Understanding LHV Group's Capital Adequacy Strategies

LHV Group's Capital Adequacy Review by the ECB

Recently, AS LHV Group received important feedback from the European Central Bank (ECB) regarding their Supervisory Review and Evaluation Process (SREP). This review focuses on how well financial institutions manage their capital and risk. Alongside this, the ECB's assessment has resulted in a revision of LHV Group's capital adequacy targets.

Insights into the New Capital Requirements

Following the ECB's latest decisions, the Pillar 2 capital requirements for LHV Group saw a reduction. LHV Group now has an additional requirement of 3.00% for their own funds, wherein at least 1.69% must be met by Core Tier 1 capital and at least 2.25% by Tier 1 capital. These adjustments reflect the ECB's ongoing commitment to ensuring that financial institutions maintain adequate capitalization in the face of potential risks.

The Role of the Countercyclical Buffer

One critical component that remains unchanged is the countercyclical buffer set by Eesti Pank, which holds steady at 1.50 percentage points. This buffer is designed to enhance the resilience of the financial sector by requiring banks to hold additional capital in good times, which can be utilized during downturns. Each member state has the flexibility to establish their own buffer to address the local macroeconomic landscape.

LHV Group's Response and Internal Capital Management

In light of the ECB's findings, the Supervisory Board of LHV Group has proactively decided to increase internal capital buffers correspondingly. This aims to maintain a total own funds target ratio of 19.70%, a Tier 1 ratio of 16.85%, and a Core Tier 1 ratio of 14.70%. Such measures are vital for ensuring that LHV Group can absorb shocks and meet regulatory requirements.

Key Indicators of Capital Adequacy

The internal capital targets consist of several key indicators which lay out LHV's capital adequacy framework. Below is the target split into essential components:

• Basic Requirement: CET 1 at 4.50%, Tier 1 at 6.00%, Total own funds ratio at 8.00%
• Pillar 2 Capital Requirement (P2R): CET 1 at 1.69%, Tier 1 at 2.25%, Total own funds ratio at 3.00%
• Total SREP Capital Requirement (TSCR): CET 1 at 6.19%, Tier 1 at 8.25%, Total own funds at 11.00%
• Capital Conservation Buffer: 2.50% across the board
• Countercyclical Buffer: 1.50% for additional safety

With the addition of various buffers, LHV Group demonstrates its commitment to maintaining substantial capital resources in line with regulatory expectations and market realities.

The Importance of Internal Capital and Risk Appetite

LHV Group also emphasizes internal capital requirements as a safeguard against unforeseen risks. The total internal capital requirement risk appetite limit stands at 14.70%, supported by an internal buffer allocation of 0.51% for CET 1, 0.60% for Tier 1, and 0.70% for total own funds. This showcases the Group's diligent approach in aligning its risk management strategies with broader financial stability objectives.

LHV Group’s Position in the Market

LHV Group has established itself as the largest domestic financial institution in Estonia, with a variety of services tailored for individual and corporate clients alike. The subsidiaries of the Group, including LHV Pank, LHV Varahaldus, and LHV Kindlustus, collectively serve over 452,000 clients. They also manage pension funds with 114,000 active clients and provide insurance services to 170,000 clients. Their international subsidiary, LHV Bank Limited, offers banking solutions aimed at fintech companies and SMEs.

Future Perspectives for LHV Group

As LHV Group navigates its regulatory framework while continually adapting to evolving market conditions, its robust capital adequacy strategies position it for sustainable growth. This supportive capital structure reflects the Group's commitment to compliance and ensuring client trust and security in their financial interactions.

Frequently Asked Questions

What is the Supervisory Review and Evaluation Process (SREP)?

The SREP is a process conducted by the European Central Bank to evaluate the capital adequacy and risk management of banks and financial institutions.

How has LHV Group's capital requirement changed?

The ECB reduced LHV Group's Pillar 2 capital requirements to an additional 3.00% for own funds.

What is the countercyclical buffer that LHV Group must maintain?

The countercyclical buffer for LHV Group remains at 1.50 percentage points to enhance financial resilience during economic fluctuations.

How does LHV Group plan to manage its internal buffers?

LHV Group intends to increase its internal buffers accordingly, maintaining a total funds target ratio of 19.70%.

What services does LHV Group provide?

LHV Group offers a range of services including banking, asset management, and insurance, catering to individual and corporate clients.

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