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165Chairman’s Review – OverviewCapital ManagementThe key objective of the Public Bank Group’s capitalmanagement is to proactively manage its capital to supportits business growth and maintain a strong capital positionwhilst optimising returns to shareholders. This involves ongoingreview and approval by the Board of Directors of thelevel and composition of the Group’s capital, assessedbased on the following key objectives:Compliance with regulatory capital requirementsAlignment of capital levels to the Group’s risk appetiteand business and strategic plansMaintenance of strong external credit ratings of AAA bydomestic rating agency and A3/A- (in line with countryrating) by international rating agenciesMaintaining an appropriate balance between optimisingreturns to shareholders and prudent capital managementprocessesCapital PlanningThe Public Bank Group’s capital management activities aregoverned by its Group Capital Management Framework,which has been enhanced by its Internal Capital AdequacyAssessment Process (“ICAAP”). Under the ICAAP, the Grouphas conducted a comprehensive assessment of all materialrisks that it is exposed to and evaluated the adequacy of itscapital levels to support its business activities. This involvesthe preparation of detailed strategic capital management planover the medium term horizon of three years, whichincorporates its business and strategic plans, and assessmentof the operating environment in order to determine thedemand for capital. Capital stress tests under variouseconomic conditions are conducted on these results in orderto ensure that the Group’s capital levels are sufficiently robustto absorb losses that may be experienced during an economicdownturn. Based on these assessments, the Group sets itsinternal capital targets incorporating sufficient capital buffers towithstand any unexpected economic shocks.Capital Adequacy RatiosThe table below shows the capital composition and capital adequacy ratios of the Public Bank Group and Public Bank asat the end of 2012:2012RM’MillionPublic Bank Group Public Bank2011*2012RM’Million RM’Million2011*RM’MillionEquity Capital 16,544 14,334 16,478 14,301Additional Tier 1 Capital Instruments 3,893 3,916 3,893 3,916Tier 1 Capital 20,437 18,250 20,371 18,217Tier 2 Capital 5,909 7,211 5,562 6,859Total Capital 26,346 25,461 25,933 25,076Less: Investment in subsidiary and associatedcompanies and holdings of other financialinstitutions’ capital instruments (48) (45) (4,209) (4,031)Capital Base 26,298 25,416 21,724 21,045Risk-weighted assets 179,527 163,027 149,774 134,888Capital Adequacy Ratios #Tier 1 Capital ratio 10.8% 10.6% 12.9% 12.8%Total Capital ratio 14.1% 15.0% 13.8% 14.9%* Restated after incorporating the effects of changes in accounting policy due to transition to MFRS framework#After deducting second interim dividends
166PUBLIC BANK BERHAD Annual Report 2012Resilient AlwaysChairman’s Review – OverviewCapital ManagementThe Group and the Bank’s capital adequacy ratios after deducting second interim dividends remained healthy at 14.1% and13.8% respectively as at the end of 2012, and were well above the regulatory minimum capital requirements.Regulatory EnvironmentThe Public Bank Group’s regulatory capital is governed by Bank Negara Malaysia’s (“BNM”) Capital Adequacy Frameworkguidelines. On 28 November 2012, BNM issued its finalised Basel III capital adequacy guidelines, with a phasedimplementation timeline commencing 1 January 2013, and full phase-in by 1 January 2019. These Basel III capital adequacyguidelines are designed to strengthen capital standards and the resilience of the banking system.Under BNM’s Basel III capital adequacy guidelines, the minimum capital adequacy ratios are progressively increased from1 January 2013 to 1 January 2019, and are inclusive of the phased introduction of a new capital conservation buffer of2.5%. Additional capital requirements, including a new counter-cyclical buffer ranging from 0% to 2.5%, will be detailed outby BNM at a later stage.In its Basel III capital adequacy guidelines, BNM has introduced additional capital deductions from Common Equity Tier 1capital whereby new items such as intangible assets and investments in banking and insurance subsidiaries and associatesare now deductible from Common Equity Tier 1 capital. Tighter requirements pertaining to write-off and/or conversion toequity have also been introduced for Tier 1 and Tier 2 capital instruments. In addition, existing Tier 1 and Tier 2 capitalinstruments which do not contain these stringent write-off or conversion features will be gradually phased-out from inclusionin regulatory capital, commencing from 1 January 2013.The Public Bank Group has incorporated these Basel III capital adequacy requirements in its capital plan as well as in settingits internal capital targets, with a view to meeting the higher minimum capital adequacy requirements ahead of BNM’simplementation deadline. As at the end of 2012, the Group is well-placed to achieve this objective, with its capital at thefollowing levels:Capital Position based on Basel III RequirementsPublic BankGroupPublicBankMinimumBasel IIIrequirements *Common Equity Tier 1 ratio 8.5% 7.5% # 7.0%Tier 1 capital ratio 10.6% 10.0% # 8.5%Total capital ratio 14.0% 13.7% 10.5%* Minimum capital requirements inclusive of the capital conservation buffer of 2.5%, which is fully effective on 1 January 2019, ie. at the end of the phase-inperiod. These minimum capital requirements exclude the counter-cyclical buffer and any other buffers yet to be introduced by BNM.#Assuming full deduction of investment in banking and insurance subsidiaries and associates from Common Equity Tier 1 capital. However, BNM’s guidelinesallow a transitional phase-in of such deduction at 20% per annum commencing 1 January 2014.On a forward-looking basis, the Group is well-positioned to sustain its capital ratios above BNM’s minimum requirementsas a result of its strong earnings-generation capacity and superior asset quality, coupled with its proactive capitalmanagement initiatives.
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