Capital adequacy is the maintenance of a level of capital by the PKO Bank Polski SA Group exceeds sum of regulatory capital requirements (the so-called Pillar 1) and sum of internal capital requirements (the so-called Pillar 2).
The objective of capital adequacy management is to maintain capital on a level that is adequate to the risk scale and profile of the Group's activities.
The process of managing the Group’s capital adequacy comprises:
- identifying and monitoring of all of significant risks,
- assessing internal capital to cover the individual risk types and total internal capital,
- monitoring, reporting, forecasting and limiting of capital adequacy,
- performing internal capital allocations to business segments, client segments and entities in the Group in connection with profitability analyses,
- using tools affecting the capital adequacy level (including: tools affecting the level of equity, the scale of equity item reductions and the level of the loan portfolio).
The main measures of capital adequacy are:
- the capital adequacy ratio whose minimum level in accordance with the Banking Act is 8%,
- the ratio of equity to internal capital whose acceptable minimum level in accordance with the Banking Act is 1.0.
As at 31 December 2011 compared with 31 December 2010 (comparable data calculated in accordance with the amended regulations concerning rules of calculating capital requirements as well as own funds), the Group’s capital adequacy ratio dropped by 0.10 pp. to 12.37%, mainly due to an increase in the Group’s credit risk capital requirement, resulted mainly from the fast loan portfolio growth of the Group.
Despite the drop in the capital adequacy ratio, the Group’s capital adequacy 2011 remained at a safe level, significantly above the statutory limits.
Own funds calculated for the capital adequacy purposes
Own funds for the purposes of capital adequacy are calculated based on the provisions of the Banking Law and the Resolution No. 325/2011*of the Polish Financial Supervision Authority of 20 December 2011 on decreasing core funds (Official journal of the PFSA nr 13 item 49 as of 30 December 2011).
Own funds comprise basic funds, supplementary funds and short-term capital.
Basic funds are comprised of the following items:
- principal funds comprising: share capital, reserve capital, other reserve capital,
- general banking risk fund,
- unappropriated profits from previous years,
- net profit prior to approval and net profit for the current reporting period, calculated based on appropriate accounting standards, decreased by any expected charges and dividends, in amounts not exceeding amounts audited by certified public accountants, in accordance with the Banking Law, Article 127.2, Point 2)c).
Basic funds are reduced by deducting the following items:
- intangible assets stated at carrying amount,
- the Bank’s equity exposures to financial institutions, lending institutions, domestic banks, foreign banks and insurance companies – in the amount of 50% of the value of such exposures,
- unrealised losses on debt, equity instruments and other receivables classified as available for sale,
- negative currency translation differences from foreign operations,
- negative amounts in respect of adjustments on revaluation of assets in the trading portfolio.
Supplementary funds are comprised of the following items:
- subordinated liabilities,
- unrealised gains on debt and equity instruments classified as available for sale – in the amount of 80% of their pre-tax value,
- positive currency translation differences from foreign operations.
Moreover, the supplementary funds are reduced by 50% of the value of the Bank’s equity exposures to financial institutions, lending institutions, domestic banks, foreign banks and insurance companies. If the amount of reduction would result in supplementary funds falling below nil, the excess above the value of the supplementary funds is subtracted from the basic funds.
The own funds of the Group include also short-term capital.
In addition, the following items are included in the calculation of consolidated own funds of the Group:
- goodwill of subsidiaries (which decreases the value of own funds),
- non- controlling interests in equity (which increase the value of own funds).
As at 31 December 2011, the Group’s own funds increased by PLN 724 370 thousand, mainly as a result of including in the funds the Bank's net profit for 2010, net of dividend paid (of PLN 836 209 thousand) and an increase in the reserve capital and other reserves of the Group’s entities of PLN 41 132 thousand. Compared with the balance as at the end of 2010, the accumulated profit dropped by PLN 135 459 thousand, and the amount of unrealised losses on debt and equity securities in the AFS portfolio increased by PLN 62 112 thousand, with a simultaneous drop in the value of other reductions of PLN 36 861 thousand.
The structure of the Group’s own funds is presented in the table below: