Note 5 - Capital adequacy and capital management

Capital adequacy is calculated and reported in accordance with the EU capital requirements regulations for banks and investment firms (CRR/CRD IV). SpareBank 1 SMN utilises the Internal Rating Based Approach (IRB) for credit risk. Advanced IRB Apporoach is used for the corporate portfolios. Use of IRB imposes wide-ranging requirements on the bank’s organisational set-up, competence, risk models and risk management systems.

As of 31 December 2021 the overall minimum requirement on CET1 capital is 12.5 per cent. The capital conservation buffer requirement is 2.5 per cent, the systemic risk requirement for Norwegian IRB-banks is 4.5 per cent and the Norwegian countercyclical buffer is 1.0 per cent. These requirements are additional to the requirement of 4.5 per cent CET1 capital. In addition the financial supervisory authority has set a Pillar 2 requirement of 1.9 per cent for SpareBank 1 SMN, however not below NOK 1,794 million in monetary terms. The Norwegian countercyclical buffer will rise to 1.5 per cent with effect from 30 June 2022, and to 2.0 per cent from 31 December 2022.

Under the CRR/CRDIV regulations the average risk weighting of exposures secured on residential property in Norway cannot be lower than 20 per cent. As of 31 December 2021 an adjustment was made in both the parent bank and the group to bring the average risk weight up to 20 per cent. This is presented in the note together with ‘mass market exposure, property’ under ‘credit risk IRB’.

The systemic risk buffer stands at 4.5 per cent for the Norwegian exposures. For exposures in other countries, the particular country’s systemic buffer rate shall be employed. As of 31 December 2021 the effective rate for the parent bank and for the group is accordingly 4.4 per cent.

The 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. As of 31 December 2021 both the parent bank and the group is below the capital deduction threshold such that the Norwegian rate is applied to all relevant exposures.

 

Parent Bank   Group
31 Dec 2020 31 Dec 2021 (NOKm) 31 Dec 2021 31 Dec 2020
18,092 19,356 Total book equity 23,241 21,310
-1,250 -1,250 Additional Tier 1 capital instruments included in total equity -1,293 -1,293
-515 -458 Deferred taxes, goodwill and other intangible assets -961 -1,044
-890 -1,517 Deduction for allocated dividends and gifts -1,517 -890
- - Non-controlling interests recognised in other equity capital -989 -838
- - Non-controlling interests eligible for inclusion in CET1 capital 568 488
-43 -41 Value adjustments due to requirements for prudent valuation -56 -56
-47 -495 Positive value of adjusted expected loss under IRB Approach -560 -74
- - Cash flow hedge reserve 3 10
-186 -202 Deduction for common equity Tier 1 capital in significant investments in financial institutions -648 -572
15,160 15,393 Common equity Tier 1 capital 17,790 17,041
1,250 1,250 Additional Tier 1 capital instruments 1,581 1,595
- -48 Deduction for significant investments in financial institutions -48 -
16,410 16,595 Tier 1 capital 19,322 18,636
         
    Supplementary capital in excess of core capital    
1,750 1,750 Subordinated capital 2,226 2,262
-139 -214 Deduction for significant investments in financial institutions -214 -139
1.611 1,536 Additional Tier 2 capital instruments 2,011 2,123
18,020 18,130 Total eligible capital 21,333 20,759
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    Minimum requirements subordinated capital    
1,053 1,049 Specialised enterprises 1,248 1,240
920 1,016 Corporate 1,030 930
1,511 1,400 Mass market exposure, property 2,384 2,261
107 93 Other mass market 95 110
1,026 1,000 Equity positions IRB 1 1
4,617 4,558 Total credit risk IRB 4,758 4,541
         
1 3 Central government 4 2
93 106 Covered bonds 133 142
441 398 Institutions 299 332
- 1 Local and regional authorities, state-owned enterprises 29 27
32 188 Corporate 432 281
20 7 Mass market 466 476
11 25 Exposures secured on real property 128 136
272 279 Equity positions 521 408
99 92 Other assets 142 159
970 1,098 Total credit risk standardised approach 2,154 1,962
         
30 35 Debt risk 36 31
- - Equity risk 34 18
- - Currency risk and risk exposure for settlement/delivery 1 3
421 433 Operational risk 817 770
25 26 Credit value adjustment risk (CVA) 93 123
6,063 6,150 Minimum requirements subordinated capital 7,893 7,448
75,785 76,873 Risk weighted assets (RWA) 98,664 93,096
3,410 3,459 Minimum requirement on CET1 capital, 4.5 per cent 4,440 4,189
         
    Capital Buffers    
1,895 1,922 Capital conservation buffer, 2.5 per cent 2,467 2,327
3,410 3,459 Systemic risk buffer, 4.5 per cent  4,440 4,189
758 769 Countercyclical buffer, 1.0 per cent 987 931
6,063 6,150 Total buffer requirements on CET1 capital 7,893 7,448
5,687 5,784 Available CET1 capital after buffer requirements 5.457 5,404
         
    Capital adequacy    
20.0 % 20.0 % Common equity Tier 1 capital ratio 18.0 % 18.3 %
21.7 % 21.6 % Tier 1 capital ratio 19.6 % 20.0 %
23.8 % 23.6 % Capital ratio 21.6 % 22.3 %
         
    Leverage ratio    
178,219 191,697 Balance sheet items 269,857 256,978
6,190 10,782 Off-balance sheet items 11,341 7,514
-606 -1,042 Regulatory adjustments -2,110 -1,577
183,803 201,437 Calculation basis for leverage ratio 279,088 262,915
16,410 16,595 Core capital 19,322 18,636
8.9 % 8.2 % Leverage Ratio 6.9 % 7.1 %
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Annual report and notes

© SpareBank 1 SMN