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 2023 the overall minimum requirement on CET1 capital is 14.0 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 2.5 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 for SpareBank 1 SMN. From 31 December 2023 the reqirement is 1,7 per cent, and must be met with a minimum of 56.25 per cent CET1 capital. In addition the bank must have an additional 0.7 per cent in Pillar 2 requirements until the application for modeling has been processed.

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 2023 an adjustment was made in the parent bank 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 2023 the effective rate is 4.3 per cent for the group.

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 2023 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 2022 31 Dec 2023 (NOKm) 31 Dec 2023 31 Dec 2022
20,887 25,150 Total book equity 28,597 25,009
-1,726 -1,800 Additional Tier 1 capital instruments included in total equity -1,903 -1,769
-467 -812 Deferred taxes, goodwill and other intangible assets -1,625 -947
-1,314 -2,591 Deduction for allocated dividends and gifts -2,591 -1,314
- - Non-controlling interests recognised in other equity capital -666 -997
- - Non-controlling interests eligible for inclusion in CET1 capital 679 784
- - Net profit - -
- - Year-to-date profit included in core capital (50 per cent (50 per cent) pre tax of group profit) - -
-72 -53 Value adjustments due to requirements for prudent valuation -72 -89
-194 -412 Positive value of adjusted expected loss under IRB Approach -546 -279
- Cash flow hedge reserve -4 -4
-281 -350 Deduction for common equity Tier 1 capital in significant investments in financial institutions -278 -619
16,833 19,131 Common equity Tier 1 capital 21,589 19,776
1,726 1,800 Additional Tier 1 capital instruments 2,252 2,106
-47 -48 Deduction for significant investments in financial institutions -48 -47
18,512 20,883 Tier 1 capital 23,793 21,835
         
    Supplementary capital in excess of core capital    
2,000 2,150 Subordinated capital 2,822 2,523
-210 -216 Deduction for significant investments in financial institutions -216 -210
1,790 1,934 Additional Tier 2 capital instruments 2,606 2,312
20,301 22,817 Total eligible capital 26,399 24,147
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    Minimum requirements subordinated capital    
1,148 1,256 Specialised enterprises 1,538 1,351
901 904 Corporate 931 923
1,379 1,569 Mass market exposure, property 2,907 2,559
98 124 Other mass market 126 100
1,249 1,485 Equity positions IRB - -
4,774 5,338 Total credit risk IRB 5,502 4,933
         
6 3 Central government 5 6
82 95 Covered bonds 153 139
403 373 Institutions 280 276
187 110 Local and regional authorities, state-owned enterprises 146 207
143 248 Corporate 506 385
7 4 Mass market 703 662
27 37 Exposures secured on real property 126 109
90 63 Equity positions 465 504
97 112 Other assets 178 162
1,042 1,046 Total credit risk standardised approach 2,561 2,450
         
27 22 Debt risk 22 29
- - Equity risk 7 10
- - Currency risk and risk exposure for settlement/delivery 2 1
458 545 Operational risk 924 853
30 38 Credit value adjustment risk (CVA) 153 101
6,331 6,988 Minimum requirements subordinated capital 9,171 8,377
79,140 87,354 Risk weighted assets (RWA) 114,633 104,716
3,561 3,931 Minimum requirement on CET1 capital, 4.5 per cent 5,159 4,712
         
    Capital Buffers    
1,978 2,184 Capital conservation buffer, 2.5 per cent 2,866 2,618
3,561 3,896 Systemic risk buffer, 4.5 per cent  5,081 4,712
1,583 2,184 Countercyclical buffer, 1.0 per cent 2,866 2,094
7,123 8,264 Total buffer requirements on CET1 capital 10,813 9,424
6,149 6,937 Available CET1 capital after buffer requirements 5,618 5,639
         
    Capital adequacy    
21.3 % 21.9 % Common equity Tier 1 capital ratio 18.8 % 18.9 %
23.4 % 23.9 % Tier 1 capital ratio 20.8 % 20.9 %
25.7 % 26.1 % Capital ratio 23.0 % 23.1 %
         
    Leverage ratio    
210,227 221,334 Balance sheet items 323,929 302,617
6,234 7,559 Off-balance sheet items 8,984 7,744
-1,061 -513 Regulatory adjustments -666 -1,985
215,400 228,380 Calculation basis for leverage ratio 332,247 308,376
18,512 20,883 Core capital 23,793 21,835
8.6 % 9.1 % Leverage Ratio 7.2 % 7.1 %
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Annual report and notes

© SpareBank 1 SMN