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 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.

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 firsth half 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 will be subject to a write-down of 60 per cent in 2018 and 70 per cent in 2019. As at 30 June 2019 the bank held hybrid capital worth NOK 450 million subject to write-down.

 

Parent Bank   Group
31 Dec 2018 30 June 2018 30 June 2019 (NOKm) 30 June 2019 30 June 2018 31 Dec 2018
16,409 15,895 16,889 Total book equity 19,450 17,984 18,686
-1,000 -1,094 -972 Additional Tier 1 capital instruments included in total equity -1,013 -1,136 -1,043
-533 -532 -519 Deferred taxes, goodwill and other intangible assets -1,105 -1,044 -1,079
-1,034 - - Deduction for allocated dividends and gifts - - -1,034
- - - Non-controlling interests recognised in other equity capital -781 -621 -637
- - - Non-controlling interests eligible for inclusion in CET1 capital 447 357 366
- -1,285 -1,544 Net profit -1,729 -1,209 -
- 690 694 Year-to-date profit included in core capital (50 per cent pre tax of group profit in 2018) 879 614 -
-31 -28 -31 Value adjustments due to requirements for prudent valuation -44 -46 -44
-268 -298 -290 Positive value of adjusted expected loss under IRB Approach -309 -299 -286
- - - Cash flow hedge reserve 5 4 5
-163 - -185 Deduction for common equity Tier 1 capital in significant investments in financial institutions -175 -74 -206
13,381 13,349 14,042 Total common equity Tier one  15,625 14,528 14,727
1,000 1,114 1,000 Additional Tier 1 capital instruments 1,384 1,592 1,378
367 367 275 Additional Tier 1 capital instruments covered by transitional provisions 275 367 367
14,748 14,830 15,318 Total core capital 17,284 16,488 16,472
             
      Supplementary capital in excess of core capital      
1,750 1,000 1,750 Subordinated capital 2,310 1,621 2,316
96 449 182 Subordinated capital covered by transitional provisions 182 449 96
-140 -141 -141 Deduction for significant investments in financial institutions -141 -141 -140
1,705 1,308 1,791 Total supplementary capital 2,351 1,930 2,272
16,453 16,138 17,108 Net subordinated capital 19,634 18,418 18,743

 

 

      Minimum requirements subordinated capital      
967 951 938 Specialised enterprises 1,094 1,072 1,116
1,156 1,115 1,156 Corporate 1,163 1,128 1,163
1,516 1,459 1,521 Mass market exposure, property 2,166 2,010 2,098
90 93 99 Other mass market 102 96 92
1,062 1,037 1,115 Equity investments 1 1 1
4,790 4,655 4,829 Total credit risk IRB 4,525 4,307 4,470
             
3 2 2 Central government 3 2 4
87 84 83 Covered bonds 136 146 124
390 407 412 Institutions 300 262 246
- - - Local and regional authorities, state-owned enterprises 8 9 8
23 46 35 Corporate 237 255 221
73 16 38 Mass market 525 438 520
12 14 14 Exposures secured on real property 207 195 215
228 260 236 Equity positions 369 359 366
57 66 83 Other assets 167 128 107
873 895 902 Total credit risk standardised approach 1,952 1,796 1,810
             
30 21 34 Debt risk 35 23 31
- - - Equity risk 14 11 7
- - - Currency risk and risk exposure for settlement/delivery 3 4 3
370 370 387 Operational risk 656 575 575
39 45 28 Credit value adjustment risk (CVA) 122 110 122
- - - Transitional arrangements 1,032 946 1,074
6,102 5,986 6,181 Minimum requirements subordinated capital 8,339 7,771 8,093
76,274 74,823 77,257 Risk weighted assets (RWA) 104,240 97,137 101,168
3,432 3,367 3,477 Minimum requirement on CET1 capital, 4.5 per cent 4,691 4,371 4,553
             
      Capital Buffers      
1,907 1,871 1,931 Capital conservation buffer, 2.5 per cent 2,606 2,428 2,529
2,288 2,245 2,318 Systemic rick buffer, 3.0 per cent 3,127 2,914 3,035
1,525 1,496 1,545 Countercyclical buffer, 2.0 per cent 2,085 1,943 2,023
5,721 5,612 5,794 Total buffer requirements on CET1 capital 7,818 7,285 7,588
4,228 4,370 4,771 Available CET1 capital after buffer requirements 3,116 2,872 2,587
      Capital adequacy      
17.5 % 17.8 % 18.2 % Common equity Tier one ratio 15.0 % 15.0 % 14.6 %
19.3 % 19.8 % 19.8 % Core capital ratio 16.6 % 17.0 % 16.3 %
21.6 % 21.6 % 22.1 % Capital adequacy ratio 18.8 % 19.0 % 18.5 %
             
      Leverage ratio      
153,395 152,080 156,091 Balance sheet items 223,781 216,406 216,240
7,110 7,235 6,824 Off-balance sheet items 8,343 9,345 9,086
-832 -858 -840 Regulatory adjustments -1,458 -1,480 -1,474
159,673 158,457 162,075 Calculation basis for leverage ratio 230,667 224,271 223,853
14,748 14,830 15,318 Core capital 17,284 16,488 16,472
9.2 % 9.4 % 9.5 % Leverage Ratio 7.5 % 7.4 % 7.4 %
© SpareBank 1 SMN