Note 5 - Capital adequacy and capital management

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 31 December 2017 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, effective as from the fourth quarter of 2016. 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.

SpareBank 1 SMN has in fourth quarter 2017 reclassified two additional Tier 1 capital bonds from liabilities to equity, and the comparable figures has been restated. For further details, see note 1.

As from the fourth quarter of 2016 differentiated rates came into force for the countercyclical buffer. 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  fourth quarter of 2017 the parent bank is below the capital deduction threshold such that the Norwegian rate is applied to all relevant exposures. For the group, the risk-weighted countercyclical capital buffer is 2.0 per cent.

Parts of the group’s hybrid capital and subordinated debt were issued under earlier rules. This will be subject to a write-down of 40 per cent in 2016 and 50 per cent in 2017. The write-down will increase by another 10 per cent per year thereafter. As at 31 Desember 2017 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 2016 31 Dec 2017 (NOK million) 31 Dec 2017 31 Dec 2016
14,166 15,372 Total book equity 17,510 16,253
-950 -950 Additional Tier 1 capital instruments included in total equity -993 -950
-470 -522 Deferred taxes, goodwill and other intangible assets -984 -741
- - Part of reserve for unrealised gains, associated companies 117 117
-609 -893 Deduction for allocated dividends and gifts -893 -609
- - Non-controlling interests recognised in other equity capital -565 -425
- - Non-controlling interests eligible for inclusion in CET1 capital 324 220
-29 -30 Value adjustments due to requirements for prudent valuation -41 -48
-190 -350 Positive value of adjusted expected loss under IRB Approach -333 -248
- - Cash flow hedge reserve 7 -
- - Deduction for common equity Tier 1 capital in significant investments in financial institutions -212 -337
11,917 12,627 Total common equity Tier one  13,938 13,233
950 950 Additional Tier 1 capital instruments 1,427 1,358
483 459 Additional Tier 1 capital instruments covered by transitional provisions 459 483
13,350 14,036 Total core capital 15,824 15,073
         
    Supplementary capital in excess of core capital    
1,000 1,000 Subordinated capital 1,615 1,698
673 561 Subordinated capital covered by transitional provisions 561 673
-256 -254 Deduction for significant investments in financial institutions -254 -256
1,418 1,307 Total supplementary capital 1,922 2,116
14,768 15,343 Net subordinated capital 17,746 17,189

 

 

    Minimum requirements subordinated capital    
1,065 978 Specialised enterprises 1,107 1,206
1,064 1,098 Corporate 1,113 1,102
1,270 1,370 Mass market exposure, property 1,892 1,753
85 90 Other mass market 91 88
1,223 1,198 Equity investments 1 3
4,707 4,733 Total credit risk IRB 4,205 4,153
         
5 3 Central government 3 5
73 80 Covered bonds 146 130
426 429 Institutions 331 340
5 0 Local and regional authorities, state-owned enterprises 4 7
45 44 Corporate 245 253
0 1 Mass market 388 179
13 13 Exposures secured on real property 193 342
245 232 Equity positions 344 338
86 70 Other assets 166 178
898 872 Total credit risk standardised approach 1,820 1,772
         
35 16 Debt risk 18 36
- - Equity risk 22 5
- - Currency risk 1 1
334 341 Operational risk 510 479
51 52 Credit value adjustment risk (CVA) 117 84
- - Transitional arrangements 784 574
6,026 6,015 Minimum requirements subordinated capital 7,478 7,103
75,325 75,182 Risk weighted assets (RWA) 93,474 88,786
3,390 3,383 Minimum requirement on CET1 capital, 4.5 per cent 4,206 3,995
         
    Capital Buffers    
1,883 1,880 Capital conservation buffer, 2.5 per cent 2,337 2,220
2,260 2,255 Systemic rick buffer, 3.0 per cent 2,804 2,664
1,130 1,504 Countercyclical buffer, 2.0 per (1.5 per cent) 1,869 1,332
5,273 5,639 Total buffer requirements on CET1 capital 7,011 6,215
3,255 3,605 Available CET1 capital after buffer requirements 2,721 3,022
    Capital adequacy    
15.8 % 16.8 % Common equity Tier one ratio 14.9 % 14.9 %
17.7 % 18.7 % Core capital ratio 16.9 % 17.0 %
19.6 % 20.4 % Capital adequacy ratio 19.0 % 19.4 %
         
    Leverage ratio    
133,514 145,821 Balance sheet items 210,764 194,324
8,234 7,112 Off-balance sheet items 9,295 10,068
-690 -902 Regulatory adjustments -1,580 -1,388
141,058 152,032 Calculation basis for leverage ratio 218,479 203,005
13,350 14,036 Core capital 15,824 15,073
9.5 % 9.2 % Leverage Ratio 7.2 % 7.4 %

Annual report and notes

© SpareBank 1 SMN