension obligations   -21   -107   -107
  - -1,089   -1,194 Net profit -1,407   -1,038 -
  - 795 872 Year-to-date profit included in core capital (73 per cent pre tax)   1,027 758 -
  - -   -27 Value adjustments due to requirements for prudent valuation   -36 - -
  - -   -300 Positive value of adjusted expected loss under IRB Approach   -367 - -
  - - - Direct, indirect and synthetic investments in financial sector companies    -349 - -
8,262   8,075 9,465 Total common equity Tier one  10,605 9,089   9,374
1,431   1,431 1,440 Hybrid capital, core capital   1,707 1,619   1,615
  - - - Direct, indirect and synthetic investments in financial sector companies  -9 - -
9,693   9,506 10,905 Total core capital 12,302 10,707   10,989
             
      Supplementary capital in excess of core capital      
  - - - Fund bonds, hybrid capital in excess of 15 per cent - 28   31
1,873   1,910 1,875 Subordinated capital   2,566 2,173   2,313
-401   -399 - 50 % deduction for subordinated capital in other financial institutions -   -90   -106
-240   -234 - 50 % deduction for expected losses on IRB, net of write-downs -   -210   -214
  - - - 50 % capital adequacy reserve -   -554   -595
  - -   -43 Direct, indirect and synthetic investments in financial sector companies    -43 - -
1,231   1,277 1,833 Total supplementary capital   2,523 1,346   1,428
  10,924 10,783 12,738 Net subordinated capital 14,826 12,053   12,417
             
             
      Minimum requirements subordinated capital      
1,573   1,592 1,482 Involvement with spesialised enterprises   1,732 1,592   1,573
1,478   1,442 1,328 Other corporations exposure   1,375 1,443   1,479
  363 336 790 Mass market exposure, property   1,233 591 628
  70 70 138 Mass market exposure, SMBs 147 76   74
  28 31 40 Other retail exposure 42 35   33
1,157   1,076 1,105 Equity investments   0 - -
4,669   4,548 4,884 Total credit risk IRB   4,529 3,736   3,787
  224 225 440 Debt risk 440 225 224
8 11 - Equity risk   2 13   10
  - - - Currency risk - - -
  297 297 292 Operational risk 416 398 398
  560 590 778 Exposures calculated using the standardised approach   1,860 2,135   2,151
-67   -67 - Deductions -   -110   -119
  - - 31 Credit value adjustment risk (CVA) 116 - -
  - - - Transitional arrangements - 403 316
5,690   5,604 6,425 Minimum requirements subordinated capitl   7,364 6,802   6,767
  71,130 70,051 80,315 Risk weigheted assets (RWA) 92,045 85,019   84,591
    3,614 Minimum requirement on CET1 capital, 4.5 per cent   4,142    
      Capital Buffers      
    2,008 Capital conservation buffer, 2,5 per cent   2,301    
    2,409 Systemic rick buffer, 3.0 per cent   2,761    
    4,417 Total buffer requirements on CET1 capital   5,062    
    1,434 Available CET1 capital after buffer requirements   1,400    
      Capital adequacy      
11.6 % 11.5 % 11.8 % Common equity Tier one ratio 11.5 % 10.7 % 11.1 %
13.6 % 13.6 % 13.6 % Core capital ratio 13.4 % 12.6 % 13.0 %
15.4 % 15.4 % 15.9 % Capital adequacy ratio 16.1 % 14.2 % 14.7 %

 

 

© SpareBank 1 SMN