Report No. 75/2014

Legal basis:

Sub-article 56.1 point 1 of the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies.

Report content:

The Management Board of PKO Bank Polski S.A. (further referred to as the ‘Bank’) informs hereby that on 26 October 2014 the European Banking Authority (‘EBA’) and the European Central Bank (‘ECB’) published the results of stress testing of the banks operating in the European Union (‘EU’) and the outcomes of the asset quality review (‘AQR’) for the banks operating in the euro zone.

The exercise aimed to provide the supervisory authorities and the market participants alike with consistent data on resilience of the EU banks under unfavourable market conditions within the framework of a uniform methodology developed by EBA. The stress testing in the EU was conducted on a sample of 123 EU banks, covering at least 50% of every country’s banking sector, and was carried out at the highest consolidation level.

As part of the aforementioned review, the Polish Financial Supervision Authority (‘KNF’) included the Bank, among others, in a similar analysis and disclosed the stress test results for 15 banks in Poland, including the Bank, as well as the outcome of an asset quality review conducted in compliance with the ECB methodology.

The test was based on the Comprehensive Assessment Stress Test Manual. The individual phases of the comprehensive assessment followed the asset quality review and were based on the results of the latter.

The EBA methodology was used by all relevant supervisory authorities of the member states. Thus, the results obtained in the individual countries enabled comparison of the resilience of the respective banking sectors under unfavourable market conditions and the estimation of the potential scale of the required recapitalisation of the banks, which may prove necessary should the assumed scenarios materialise.

The assessment test of the banks was comprised of two parts:

• The first part involved the asset quality review (AQR). A bank passed this assessment if its Common Equity Tier 1 capital ratio (CET1) reached 8%.
• The second part involved stress testing the banks, in other words, testing the extent to which a bank’s own funds would change over three consecutive years if the scenarios (the baseline and the adverse) specified in the stress tests were to materialise.

-       In the baseline scenario, a bank should be able to retain at least an 8% CET1 capital ratio.

-       In the adverse scenario, a bank should be able to retain at least a 5.5% CET1 capital ratio.  The adverse scenario assumed:

• deepening of crisis in the euro zone; expressed among others in significant decrease of GDP and increase of unemployment rate, as well as slower pace of recovery from downturn,
• a 25% weakening of the local currency (Polish zloty);
• an increase in yields of debt instruments with the corresponding increase in the cost of funding for the banks;
• an sharp increase in short-term interest rates by 80 basis points compared to the baseline scenario, which, however, could, to a limited extent, translate into an increase in loans interest rates.

As a result of the aforementioned tests, the following impact on the Bank’s CET1 capital ratio was identified:

CET1 capital ratio after the AQR adjustment

– test result: 13.26%

CET1  capital ratio after the AQR adjustment and the stress-test baseline scenario

- test result: 14.34%,

- the levels required in the test: 8.00%,

- surplus:  + 6.34 pp

CET1 capital ratio after the AQR adjustment and stress-test adverse scenario

- test result: 13.28%,

- the levels required in the test: 5.50%,

- surplus:  + 7.78 pp

The results the Bank achieved both in the AQR and the stress testing confirm its strong capital position. In each scenario, even the most extreme, Bank’s results significantly exceed the required capital adequacy ratios. In the baseline scenario of about 80% and of about 140% in the adverse scenario. These positive results were achieved in spite of the conservative financial forecast assumptions imposed by the EBA. In the Bank’s opinion, considering the structure of its balance sheet, the constraints in the growth of asset interest rates as adopted by the EBA would not occur in reality should the assumed stress test scenarios materialise.

Both the baseline scenario and the adverse scenario adopted for purposes of the tests should not be used as a forecast of the Bank’s financial position or compared in any way to any other information the Bank publishes, and the results of the above-mentioned tests should not be deemed to be factors that are directly reflected in the Bank’s financial results. The Bank prepares its financial statements in compliance with the International Financial Reporting Standards (IFRS) and publishes detailed disclosures in compliance with the regulatory requirements. In the Bank’s view, the results of these tests confirm that the Bank continues to conduct the correct policy of maintaining strong capital position, which constitutes the basis of its stable development of the business operations.  

Detailed results of the aforementioned tests can be found on the KNF website at www.knf.gov.pl.