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Note 34 - Capital adequacy

The information in this note includes information that is required to be disclosed pursuant to FFFS 2008:25, including applicable amendments, regarding annual reports for credit institutions and FFFS 2014:12, including applicable amendments, concerning supervisory requirements and capital buffers. The information refers to the Hoist Finance AB (publ) consolidated situation (“Hoist Finance”) and Hoist Finance AB (publ), the regulated entity.

The Company’s statutory capital requirements are determined primarily by Regulation (EU) No 575/2013 of the European Parliament and of the Council and the Capital Buffers Act (SFS 2014:966). These laws are aimed at ensuring that the regulated entity and its consolidated situation manages its risks and protects its customers.

The difference between the consolidated accounts and the consolidated situation for capital adequacy purposes is as follows. Joint ventures are consolidated with the equity method in the consolidated accounts, whereas the proportional method is used for the consolidated situation. Securitised assets are recognised in the consolidated accounts but are removed from the accounting records for the consolidated situation. Hoist Finance’s participating interest in the securitised assets is always covered.

There are no existing or anticipated actual or legal obstacles to the immediate transfer of own resources or debt repayment between companies and their subsidiaries.

Additional information on capital adequacy is available in the company’s Pillar 3 report available on www.hoistfinance.com.

Transitional rules, IFRS 9

After obtaining Swedish Financial Supervisory Authority’s approval, Hoist Finance has decided to apply the transitional rules regarding IFRS 9 for the period 30 April 2018 through 31 December 2022. Application of these transitional rules allow the gradual phase-in of expected credit losses to capital adequacy.

Own funds

The table below shows own funds used to cover the capital requirements for Hoist Finance consolidated situation and the regulated entity Hoist Finance AB (publ).

 Hoist Finance consolidated situationHoist Finance AB (publ)
SEK m31 Dec 202031 Dec 201931 Dec 202031 Dec 2019
Common Equity Tier 1 (CET1) capital: instruments and reserves
Capital instruments and related share premium accounts1,9131,913 1,9131,913
Retained earnings2,0441,534 924819
Accumulated other comprehensive income and other reserves -1133 698694
Independently reviewed interim profits net of any foreseeable charge or dividend1) 50605 255197
CET1 capital before regulatory adjustments4,0064,1853,7903,623
CET1 capital: regulatory adjustments
Additional value adjustments-70-70
Intangible assets (net of related tax liability) -284-382-113-186
Deferred tax assets that rely on future profitability -93-27-1-2
Exposure amount of securitisation positions which qualify for a RW of 1,250 %, where the institution opts for the deduction alternative -8-9-8-9
Transitional rules regarding IFRS9 34 22
Total regulatory adjustments to CET1 -389-414 -127-195
CET1 capital3,6173,7713,6633,428
Additional Tier 1 (AT1) capital: instruments
Capital instruments and the related share premium accounts1,1066901,106690
AT1 capital 1,1066901,106690
Tier 1 (T1) capital 4,7234,461 4,7694,118
Tier 2  (T2) capital: instruments and provisions
Capital instruments and the related share premium accounts 821852821852
T2 capital 821852 821852
Total capital (TC = T1+ T2) 5,5445,313 5,5904,970

1) The Board of Directors will propose to the annual general meeting not to pay any dividend for financial year 2020. Therefore no dividend deduction has been included.

As presented in the above table, issued Tier 1 capital instruments and Tier 2 capital instruments are both used in calculating own funds. These instruments are described briefly below.

Additional Tier 1 capital

Additional Tier 1 capital is comprised of three issues of write-down instruments with a nominal amount of EUR 30m, EUR 40m and EUR 40m, respectively, and with coupon rates of 8.625 per cent, 8 per cent and 7.75 per cent, respectively. The convertibles were issued to improve Hoist Finance’s capital structure. The instruments have no scheduled maturity date, although the issuer may redeem the instruments in full at specified dates. The first possible redemption dates are 21 June 2023, 1 September 2023 and 26 February 2025, respectively.

Tier 2 capital instruments

In May 2017 Hoist Finance issued a subordinated loan of EUR 80m, which is included as Tier 2 capital in Hoist Finance’s own funds. The subordinated loan matures on 19 May 2027 with possibility for early redemption after five years and carries a fixed coupon rate of 3.875 per cent. The instrument is listed on the Dublin Stock Exchange.

Revaluation reserve

Hoist Finance’s own funds include a revaluation reserve of SEK 72m in other reserves, of which SEK 64m pertains to a revaluation of shares in subsidiary Hoist Finance UK Ltd during 2013 and SEK 8m pertains to revaluation of acquired loan portfolios.

Capital requirement

The tables below show the risk-weighted exposure amounts and own funds requirements per risk category for Hoist Finance and the regulated entity Hoist Finance AB (publ).

