CNB published a communication that sets out the framework for distribution of profits for 2019 and 2020 by credit institutions. The starting point of this framework is the calculation of the quantitative limit for the maximum amount of dividends from profits achieved in 2019 and 2020, determined according to a general formula prepared by CNB. The next follow-up step of CNB will be the individual evaluation of the institution's risk profile, business model, and other significant factors assessed in the review and evaluation process. Following this evaluation, CNB may further reduce the resulting dividend amount for specific institutions.
CNB recently sent a letter to individual credit institutions in which, due to the continuing uncertainty about the economic impact of the ongoing COVID-19 pandemic, it provided them with a framework for paying dividends on 2019 and 2020 profits. As part of the framework, CNB sets the lowest of the following four values as the initial maximum amount of dividends:
- 100 basis points of total risk-weighted assets as at December 31, 2020
- 25% of the cumulative profit for 2019 and 2020
- the amount of funds after which the capital adequacy would be 4 percentage points above the total capital requirement
- the volume of funds after which the adjusted leverage ratio would be 7%; the adjusted leverage ratio is the leverage ratio, where exposures for CNB are excluded from the total exposure for the leverage ratio
The quantitative limit set in this way makes it possible not only to consider the volume of profits generated and the maximum change in the capital ratio, but also to consider the capital adequacy of individual institutions. The initial quantitative limit will be set only in relation to the final audited results of credit institutions for 2020. CNB will individually assess the proposals of credit institutions regarding the amount of dividends. In assessing the risk profile, CNB will consider the documents submitted by the institution for the Supervisory Review and Evaluation Process, or SREP, including the internal assessment of the institution's capital adequacy and liquidity; business, financial, and capital plans; and the results of stress tests. CNB will focus on evaluating the adequacy of the amount of provisions created so far due to the impact of the COVID-19 crisis and on evaluating the institution's plan for further provisioning. In assessing the institution's risk profile and capital adequacy, CNB will also consider the potential impact of planned or ongoing acquisitions and mergers and other changes in operations.
CNB expects to be prepared to communicate to individual credit institutions about the evaluation of their proposals for the payment of dividends during the third quarter of 2021. CNB is convinced that the chosen method of approach to profit distribution will not endanger the capital adequacy of any individual credit institution and will ensure the capital stability of the entire banking sector.
Related Link (in Czech): Press Release
Keywords: Europe, Czech Republic, COVID-19, Dividend Distribution, Credit Risk, Regulatory Capital, Leverage Ratio, Financial Stability, Basel, CNB
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