Equity and capital adequacy measures

Equity of the PKO Bank Polski SA Group increased by 7.8% y/y and comprised 12.1% of total liabilities and equity as at the end of 2018.

The reinforcement of the capital base (an increase in average equity of 8.5% y/y) which resulted from the need to comply with the recommendations of the PFSA and the regulatory requirements, with a 20.5% y/y financial result dynamics, translated into an increase in the return on equity ratio (ROE) to 10.0%

* risk free rate calculated as annual average on profitability of 10-year Treasury bonds

The capital adequacy of the PKO Bank Polski SA Group as at the end of 2018 remained on a safe level, considerably above supervisory limits. As at 31 December 2018 the capital adequacy measures of the PKO Bank Polski SA Group were calculated based on the provisions of the CRR Regulation, taking account of prudential consolidation.

As at the end of 2018 the total capital ratio of the PKO Bank Polski SA Group increased by 1.51 p.p. y/y to 18.88%, and the Tier 1 capital ratio increased by 1.0 p.p. y/y to 17.54%.

The increase in the capital ratios was mainly due to an increase in own funds of PLN 3.8 billion, with a simultaneous increase in capital requirements of approx. PLN 0.4 billion (mainly in respect of credit risk).

The following factors had an impact on the increase in own funds: inclusion, at the consent of the PFSA, of part of the profit earned in 2018 of PLN 1.6 billion in own funds, issue of subordinated debt of PLN 1 billion, and accumulation of the profits of the Bank’s Group’s companies and the accumulation of 75.2% of the Bank’s profit from 2017 of PLN 2.1 billion (which led to an effective increase in own funds of PLN 0.3 billion, as part of the profit for 2017 of PLN 1.8 billion had already been included in own funds, at the PFSA’s consent, in previous quarters: in Q3 2017 part of the profit from H1 2017 of PLN 1,1 billion, and on Q4 2017 part of the profit from Q3 2017 of PLN 0.7 billion).

As at 31 December 2018 the following factors had an impact on the level of the PKO Bank Polski SA Group’s capital requirements: applying the preferential risk weight of 35% to housing mortgage-secured exposures in respect of exposures that do not have a rating in the form of a valuation survey prepared by a valuation expert, which reduced housing loan requirements by approx. PLN (-)0.8 billion and translated into an increase in the total capital ratio of 0.94 p.p. and the base capital ratio of 0.87 p.p.

As at the end of 2018 the total capital ratio of the PKO Bank Polski SA Group increased by 1.7 p.p. y/y to 21.33%, and the Tier 1 capital ratio increased by 1.2 p.p. y/y to 19.80%.

The increase in the capital adequacy ratios was mainly due to an increase in own funds of approx. PLN 3.5 billion in 2018 in consequence of including, at the PFSA’s consent, part of the profit earned in 2018 of PLN 1.6 billion in own funds, issuance of subordinated debt of PLN 1 billion, and the accumulation of 75.2% of the Bank’s profit from 2017 of PLN 2.1 billion (which led to an effective increase in own funds of PLN 0.3 billion, as part of the profit for 2017 of PLN 1.8 billion had already been included in own funds at the PFSA’s consent).

Stability of capital requirements was maintained thanks to the optimization of RWA in H2 2018 as a result of accepting the assessment of the value of real property by the Bank as meeting CRR requirements in the scope of allowability of mortgage as security and the wider use of the risk weight 35%, which led to lowering the requirements in the Bank by approx. PLN 0.8 billion.

On 18 June 2018 the Annual General Meeting of PKO Bank Polski SA passed a resolution on appropriating the Bank’s profit for 2017, pursuant to which the profit earned of PLN 2 774 million was earmarked for:

Dividend amounted to 24.8% of the profit for 2017, which constitutes PLN 0.55, gross, per share. The Annual General Meeting of PKO Bank Polski SA set the dividend date (date of vesting rights to dividend) at 8 August 2018, and the dividend payment date at 22 August 2018.

The Resolution of the Annual General Meeting of the Bank on the appropriation of the Bank’s profit for 2017 complies with the recommendation of the PFSA of 16 March 2018 to leave at least 25% of the 2017 profit unappropriated.

Retaining profit of PLN 2 086.5 million for 2017 translated into an effective increase in own funds of PLN 264.5 million, as part of the profit generated in 2017 of PLN 1 822 million had already been included in own funds pursuant to the consent of the PFSA in 2017.

The dividend policy of the Bank and the Bank’s Group is specified in the “Principles for management of capital adequacy and equity in PKO Bank Polski SA and in the PKO Bank Polski SA Group.”

