24.1 Capital management at particular times
Already during 2011 the capital ratios of SNS Bank NV were a primary focus of attention. At that time the EBA stress test resulted in a capital deficit at SNS Bank NV. Mid-2012 the capital ratio improved as a result of the reduction in
risk-weighted assets. However, the underlying enchasing triggers of the decreasing capital ratios, such as the value adjustments at especially Property Finance and higher capital requirements, were distressing. During the course of 2012, the increase of the risks of the property finance portfolio of SNS Bank NV led to the conclusion that without additional actions the solvency could not be improved sufficiently enough to meet the (internal) capital requirements in the medium term for SNS Bank NV. Also for house financing impairment losses increased. The risk weighted assets of houses are mainly based on statistical models. Recent developments are used to rebuild these models. In particular, the losses in a period of recession, a so-called downturn, are estimated higher. The new models project, under the same circumstances, significantly higher losses and lead to higher risk weighted assets.
Due to these developments, the financial position of SNS Bank NV in 2012 weakened. The core Tier 1 ratio decreased from 9.2% in 2011 to 6.1% at year-end 2012, and thus below the limit required by DNB and under the internal standard of at least 9%. As a result, it was decided to perform a strategic reorientation, as communicated in July 2012. Various scenarios were investigated to strengthen the capital base.
Near the end of 2012, SNS Bank NV frequently made the headlines. The trust of consumers and financial markets in a solution for the strengthening of the capital position declined.
End of 2012, SNS Bank NV concluded in its Internal Capital Adequacy Assessment Process (ICAAP) that without additional actions there would be insufficient capital. With the ongoing negative economic developments it would be improbable that SNS REAAL could indeed repay the capital support received form the State in 2008 on the agreed date (year-end 2013 at the latest). In the upcoming years, it was expected that the capital ratio of the company would even be under more pressure and the (up till then) projected increasing capitalisation would not further improve.
The Dutch Central Bank (DNB) informed through its Supervisory Review and Evaluation Process (SREP) SNS Bank NV that the risks regarding the property finance portfolio were far more material than was presumed. DNB also informed the company that an increase of the core capital would be necessary on short term notice. When SNS Bank NV, according to DNB, could not meet the demands set out to accomplish this in time, DNB informed the Ministry of Finance it would not be justified for SNS Bank NV to continue its Banking activities. On 1 February 2013, the Ministry of Finance therefore decided to nationalise SNS REAAL, as is described in chapter 3 Nationalisation.
SNS Bank NV now has the possibility to focus on its core activities and further strengthen its capital base. The pro forma capitalisation of SNS Bank NV improved after nationalisation.
The pro forma core Tier 1 ratio of SNS Bank NV is 14.9% at year-end 2012. The pro forma solvency ratios take all known effects caused by the nationalisation into account, including secondary effects such as:
•
The transfer of Property Finance to a real estate management organisation at a loss on separation of € 2.8 billion on the real estate portfolio compared to the book value of June 2012 (refer to section 3.2.1.1). Of this amount, € 776 million is recognised in the second half of 2012. For the remaining loss, a provision of € 2.0 billion has been made in the first quarter of 2013. This provision will lead to a decrease in the risk-weighted assets of SNS Bank as per February, after which the remaining risk-weighted assets will be released at the external transfer of the portfolio (refer to 3.2.1.4).•
The expropriation and conversion into equity of subordinated debt of SNS Bank NV and SNS REAAL NV.•
A paid-in share premium of € 2.2 billion by the Dutch State in SNS REAAL, € 1.9 billion of which has passed through as share premium to SNS Bank NV.•
The release of around € 5.5 billion in risk-weighted assets by transferring the activities of Property Finance to a new, to be established real estate management organisation in combination with the government guarantee of around € 5 billion for the temporary loan that SNS Bank NV will provide to this real estate management•
The contribution by SNS Bank NV to the Resolution levy imposed by the Minister.•
An estimation of the corporation tax settlement on the impairments of Property Finance and the conversion into equity of subordinated debts.SNS Bank NV strives to a strong solvency in view of the further implementation of Basel III.
24.2 Going concern capital management
24.2.1 Planning
Every year, SNS Bank NV prepares operational plans with a three-year horizon. At the same time, it prepares the Capitalisation and Funding Plan with the same horizon, in which the expected development of the capital and funding available is compared to the capital and funding requirements ensuing from the operational plans. Instruments to lower the risks and to increase the available capital and liquidity are used for control purposes. For more details on funding, please refer to chapter 12 Funding and credit ratings.
In addition to the long-term planning in the Capitalisation and Funding Plan, each month a 12-month rolling forecast of capitalisation developments is made for the Banking activities, which is discussed at ALCO Bank. This forecast makes it possible to take additional measures if necessary. The quantitative assessment of the capital position comprises a comparison of the capital available and the internal standards under the current regulatory framework as well as the economic capital. In addition, the expected capital ratios are confronted with the applicable internal standards after a stress event. In determining the available capital, the restrictions that supervisory authorities and rating agencies require with regard to the composition of capital are taken into account.
