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 September 2019 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 1.9 per cent for SpareBank 1 SMN. The total minimum requirement on CET1 capital is accordingly 13.9 per cent.

It has been announced that the countercyclical capital buffer is to be increased to 2.5 per cent as from 31 December 2019. In addition, a consultation document dated 25 June 2019 from the Ministry of Finance proposes increasing the systemic risk buffer to 4.5 per cent with effect from 31 December 2019. This coincides with the removal of the Basel 1 floor and the proposed introduction of an SME discount. If this is introduced with effect from 31 December 2019, the total minimum requirement on CET1 capital including the Pillar 2 requirement will be 15.9 per cent.

The 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 first nine months of 2019 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 has been subject to a write-down of 60 per cent in 2018 and 70 per cent in 2019. As at 30 September 2019 the bank held hybrid capital worth NOK 450 million subject to write-down.

Parent Bank   Group
31 Dec 2018 30 Sept 2018 30 Sept 2019 (NOKm) 30 Sept 2019 30 Sept 2018 31 Dec 2018
16,409 16,428 17,228 Total book equity 19,904 18,650 18,686
-1,000 -1,268 -963 Additional Tier 1 capital instruments included in total equity -1,004 -1,310 -1,043
-533 -538 -515 Deferred taxes, goodwill and other intangible assets -1,106 -1,059 -1,079
-1,034 - - Deduction for allocated dividends and gifts - - -1,034
- - - Non-controlling interests recognised in other equity capital -792 -623 -637
- - - Non-controlling interests eligible for inclusion in CET1 capital 450 371 366
- -1,649 -1,893 Net profit -2,217 -1,689 -
- 825 804 Year-to-date profit included in core capital (50 per cent pre tax of group profit in 2018) 1,128 864 -
-31 -29 -32 Value adjustments due to requirements for prudent valuation -44 -47 -44
-268 -308 -353 Positive value of adjusted expected loss under IRB Approach -383 -316 -286
- - - Cash flow hedge reserve 5 2 5
-163 -163 -185 Deduction for common equity Tier 1 capital in significant investments in financial institutions -183 -147 -206
13,381 13,298 14,091 Total common equity Tier one  15,758 14,697 14,727
1,000 1,000 1,000 Additional Tier 1 capital instruments 1,384 1,478 1,378
367 367 275 Additional Tier 1 capital instruments covered by transitional provisions 275 367 367
14,748 14,665 15,367 Total core capital 17,417 16,542 16,472
             
      Supplementary capital in excess of core capital      
1,750 1,500 1,750 Subordinated capital 2,310 2,118 2,316
96 449 179 Subordinated capital covered by transitional provisions 179 449 96
-140 -140 -141 Deduction for significant investments in financial institutions -141 -140 -140
1,705 1,809 1,788 Total supplementary capital 2,348 2,427 2,272
16,453 16,473 17,155 Net subordinated capital 19,765 18,969 18,743

  

 

      Minimum requirements subordinated capital      
967 951 948 Specialised enterprises 1,128 1,107 1,116
1,156 1,173 1,183 Corporate 1,194 1,181 1,163
1,516 1,508 1,518 Mass market exposure, property 2,169 2,070 2,098
90 91 103 Other mass market 106 94 92
1,062 1,045 1,118 Equity investments 1 1 1
4,790 4,768 4,870 Total credit risk IRB 4,597 4,453 4,470
             
3 2 2 Central government 2 3 4
87 95 90 Covered bonds 149 145 124
390 375 435 Institutions 301 217 246
- - - Local and regional authorities, state-owned enterprises 5 10 8
23 30 38 Corporate 237 241 221
73 70 32 Mass market 532 510 520
12 15 18 Exposures secured on real property 200 181 215
228 228 236 Equity positions 371 358 366
57 53 89 Other assets 157 109 107
873 868 939 Total credit risk standardised approach 1,955 1,774 1,810
             
30 31 25 Debt risk 27 33 31
- - - Equity risk 6 24 7
- - - Currency risk and risk exposure for settlement/delivery 3 3 3
370 370 387 Operational risk 656 575 575
39 33 35 Credit value adjustment risk (CVA) 130 80 122
- - - Transitional arrangements 983 971 1,074
6,102 6,071 6,256 Minimum requirements subordinated capital 8,357 7,913 8,093
76,274 75,887 78,196 Risk weighted assets (RWA) 104,464 98,915 101,168
3,432 3,415 3,519 Minimum requirement on CET1 capital, 4.5 per cent 4,701 4,451 4,553
             
      Capital Buffers      
1,907 1,897 1,955 Capital conservation buffer, 2.5 per cent 2,612 2,473 2,529
2,288 2,277 2,346 Systemic rick buffer, 3.0 per cent 3,134 2,967 3,035
1,525 1,518 1,564 Countercyclical buffer, 2.0 per cent 2,089 1,978 2,023
5,721 5,692 5,865 Total buffer requirements on CET1 capital 7,835 7,419 7,588
4,228 4,191 4,708 Available CET1 capital after buffer requirements 3,222 2,827 2,587
      Capital adequacy      
17.5 % 17.5 % 18.0 % Common equity Tier one ratio 15.1 % 14.9 % 14.6 %
19.3 % 19.3 % 19.7 % Core capital ratio 16.7 % 16.7 % 16.3 %
21.6 % 21.7 % 21.9 % Capital adequacy ratio 18.9 % 19.2 % 18.5 %
             
      Leverage ratio      
153,395 150,853 159,426 Balance sheet items 228,285 213,761 216,240
7,110 7,629 6,774 Off-balance sheet items 7,939 9,595 9,086
-832 -1,170 -900 Regulatory adjustments -1,546 -1,729 -1,474
159,673 157,313 165,301 Calculation basis for leverage ratio 234,678 221,628 223,853
14,748 14,665 15,367 Core capital 17,417 16,542 16,472
9.2 % 9.3 % 9.3 % Leverage Ratio 7.4 % 7.5 % 7.4 %
© SpareBank 1 SMN