Capital adequacy

The increase in the capital ratios was determined by a decrease in capital requirements of PLN 0.2 billion with own funds lower by PLN 0.3 billion.

In 2021, the requirement for own funds in relation to market risk went down by PLN 1.4 billion, mainly as a result of a decrease in requirements related to the currency risk due to the lower foreign currency position of the Bank after accounting for the EUCoJ provision. The increase in the own funds requirement in respect of credit risk amounted to PLN 1.1 billion and resulted mainly from the balance sheet total and an increase in foreign currency exchange rates.

The changes in own funds resulted mainly from a decrease in the fair value of financial assets measured at fair value through other comprehensive income of approx. PLN 1.8 billion and including in the core equity Tier 1 a part of the net profit earned for the period from 1 January 2021 to 30 June 2021 of PLN 1,975 million.

The level of capital ratios as at the end of 2021 was also affected by the application of regulations mitigating the impact of the COVID-19 pandemic (Art. 468 of the CRR), relating to the temporary treatment of unrealized profits and losses measured at fair value through other comprehensive income, which resulted in an increase in own funds of PLN 1.2 billion and stimulated the growth of the total capital ratio by approx. 55 b.p. and the core capital T1 ratio by approx. 55 b.p.

In 2021, the total capital ratio of PKO Bank Polski S.A. increased by 6 b.p. to 19.84%, and the core capital T1 ratio by 2 b.p. to 18.47%. The increase in the capital ratios results mainly from a decrease in capital requirements of PLN 0.5 billion. The requirement for market risk went down by PLN 1.5 billion (the effect of the lower currency position of the Bank following accounting for the EUCoJ reserve), and the requirement for credit risk went up by PLN 0.8 billion, mainly as a result of an increase in the balance sheet total and an increase in foreign currency exchange rates.

Own funds of PKO Bank Polski S.A. decreased by PLN 1.1 billion, mainly as a result of a decrease in the fair value of financial assets measured at fair value through other comprehensive income of approx. PLN 1.8 billion, and an increase in the reduction due to exposures excluded from the exposure concentration limit, and deferred tax on the core equity Tier 1 position of PLN 0.9 billion. The increase in own funds resulted from the consent of the PFSA to include in the core equity Tier 1 a part of the Bank’s net profit earned for the period from 1 January 2021 to 30 June 2021 of PLN 2,073 million.

The level of capital ratios as at the end of 2021 was also affected by the application of regulations mitigating the impact of the COVID-19 pandemic (Art. 468 of the CRR) relating to the temporary treatment of unrealized profits and losses measured at fair value through other comprehensive income, which resulted in an increase in own funds of PLN 1.2 billion and stimulated growth of the total capital ratio by approx. 63 b.p. and the core equity T1 ratio by approx. 63 b.p.

In December 2021 the PFSA took a stand on the dividend policy of the supervised institutions in 2022, which was subsequently confirmed with the communication of 25 January 2022. The criteria for dividend distribution indicated in the PFSA’s positions in respect of distribution of dividend by commercial banks are as follows:

1. up to 50% of net profit for 2021 can only be distributed by banks which meet the following criteria jointly:
   • 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 core equity Tier 1 ratio (CET1) no lower than the required minimum: 4.5%+56%*P2R requirement + combined buffer requirement (taking into account 3% of the systemic risk buffer);
   • with Tier 1 ratio (T1) no lower than the required minimum plus 1.5 p.p.: 6%+75%*P2R requirement + combined buffer requirement (taking into account 3% of the systemic risk buffer);
   • with total capital ratio (TCR) no lower than the required minimum plus 1.5 p.p.: 8%+ P2R requirement + combined buffer requirement (taking into account 3% of the systemic risk buffer);
2. up to 75% of net profit for 2021 can only be distributed by banks which at the same time meet the criteria for the 50% distribution, taking into account – among capital criteria – the bank’s sensitivity to an unfavourable macroeconomic scenario;
3. up to 100% of net profit for 2021 can only be distributed by banks which at the same time meet the criteria for the 75% distribution, taking into account – among capital criteria – the bank’s sensitivity to an unfavourable macroeconomic scenario related to an increase in interest rates and its impact on the credit risk.

The criteria defined in points 1-3 above should be met by banks at both the separate and consolidated level.

Additionally, the PFSA indicated that the banks which have considerable portfolios of foreign currency housing loans should adjust the rate of dividend distribution based on two additional criteria:

• Criterion 1 – 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 – 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 5% – adjustment of the dividend rate by 20 p.p.;
  • banks with a share exceeding 10% – adjustment of the dividend rate by 40 p.p.;
  • banks with a share exceeding 20% – adjustment of the dividend rate by 60 p.p.;
  • banks with a share exceeding 30% – adjustment of the dividend rate by 100 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.;

whereas the total value of the adjustment (maximum 100%) is the sum of adjustments resulting from both criteria.

On 11 February 2022 the Bank received an individual recommendation from the PFSA regarding the level of capital add-on under pillar II (P2G) with an indication of a reduction of the risk imminent to the Bank’s activities by maintaining, both on the separate and consolidated level, own funds to cover additional capital add-on to absorb potential losses resulting from stress conditions at the level of 0.29% over the combined value of the capital ratio referred to in Art. 92.1.c of Regulation No. 575/2013, increased by an additional requirement in respect of own funds referred to in Art. 138.2.2 of the Banking Law, and the combined buffer requirement referred to in Art. 55.4 of the Act on macro-prudential supervision. The capital add-on should entirely consist of the core equity T1.

At the same time, according to the PFSA letter of 25 January 2022; in February the Bank will receive an individual recommendation related to the ability to pay dividends.

As at 31 December 2021 the ratios amounted to:

• at the consolidated level:
  • T1 capital ratio and core equity ratio T1 = 17.03%;
  • total capital ratio TCR = 18.23%;
  • Criterion 1 = 8.3%;
  • Criterion 2 = 38.7%;
• at the separate level:
  • T1 capital ratio and core equity ratio T1 = 18.47%;
  • total capital ratio TCR = 19.84%;
  • Criterion 1 = 8.3%;
  • Criterion 2 = 38.7%.

The Bank intends to pay dividends in 2022 out of the net profit of 2021.

Pursuant to Article 395 § 2.2 of the Commercial Companies Code the decision on the distribution of profit remains within the competences of the Bank’s Ordinary General Shareholders’ Meeting.