SNS REAAL’s Group ALCO assesses the results of the economic capital calculations, the requirements of supervisory authorities and rating agencies, the outcomes of stress tests and capital planning. Based on these assessments, it is decided whether additional measures are required for the banking activities.
24.2.2 Capital adequacy assessment
The assessment of capital adequacy consists of the following elements:
•
An ICAAP is performed on an annual basis, with close involvement of senior management to determine the capital adequacy. ICAAP is further described in paragraph 24.5.2 Capital Adequacy Banking activities (ICAAP).•
As part of the ICAAP, the capital requirements ensuing from stress testing are compared to the qualifying capital present.•
The results of the stress tests are annually compared with the economic capital required. The economic capital is calculated and reported to Group ALCO on a quarterly basis. Sensitivity analyses are performed and forecasts of capital development are made on a monthly basis.•
Using the Supervisory Review & Evaluation Process (SREP), a dialogue with DNB about the capital adequacy is held. Please refer to paragraph 3.1 Nationalisation of SNS REAAL for the outcome of this process.24.3 Objectives and framework of standards
24.3.1 Objectives
SNS Bank NV’s capitalisation policy focuses on the optimisation of the capital structure in such a manner that it contributes to the realisation of SNS Bank NV’s strategic objectives. At the same time, SNS Bank NV also seeks to maintain a healthy balance between the amount of capital and the risks it runs.
In determining the capital structure, SNS Bank NV takes into account the restrictions set by the Dutch Central Bank, national and European regulations, rating agencies and internal requirements regarding capital adequacy.
SNS Bank NV’s capital management is aimed to again obtain a solid A rating at the rating agencies, as well as on permanent compliance with regulatory requirements. Through active capital management, SNS Bank NV aims for
optimum capital allocation among the various business units to achieve maximum returns on its activities.
24.3.2 Framework of standards
In 2012, SNS Bank NVs' internal targets for solvency, are mentioned in the scheme below.
Internal solvency standards
Target Realisation
in percentages 2012 2011
Tier 1 ratio > 10% 7.7% 12.2%
core Tier 1 ratio > 9% 6.1% 9.2%
To calculate its solvency ratios, SNS Bank NV applies the Basel II regulatory framework. This includes the credit risk types, market risk of trading portfolios and operational risk, and applies the Internal Rating Based method for the credit risk for residential mortgages.
24.4 Capital position
CapitalisationIn € millions December 2012 December 2011
Banking activities
core Tier 1 ratio 6.1% 9.2%
Tier 1 ratio 7.7% 12.2%
BIS ratio 9.3% 14.4%
core Tier 1 capital 1,253 1,879
Tier 1 capital 1,584 2,505
BIS capital 1,908 2,961
Risk weighted assets 20,592 20,534
SNS Bank publishes its solvency ratios using the risk-weighted assets as calculated under Basel II, taking into account the Basel I Floor rules.
24.4.1 Solvency
SNS Bank NV publishes its solvency ratios using the risk-weighted assets as calculated under Basel II, taking in account the Basel I 80% floor rules. In the second half of 2012 the implementation of more prudent risk assessment models for loans in combination with a deteriorating credit risk environment led to an increase in the level of risk-weighted assets under Basel II, which surpassed the level of Basel I with an 80% floor. As a consequence, solvency ratios are since then calculated using Basel II risk-weighted assets, whereas for previous periods Basel I with an 80% floor was used. Basel II risk-weighted assets increased from € 19.2 billion at year-end 2011 to € 20.6 billion. The use of more stringent risk assessment models for retail mortgages led to an increase of € 3.5 billion in Basel II risk-weighted assets, which were also impacted by the redemption of debt securities issued under securitisation programmes. This was partly
compensated by the decline of the total exposure at Property Finance. Due to the net loss at SNS Bank NV and the increase in risk-weighted assets, the core Tier 1 ratio dropped from 9.2% at the end of 2011 to 6.1%, which was below the internal and the DNB requirements.
24.5 Capital adequacy
24.5.1 Capital management framework
In assessing capital adequacy, SNS Bank NV takes into account the economic risks of the underlying activities. These risks are assessed using stress tests, regulatory capital calculations as prescribed in the Basel II/III regulatory
framework, and economic capital calculations. SNS Bank NV’s capitalisation is aimed at holding and maintaining a single A rating. SNS Bank NV’s capital management comprises the following main activities: determining the minimum level of required capital, performing stress tests on the capital adequacy and a qualitative capital adequacy assessment (ICAAP) and maintaining the available capital at the required level.
24.5.2 Capital adequacy (ICAAP)
In the ICAAP, the required amount of capital is determined by the Management Board of SNS Bank and the Executive Board. Points of departure are the balance sheet, (proposed) strategy, risk appetite and existing risks. The assessment includes the questions of how risks are dealt with and whether the capitalisation of SNS Bank in current and possibly future circumstances is sufficiently robust to absorb the risks. Risks are identified using the business strategy and are tested against risk tolerance levels within the risk appetite framework defined. This also enables the integration of risk management according to the recommendations of the Dutch Banking Code.