The objective of the dividend policy is to optimally shape the Bank’s and the Bank’s Group’s capital structure, taking into account the return on capital employed and its cost, capital requirements related to development, accompanied by the necessity to ensure an appropriate level of the capital adequacy ratios.

The dividend policy assumes stable dividend payments in the long term, in keeping with the principle of prudent management of the Bank and the Bank’s Group, and a policy for making payments out of the capital surplus above the minimum capital adequacy ratios arising from the universally binding provisions of the law and regulatory requirements, and the minimum level of capital ratios set by the Polish Financial Supervision Authority for the purpose of dividend payment by the Bank.

The dividend policy takes into account factors related to the operations of the Bank and the Bank’s Group companies, and in particular the supervisory requirements and recommendations concerning capital adequacy.

The Bank’s Group effectively and rationally manages capital adequacy so as to ensure that TCR and Tier1 ratios are at levels exceeding the regulatory and supervisory requirements, and at the same time that the distribution of dividend is possible.

On 15 January 2019 the PFSA took a stand on the dividend policy of commercial banks. The criteria for dividend distribution in 2019 indicated by the PFSA in respect of 2018 profits earned by commercial banks are as follows:

• those that do not pursue the recovery plan;
• are positively assessed under the supervisory review and evaluation process (SREP) – final SREP grade no lower than 2.5;
• with a leverage ratio (LR) higher than 5%;
• with Tier 1 ratio (CET1) no lower than the required minimum plus 1.5 p.p.: 4.5% +56%*add-on + combined buffer requirement +1.5%;

• with Tier 1 ratio (T1) no lower than the required minimum plus 1.5 p.p.: 6% +75%*add-on + combined buffer requirement +1.5%;
• with total capital ratio (TCR) no lower than the required minimum plus 1.5 p.p.: 8%*add-on + combined buffer requirement +1.5%.

The PFSA recommends that the banks that simultaneously meet all of the above criteria pay out up to 75% of the profit earned in 2017.

The PFSA recommended that banks that meet all the above criteria pay out up to 100% of the profit earned, in consideration of the capital requirements and the bank’s sensitivity to an unfavourable macroeconomic scenario.

Additionally, the PFSA indicated that the banks exposed to foreign currency loans should adjust the rate of dividend distribution based on two additional criteria:

• Criterion 1 (K1) – based on the share of foreign currency housing loans for households in the total portfolio of amounts due from the non-financial sector;
• Criterion 2 (K2) – based on the share of foreign currency housing loans granted in 2007 and 2008 in the foreign currency housing loans for households portfolio.

The PFSA recommended that appropriate adjustments be made depending on the size of the portfolio held by the bank:

• Criterion 1
  • banks with a share exceeding 10% – adjustment of the dividend rate by 20 p.p.
  • banks with a share exceeding 20% – adjustment of the dividend rate by 30 p.p.
  • banks with a share exceeding 30% – adjustment of the dividend rate by 50 p.p.

• Criterion 2
  • banks with a share exceeding 20% – adjustment of the dividend rate by 30 p.p.
  • banks with a share exceeding 50% – adjustment of the dividend rate by 50 p.p.

The level of capital ratios to be observed by the Bank in the distribution of up to 100% out of the profit earned as stated by the PFSA is as follows:

• at the consolidated level:
  • Core Tier 1 capital ratio (CET1) = 13.40%;
  • Tier 1 capital ratio T1 = 14.98%;
  • total capital ratio TCR = 17.08%.

• at the separate level:
  • Core Tier 1 capital ratio (CET1) = 13.42%;
  • Tier 1 capital ratio T1 = 15.01%;
  • total capital ratio TCR = 17.13%.

As at 31 December 2018 the ratios amounted to:

• at the consolidated level:
  • Tier 1 capital ratio T1 and basic capital ratio T1 = 17.54%;
  • total capital ratio TCR = 18.88%;
  • Criterion 1 = 12.22%;
  • Criterion 2 = 45.16%.

• at the separate level:
  • Tier 1 capital ratio T1 and basic capital ratio T1 = 19.80%;
  • total capital ratio TCR = 21.33%;
  • Criterion 1 = 14.85%;
  • Criterion 2 = 45.38%.

After accounting for adjustments to the dividend ratio by Criteria 1 and 2, according to the data as at 31 December 2018 the Bank meets the requirements as to the distribution of dividend up to 50% of the net profit for 2018.

On 25 February 2019, Bank received an individual recommendation from PFSA in which PFSA prescribed Bank to increase its own funds by retaining at least 50% of the profit generated in the period from 1 January to 31 December 2018.