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 31 December 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 31 December 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 September 2014. Comparatives have not been restated.

Parent Bank   Group
31 Dec 2013 31 Dec 2014 (NOKm) 31 Dec 2014 31 Dec 2013
2,597 2,597 Equity capital certificates 2,597 2,597
-0 -0  - Own holding of ECCs -0 -0
895 895 Premium fund 895 895
2,496 3,122 Dividend equalisation fund 3,122 2,496
3,276 3,619 Savings bank's reserve 3,619 3,276
227 292 Recommended dividends 292 227
124 160 Provision for gifts 160 124
195 139 Unrealised gains reserve 148 206
- - Other equity and minority interest 1,620 1,354
- - Minority interests 72 67
9,811 10,824 Total book equity 12,524 11,242
-447 -447 Deferred taxes, goodwill and other intangible assets -566 -582
- - Part of reserve for unrealised gains, associated companies 120 98
-352 -452 Deduction for allocated dividends and gifts -452 -361
-401 - 50 % deduction for subordinated capital in other financial institutions - -106
-240 - 50 % deduction for expected losses on IRB, net of write-downs - -214
- - 50 % capital adequacy reserve - -595
- - Minority interests recognised in other equity capital -72 -
- - Minority interests eligible for inclusion in CET1 capital 35 -
-109 -4 Surplus financing of pension obligations - -107
- -31 Value adjustments due to requirements for prudent valuation -45 -
- -325 Positive value of adjusted expected loss under IRB Approach -419 -
- - Direct, indirect and synthetic investments in financial sector companies  -451 -
8,262 9,565 Total common equity Tier one  10,674 9,374
1,431 1,449 Hybrid capital, core capital 1,716 1,615
- - Direct, indirect and synthetic investments in financial sector companies  -9 -
9,693 11,014 Total core capital 12,382 10,989
         
    Supplementary capital in excess of core capital    
- - Fund bonds, hybrid capital in excess of 15 per cent - 31
1,873 1,906 Subordinated capital 2,598 2,313
-401 - 50 % deduction for subordinated capital in other financial institutions - -106
-240 - 50 % deduction for expected losses on IRB, net of write-downs - -214
- - 50 % capital adequacy reserve - -595
- -43 Direct, indirect and synthetic investments in financial sector companies  -43 -
1,231 1,864 Total supplementary capital 2,555 1,428
10,924 12,878 Net subordinated capital 14,937 12,417
         
         
    Minimum requirements subordinated capital    
1,573 1,632 Involvement with spesialised enterprises 1,887 1,573
1,478 1,331 Other corporations exposure 1,371 1,479
363 829 Mass market exposure, property 1,280 628
70 149 Mass market exposure, SMBs 159 74
28 49 Other retail exposure 51 33
1,157 1,111 Equity investments 0 -
4,669 5,102 Total credit risk IRB 4,748 3,787
224 397 Debt risk 397 224
8 - Equity risk 1 10
- - Currency risk 0 -
297 292 Operational risk 416 398
560 849 Exposures calculated using the standardised approach 1,971 2,151
-67 - Deductions - -119
- 42 Credit value adjustment risk (CVA) 92 -
- - Transitional arrangements - 316
5,690 6,682 Minimum requirements subordinated capital 7,625 6,767
71,130 83,523 Risk weigheted assets (RWA) 95,317 84,591
  3,759 Minimum requirement on CET1 capital, 4.5 per cent 4,289  
    Capital Buffers    
  2,088 Capital conservation buffer, 2,5 per cent 2,383  
  2,506 Systemic rick buffer, 3.0 per cent 2,860  
  4,594 Total buffer requirements on CET1 capital 5,242  
  1,212 Available CET1 capital after buffer requirements 1,143  
    Capital adequacy    
11.6 % 11.5 % Common equity Tier one ratio 11.2 % 11.1 %
13.6 % 13.2 % Core capital ratio 13.0 % 13.0 %
15.4 % 15.4 % Capital adequacy ratio 15.7 % 14.7 %
© SpareBank 1 SMN