Risk management under Basel II and Pillar III disclosure
4. Capital management
The aim of capital management at BinckBank is to maintain a sound solvency position, seeking constantly to strike the right balance between the equity capital it holds and the risks to which it is exposed. Capital management is making an increasingly important contribution to the systematic analysis and improvement of the return on BinckBank's operations. In configuring the capital structure, BinckBank takes account of the limits set by DNB, the Basel II regulations and its internal requirements with respect to capital adequacy.
Capital strategy
BinckBank aims for a solvency ratio of between 12% and 20%. Its capital policy envisages the distribution of surplus capital to the shareholders in the form of dividend or share buy-back, if the solvency ratio approaches 20%.
Capital targets
BinckBank has set the following capital targets:
- growing Tier 1 capital from €77.3 million to € 100 million in three years (2009/2010/2011);
- paying an attractive dividend (50% of adjusted net profit) each year;
- buying back shares in order to return to the shareholders part of the capital released via amortisation of the intangible assets, provided the solvency ratio does not fall below 15%.
As at 31 December 2008, BinckBank had equity capital of € 477.6 million and Tier 1 capital of € 77.3 million. The large difference between the Tier 1 capital and the reported equity capital is mainly due to the fact that the net book value (purchase price) of Alex (€ 391.1 million) used in the solvency calculations is not included in Tier 1 capital. For accounting purposes, the purchase price of Alex was recognised at the time of the acquisition as goodwill (€ 142.9 million) and intangible assets (€ 248.5 million). The intangible assets will be amortised over 5-10 years. The annual amortisation charge will be € 28.2 million for the first five years and € 21.5 million thereafter. Goodwill is not amortised, but is subjected annually to an impairment test. On the basis of the BIS requirements, amortisation of the intangible assets raises the solvency ratio by more than 5 percentage points per year. In addition to the monthly amortisation of intangible assets, BinckBank's solvency position is also affected by a number of (partly opposing) factors, such as the capital requirement in respect of:
- risk-weighted assets
- risks identified by the Internal Capital Adequacy Assessment Process
- profit for the current financial year
- dividend policy
At the time of the acquisition of Alex, BinckBank introduced a dividend structure based on the adjusted net profit, which is calculated in the following way. Net profit adjusted for IFRS amortisation and the additional tax benefit on the difference between the commercial and fiscal amortisation of intangable assets and goodwill acquired on the purchase of Alex. In principle, 50% of the adjusted net profit is distributed as dividend.
Funding the dividend programme
The dividend programme is funded from the reported profit. Dividend is only paid if the company's reserves and its liquidity and solvency positions are adequate.
Funding the share buy-back programme
The share buy-back programme is also being funded from the capital released by the amortisation of the intangible assets, the allocation of which is monitored continuously by BinckBank. A monthly check is made on how much is left for the share buy-back programme. When planning the capital available for share buy-back, due account is taken of the possibility of the capital requirement increasing sharply in the short term, for example if BinckBank is obliged to hold more liquidity owing to stress in the financial markets. Because the scope available for share buy-back has to be determined in advance and the profit and the precise capital requirement for the current month are not known, it is important to hold sufficient surplus capital at all times. The scope for share buy-back is adjusted depending on developments on the financial markets and the extent to which movements in the risk-weighted assets can be foreseen. In parallel with its policy on dividends and share buy-back, BinckBank is aiming to grow the total Tier 1 capital to € 100 million in the long term, meaning not all the growth in the surplus capital will be allocated to the share buy-back programme.
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Capital management framework
The capital management process comprises four stages which run continuously as part of the day-to-day operations.
The necessary amount of capital depends on BinckBank's risk profile, which is obtained from a systematic analysis of all of the risks to which BinckBank is exposed combined with the company's attitude to risk. Using this risk profile, the necessary amount of capital is subsequently calculated. To ascertain the adequacy of the calculated capital requirement, BinckBank performs periodical stress tests.
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