The robustness of capital levels is also tried by performing stress tests. In 2012, SNS Bank performed an internal stress test as part of the 2012 ICAAP. For this stress test, the risks involved were thoroughly analysed and tested. SNS Bank applies its own specific economic scenarios for this stress test. The economic capital and the Regulatory Capital (Basel II, pillar 1) are part of the ICAAP as well and the capital management process is reviewed. The results of the 2012 ICAAP show that SNS Bank does not meet the internal standards either in the base case scenario or in a stress scenario. With reference to the Supervisory Review and Evaluation Process (SREP) SNS Bank is in ongoing dialogue with the Dutch Central Bank on the ICAAP results.
The Dutch Central Bank (DNB) informed through its Supervisory Review and Evaluation Process (SREP) SNS Bank NV that the risks regarding the property finance portfolio were far more material than was presumed. DNB also informed the company that an increase of the core capital would be necessary on short term notice. When SNS Bank NV, according to DNB, could not meet the demands set out to accomplish this in time, DNB informed the Ministry of Finance it would not be justified for SNS Bank NV to continue its Banking activities. On 1 February 2013, the Ministry of Finance therefore decided to nationalise SNS REAAL, as is described in chapter 3 Nationalisation of SNS REAAL.
24.5.3 Economic capital
SNS Bank NV uses economic capital (that is unexpected losses) as much as possible for the management of the Company and the business units with the aim to create value in the long term. To this end, the economic capital must first be calculated as precisely as possible, without incorporating a margin of conservatism in the estimate of the economic capital formula components and the economic capital calculations themselves. In assessing capital adequacy, SNS Bank NV takes into account any uncertainties in the economic capital models. These uncertainties are translated into separate surcharges and added to the unadjusted economic capital.
A one-year horizon with a confidence level of 99.96% is used in determining the economic capital. This confidence level is calibrated to the default probability of a company with an AA rating. SNS Bank deliberately chooses this higher confidence level over the level related to the rating ambition in order to be more confident that it will achieve the single A rating. In the economic capital calculation, diversification effects between risk categories are taken into account. These diversification effects occur because not all risks manifest themselves simultaneously.
The economic capital for SNS Bank as a whole is calculated on a quarterly basis. After these figures have been analysed, the conclusions are discussed in the various allocation committees and with the Supervisory Board. The economic capital figures are also discussed with the Dutch Central Bank. Economic capital is furthermore used in the ICAAP and in the specification and assessment of risk appetite. At the Banking activities, economic capital is used to determine the value of our customers.
24.5.4 Stress testing
DNB stress test
At the Dutch Central Bank’s request, SNS Bank NV performed two (macro) stress tests on its activities in the third quarter of 2012: a stress test for the whole of SNS Bank NV, and a housing market stress test on residential mortgages. Both stress tests are based on a core Tier 1 ratio of 9.6%, the situation as it was at the end of June 2012.
The SNS Bank NV stress test has a two-year horizon, for which the Dutch Central Bank has prepared a base case scenario and a stress scenario. The stress scenario takes into account a further deterioration of the economy and the financial markets. For example, this stress scenario includes a considerable value decrease of residential property (approximately 30% in 2 years) and commercial property and rising unemployment rates.
The results show that the solvency drops in the stress scenario due to high impairments on the Property Finance and SNS SME portfolios and the adjustment for the revaluation reserve. This brought the solvency below the internal 2012 standard of 5.125% core Tier 1 ratio after stress.
The Dutch Central Bank’s housing market stress test has a five-year horizon and consists solely of a stress scenario prescribed by the Dutch Central Bank. This scenario takes into account a further deterioration of the economy, combined with amendments to (tax) legislation. The scenario assumes that tax laws are amended for concluding a mortgage loan. The scenario goes beyond the measures announced in the Spring Agreement that limit the Loan-to-Value ratio and interest deductibility of new loans.
The economic scenario includes a considerable decrease of residential property prices (more than 40% in 5 years) and rising unemployment rates. However, the economic scenario is not in line with the scenario of the SNS Bank stress test, which makes it difficult to compare these two stress tests.
See for more information about stress testing paragraph 24.5.2 Capital adequacy (ICAAP).
EBA stress test on Banking activities
In 2012, the European Banking Authority (EBA) did not ask SNS Bank NV to perform a stress test on its activities. In the meantime it was announced that there will not be an EBA stress test for 2013. This will be moved up to 2014.
See for more information about stress testing paragraph 24.5.2 Capital adequacy (ICAAP).
ICAAP stress test
In the third quarter of 2012, SNS Bank NV subjected its activities to an internal stress test within the context of its Internal Capital Adequacy Assessment Process (ICAAP). This internal stress test is largely based on the Dutch Central Bank’s company-wide stress test. The results showed that the solvency drops in the stress scenario due to high impairments on the portfolios of Property Finance and SNS SME. This brought the solvency below the internal 2012 standard of 5.125% core Tier 1 ratio after stress.