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 2015 the capital conservation buffer requirement is 2.5 per cent, the systemic risk requirement is 3 per cent and countercyclical buffer is 1 per cent. These requirements are additional to the requirement of 4.5 per cent CET1 capital, so that the overall minimum requirement on CET1 capital is 11 per cent. The countercyclical buffer is announced to increase to 1.5 per cent with effect from 30 June 2016.

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. As from 31 March 2015 the bank has received permission to apply the Advanced  IRB Approach to those corporate portfolios that were previously reported under the  Basic Indicator Approach.

SpareBank 1 SMN has reviewed the intention for the bond portfolios and on that basis reclassified certain portfolios from trading to banking in the first quarter of 2015. This is reflected in reduced debt risk and increased credit risk under the standardised approach.

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 2015 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.

The parent bank calculates capital charges against operational risk using the standardised approach. In the case of subsidiaries, the basic indicator approach is applied.  

 

Parent Bank   Group
31 Dec 2014 30 Sept 2014 30 Sept 2015 (NOKm) 30 Sept 2015 30 Sept 2014 31 Dec 2014
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
3,122 2,496 3,122 Dividend equalisation fund 3,122 2,496 3,122
3,619 3,276 3,619 Savings bank's reserve 3,619 3,276 3,619
292 - - Recommended dividends - - 292
160 - - Provision for gifts - - 160
139 195 139 Unrealised gains reserve 148 206 148
- -65 - Other equity 1,660 1,282 1,620
- - - Minority interests 295 69 72
- 1,194 1,294 Net profit 1,119 1,407 -
10,824 10,588 11,666 Total book equity 13,455 12,228 12,524
-447 -447 -447 Deferred taxes, goodwill and other intangible assets -679 -565 -566
- - - Part of reserve for unrealised gains, associated companies 179 131 120
-452 - - Deduction for allocated dividends and gifts - - -452
- - - Minority interests recognised in other equity capital -295 -69 -72
- - - Minority interests eligible for inclusion in CET1 capital 49 34 35
-4 -28 -4 Surplus financing of pension obligations - -21 -
- -1,194 -1,294 Net profit -1,119 -1,407 -
- 872 992 Year-to-date profit included in core capital (73 per cent pre tax of group profit) 817 1,027 -
-31 -27 -32 Value adjustments due to requirements for prudent valuation -49 -36 -45
-325 -300 -199 Positive value of adjusted expected loss under IRB Approach -277 -367 -419
- - - Direct, indirect and synthetic investments in financial sector companies  -428 -349 -451
9,565 9,465 10,682 Total common equity Tier one  11,652 10,605 10,674
1,449 1,440 950 Hybrid capital, core capital 1,311 1,707 1,716
- - 496 Hybrid capital covered by transitional provisions 496 - -
- - - Direct, indirect and synthetic investments in financial sector companies  -9 -9 -9
11,014 10,905 12,128 Total core capital 13,451 12,302 12,382
             
      Supplementary capital in excess of core capital      
1,906 1,875 1,000 Subordinated capital 1,692 2,566 2,598
- - 786 Subordinated capital covered by transitional provisions 786 - -
-43 -43 -43 Direct, indirect and synthetic investments in financial sector companies  -43 -43 -43
1,864 1,833 1,743 Total supplementary capital 2,435 2,523 2,555
12,878 12,738 13,871 Net subordinated capital 15,886 14,826 14,937
             
             
      Minimum requirements subordinated capital      
1,632 1,482 1,062 Involvement with spesialised enterprises 1,262 1,732 1,887
1,331 1,328 981 Other corporations exposure 1,058 1,375 1,371
829 790 1,136 Mass market exposure, property 1,551 1,233 1,280
149 138 174 Mass market exposure, SMEs 186 147 159
49 40 15 Other retail exposure 15 42 51
1,111 1,105 1,155 Equity investments 0 0 0
5,102 4,884 4,524 Total credit risk IRB 4,073 4,529 4,748
397 440 93 Debt risk 94 440 397
- - - Equity risk 10 2 1
- - - Currency risk 0 - 0
292 292 316 Operational risk 457 416 416
849 778 911 Exposures calculated using the standardised approach 1,827 1,860 1,971
42 31 55 Credit value adjustment risk (CVA) 92 116 92
- - - Transitional arrangements 533 - -
6,682 6,425 5,899 Minimum requirements subordinated capital 7,087 7,364 7,625
83,523 80,315 73,732 Risk weighted assets (RWA) 88,586 92,045 95,317
3,759 3,614 3,318 Minimum requirement on CET1 capital, 4.5 per cent 3,986 4,142 4,289
      Capital Buffers      
2,088 2,008 1,843 Capital conservation buffer, 2.5 per cent 2,215 2,301 2,383
2,506 2,409 2,212 Systemic rick buffer, 3.0 per cent 2,658 2,761 2,860
    737 Countercyclical buffer, 1.0 per cent 886    
4,594 4,417 4,793 Total buffer requirements on CET1 capital 5,758 5,062 5,242
1,212 1,434 2,571 Available CET1 capital after buffer requirements 1,908 1,400 1,143
      Capital adequacy      
11.5 % 11.8 % 14.5 % Common equity Tier one ratio 13.2 % 11.5 % 11.2 %
13.2 % 13.6 % 16.4 % Core capital ratio 15.2 % 13.4 % 13.0 %
15.4 % 15.9 % 18.8 % Capital adequacy ratio 17.9 % 16.1 % 15.7 %
© SpareBank 1 SMN