 Hoist Finance consolidated situationHoist Finance AB (publ)
Risk-weighted exposure amounts, SEK m31 Dec 202031 Dec 201931 Dec 202031 Dec 2019
Exposures to central governments or central banks00 00
Exposures to regional governments or local authorities 00 00
Exposures to institutions 670752 411363
of which, counterparty credit risk 7260 7260
Exposures to corporates 462319 12,59414,565
Retail exposures 2738 2333
Exposures secured by mortgages on immovable property 352368 83101
Exposures in default 25,01228,746 9,25810,043
Exposures in the form of covered bonds 408277 408277
Equity exposures -- 816807
Other items 470382 16484
Credit risk (standardised approach) 27,40130,882 23,75726,273
Securitisation positions in the banking book (external ratings-based approach) 1,9542,984 1,9542,984
Market risk (foreign exchange risk – standardised approach) 078 078
Operational risk (standardised approach) 4,2083,935 2,2131,916
Credit valuation adjustment (standardised approach) 6248 6248
Total risk-weighted exposure amount 33,62537,927 27,98631,299
 Hoist Finance consolidated situationHoist Finance AB (publ)
Capital requirements, SEK m31 Dec 202031 Dec 201931 Dec 202031 Dec 2019
Pillar 1    
Exposures to central governments or central banks 00 00
Exposures to regional governments or local authorities 00 00
Exposures to institutions 5460 3329
of which, counterparty credit risk 65 65
Exposures to corporates 3726 1,0071,165
Retail exposures 23 23
Exposures secured by mortgages on immovable property 2829 78
Exposures in default 2,0012,300 741803
Exposures in the form of covered bonds 3322 3322
Equity exposures -- 6565
Other items 3831 137
Credit risk (standardised approach) 2,1932,471 1,9012,102
Securitisation positions in the banking book (external ratings-based approach) 156239 156239
Market risk (foreign exchange risk – standardised approach) 06 06
Operational risk (standardised approach) 337315 177153
Credit valuation adjustment (standardised approach) 54 54
Total own funds requirement – Pillar 1 2,6913,035 2,2392,504
Pillar 2    
Concentration risk 234245 267356
Interest-rate risk in the banking book 96129 41129
Pension risk 03 03
Other Pillar 2 risks 2737 2737
Total own funds requirement – Pillar 2 357414 335525
Capital buffers    
Capital conservation buffer 841948 700783
Countercyclical buffer 0128 094
Total own funds requirement – Capital buffers 8411,076 700877
Total capital requirements 3,8894,525 3,2743,906

Capital ratios and capital buffers

Regulation (EU) No 575/2013 of the European Parliament and the Council requires credit institutions to maintain Common Equity Tier 1 capital of at least 4.5 per cent, Tier 1 capital of at least 6 per cent and a total capital ratio (capital in relation to risk-weighted exposure amount) of 8 per cent. Credit institutions are also required to maintain specific capital buffers. Hoist Finance is currently required to maintain a capital conservation buffer of 2.5 per cent of the total risk-weighted exposure amount and an institutional specific countercyclical buffer of 0 per cent of the total risk-weighted exposure amount.

The table below shows CET1 capital, Tier 1 capital and the total capital ratio in relation to the total risk-weighted exposure amount for Hoist Finance consolidated situation and for the regulated entity Hoist Finance AB (publ). It also shows the total regulatory requirements under each pillar and the institution-specific CET1 capital requirements. All capital ratios exceed the minimum requirements and capital buffer requirements.

 Hoist Finance consolidated situationHoist Finance AB (publ)
Capital ratios and capital buffers, %31 Dec 202031 Dec 201931 Dec 202031 Dec 2019
CET1 ratio 10.769.94 13.0910.95
Tier 1 capital ratio 14.0511.76 17.0413.16
Total capital ratio 16.4914.01 19.9715.88
Institution-specific CET1 requirements 7.007.34 7.007.30
of which, capital conservation buffer requirement 2.502.50 2.502.50
of which, countercyclical buffer requirement 0.000.34 0.000.30
CET1 capital available to meet buffers (as a percentage of risk exposure amount)1) 6.265.448.596.45

1) CET1 ratio as reported, less minimum requirement of 4.5 per cent (excluding buffer requirements) and less any CET1 items used to meet the Tier 1 and total capital requirements.

Internally assessed capital requirement

As per 31 December 2020, the internally assessed capital requirement for Hoist Finance was SEK 3,048m (3,449), of which SEK 357m (414) was attributable to Pillar 2.

 Hoist Finance Consolidated situationHoist Finance AB (Publ)
Leverage ratio31 Dec 202031 Dec 201931 Dec 202031 Dec 2019
Exposure measure for leverage ratio calculation31,177 34,198 31,167 33,501
Tier 1 capital 4,723 4,461 4,768 4,118
Leverage ratio, % 15.15 13.04 15.30 12.29

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