Note 4 - Capital adequacy

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.

As of 30 June 2018 the capital conservation buffer requirement is 2.5 per cent, the systemic risk requirement is 3.0 per cent and the Norwegian countercyclical buffer is 2.0 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 12.0 per cent. In addition the financial supervisory authority has set a Pillar 2 requirement of 2.1 per cent for SpareBank 1 SMN. The total minimum requirement on CET1 capital is accordingly 14.1 per cent.

The countercyclical buffer increased from 1.5 per cent to 2.0 per cent with effect from 31 December 2017.

Countercyclical buffer is calculated using differentiated rates. For exposures in other countries the countercyclical buffer rate set by the authorities in the country concerned is applied. If that country has not set a rate, the same rate as for exposures in Norway is applied unless the Ministry of Finance sets another rate. For the second quarter of 2018 both the parent bank and the group is below the capital deduction threshold such that the Norwegian rate is applied to all relevant exposures.

Parts of the group’s hybrid capital and subordinated debt were issued under earlier rules. This will be subject to a write-down of 50 per cent in 2017 and 60 per cent in 2018. As at 30 June 2018 the bank held hybrid capital worth NOK 450 million subject to write-down. For subordinated debt the figure was NOK 659 million.

 

Parent Bank   Group
31 Dec 2017 30 June 2017 30 June 2018 (NOKm) 30 June 2018 30 June 2017 31 Dec 2017
15,372 14,672 15,895 Total book equity 17,984 16,733 17,510
-950 -933 -1,094 Additional Tier 1 capital instruments included in total equity -1,136 -1,198 -993
-522 -480 -532 Deferred taxes, goodwill and other intangible assets -1,044 -872 -984
-893 - - Deduction for allocated dividends and gifts - - -893
- - - Non-controlling interests recognised in other equity capital -621 -514 -565
- - - Non-controlling interests eligible for inclusion in CET1 capital 357 241 324
- -1,106 -1,285 Net profit -1,209 -759 -
- 726 690 Year-to-date profit included in core capital (50 per cent pre tax of group profit in 2018) 614 380 -
-30 -32 -28 Value adjustments due to requirements for prudent valuation -46 -50 -41
-350 -195 -298 Positive value of adjusted expected loss under IRB Approach -299 -257 -333
- - - Cash flow hedge reserve 4 7 7
- - - Deduction for common equity Tier 1 capital in significant investments in financial institutions -74 -3 -212
12,627 12,653 13,349 Total common equity Tier one  14,528 13,709 13,820
950 950 1,114 Additional Tier 1 capital instruments 1,592 1,358 1,427
459 459 367 Additional Tier 1 capital instruments covered by transitional provisions 367 459 459
14,036 14,062 14,830 Total core capital 16,488 15,526 15,707
             
      Supplementary capital in excess of core capital      
1,000 1,000 1,000 Subordinated capital 1,621 1,710 1,615
561 561 449 Subordinated capital covered by transitional provisions 449 561 561
-254 -245 -141 Deduction for significant investments in financial institutions -141 -245 -254
1,307 1,317 1,308 Total supplementary capital 1,930 2,026 1,922
15,343 15,378 16,138 Net subordinated capital 18,418 17,552 17,629

 

 

      Minimum requirements subordinated capital      
978 1,106 951 Specialised enterprises 1,072 1,232 1,107
1,098 1,031 1,115 Corporate 1,128 1,045 1,113
1,370 1,277 1,459 Mass market exposure, property 2,010 1,759 1,892
90 91 93 Other mass market 96 94 91
1,198 1,234 1,037 Equity investments 1 1 1
4,733 4,739 4,655 Total credit risk IRB 4,307 4,131 4,205
             
3 5 2 Central government 2 5 3
80 74 84 Covered bonds 146 131 146
431 489 407 Institutions 262 429 333
0 5 - Local and regional authorities, state-owned enterprises 9 9 4
25 23 46 Corporate 255 142 226
18 17 16 Mass market 438 418 405
13 16 14 Exposures secured on real property 195 306 193
232 221 260 Equity positions 359 339 344
70 64 66 Other assets 128 164 166
872 914 895 Total credit risk standardised approach 1,796 1,942 1,820
             
16 28 21 Debt risk 23 29 18
- - - Equity risk 11 6 22
- - - Currency risk and risk exposure for settlement/delivery 4 1 1
341 341 370 Operational risk 575 510 510
52 67 45 Credit value adjustment risk (CVA) 110 123 117
- - - Transitional arrangements 946 634 891
6,015 6,089 5,986 Minimum requirements subordinated capital 7,771 7,376 7,585
75,182 76,107 74,823 Risk weighted assets (RWA) 97,137 92,202 94,807
3,383 3,425 3,367 Minimum requirement on CET1 capital, 4.5 per cent 4,371 4,149 4,266
             
      Capital Buffers      
1,880 1,903 1,871 Capital conservation buffer, 2.5 per cent 2,428 2,305 2,370
2,255 2,283 2,245 Systemic rick buffer, 3.0 per cent 2,914 2,766 2,844
1,504 1,142 1,496 Countercyclical buffer, 2.0 per cent (1,5 per cent) 1,943 1,383 1,896
5,639 5,327 5,612 Total buffer requirements on CET1 capital 7,285 6,454 7,111
3,605 3,900 4,370 Available CET1 capital after buffer requirements 2,872 3,106 2,444
      Capital adequacy      
16.8 % 16.6 % 17.8 % Common equity Tier one ratio 15.0 % 14.9 % 14.6 %
18.7 % 18.5 % 19.8 % Core capital ratio 17.0 % 16.8 % 16.6 %
20.4 % 20.2 % 21.6 % Capital adequacy ratio 19.0 % 19.0 % 18.6 %
             
      Leverage ratio      
145,821 145,532 152,080 Balance sheet items 216,406 207,760 210,764
7,112 7,555 7,235 Off-balance sheet items 9,345 9,400 9,295
-902 -707 -858 Regulatory adjustments -1,480 -1,190 -1,580
152,032 152,380 158,457 Calculation basis for leverage ratio 224,271 215,969 218,479
14,036 14,062 14,830 Core capital 16,488 15,526 15,707
9.2 % 9.2 % 9.4 % Leverage Ratio 7.4 % 7.2 % 7.2 %
© SpareBank 1 SMN