Note 5 - Capital adequacy and capital management

The Ministry of Finance adopted on 22 August 2014 amendments to regulations on capital requirements taking effect on 30 September 2014. The amendments bring Norwegian legislation into line with the EU’s new capital requirements framework (CRR/CRD IV). This framework is for the present not incorporated into the EEA agreement, although its most important provisions have been incorporated in the Financial Institutions Act and the Securities Trading Act. The adjusted legislation entered into force on 1 July 2013, and requires a gradual increase in minimum requirements on Common Equity Tier 1 (CET1) capital in the period to 1 July 2016.

As of 31 December 2015 the capital conservation buffer requirement is 2.5 per cent, the systemic risk requirement is 3 per cent and countercyclical buffer is 1 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 11 per cent. The countercyclical buffer is announced to increase to 1.5 per cent with effect from 30 June 2016.

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. In 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.

SpareBank 1 SMN has reviewed the intention for the bond portfolios and on that basis reclassified certain portfolios from trading to banking in 2015. This is reflected in reduced debt risk and increased credit risk under the standardised approach.

In connection with changed requirements on conditions governing hybrid capital, hybrid capital not meeting the new requirements over time will not be eligible as other core capital. The bonds will subject to a stepwise reduction of 30 per cent in 2015 and 10 per cent thereafter. As at 31 December 2015 SpareBank 1 SMN held hybrid capital worth NOK 450m that will be subject to stepwise reduction. Finanstilsynet may require the hybrid capital to be written down in proportion to equity capital if the bank’s CET1 capital ratio falls below 5.125 per cent.

The parent bank calculates capital charges against operational risk using the standardised approach. In the case of subsidiaries, the basic indicator approach is applied.  

 

 

Parent bank   Group
31 Dec 14 31 Dec 15 (NOKm) 31 Dec 15 31 Dec 14
2,597 2,597 Equity capital certificates 2,597 2,597
-0 -0 Own holding of ECCs -21 -0
895 895 Premium fund 895 895
3,122 3,790 Dividend equalisation fund 3,790 3,122
3,619 4,105 Savings bank's reserve 4,105 3,619
292 292 Recommended dividends 292 292
160 40 Provision for gifts 40 160
139 279 Unrealised gains reserve 290 148
- - Other equity 1,597 1,620
- - Non-controlling interests 318 72
10,824 11,998 Total book equity 13,904 12,524
-447 -447 Deferred taxes, goodwill and other intangible assets -662 -566
- - Part of reserve for unrealised gains, associated companies 264 120
-452 -332 Deduction for allocated dividends and gifts -332 -452
- - Non-controlling interests recognised in other equity capital -318 -72
- - Non-controlling interests eligible for inclusion in CET1 capital 132 35
-4 -93 Surplus financing of pension obligations -43 -
-31 -33 Value adjustments due to requirements for prudent valuation -55 -45
-325 -164 Positive value of adjusted expected loss under IRB Approach -239 -419
- - Direct, indirect and synthetic investments in financial sector companies  -458 -451
9,565 10,928 Total common equity Tier one  12,192 10,674
1,449 950 Hybrid capital, core capital 1,310 1,716
- 495 Hybrid capital covered by transitional provisions 495 -
- - Direct, indirect and synthetic investments in financial sector companies  -9 -9
11,014 12,373 Total core capital 13,988 12,382
         
    Supplementary capital in excess of core capital    
1,906 1,000 Subordinated capital 1,647 2,598
- 786 Subordinated capital covered by transitional provisions 786 -
-43 -43 Direct, indirect and synthetic investments in financial sector companies  -43 -43
1,864 1,743 Total supplementary capital 2,390 2,555
12,878 14,116 Net subordinated capital 16,378 14,937
         
         
    Minimum requirements subordinated capital    
1,632 1,027 Involvement with spesialised enterprises 1,213 1,887
1,331 1,049 Other corporations exposure 1,105 1,371
829 1,093 Mass market exposure, property 1,557 1,280
149 157 Mass market exposure, SMEs 167 159
49 38 Other retail exposure 40 51
1,111 1,221 Equity investments 0 0
5,102 4,585 Total credit risk IRB 4,082 4,748
397 64 Debt risk 64 397
- - Equity risk 10 1
- - Currency risk - 0
292 316 Operational risk 457 416
849 922 Exposures calculated using the standardised approach 1,805 1,971
42 53 Credit value adjustment risk (CVA) 106 92
- - Transitional arrangements 634 -
6,682 5,939 Minimum requirements subordinated capital 7,157 7,625
83,523 74,243 Risk weighted assets (RWA) 89,465 95,317
3,759 3,341 Minimum requirement on CET1 capital, 4.5 per cent 4,026 4,289
    Capital Buffers    
2,088 1,856 Capital conservation buffer, 2.5 per cent 2,237 2,383
2,506 2,227 Systemic rick buffer, 3.0 per cent 2,684 2,860
  742 Countercyclical buffer, 1.0 per cent 895  
4,594 4,826 Total buffer requirements on CET1 capital 5,815 5,242
1,212 2,761 Available CET1 capital after buffer requirements 2,351 1,143
    Capital adequacy    
11.5 % 14.7 % Common equity Tier one ratio 13.6 % 11.2 %
13.2 % 16.7 % Core capital ratio 15.6 % 13.0 %
15.4 % 19.0 % Capital adequacy ratio 18.3 % 15.7 %
8.3 %  9.1 %  Leverage Ratio 6.7 %  6.0 % 

Financial results

Annual report and notes

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