Notice No. 8/GBM/2017 of April 3 – Regulation on the Own Funds of Credit Institutions

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Bank of Mozambique Governor

NOTICE NO. 8/GBM/2017 Maputo, April 3, 2017

SUBJECT: Regulation on the Own Funds of Credit Institutions

Given the need to align the regulatory own funds calculation requirements for credit institutions, the Bank of Mozambique, exercising its powers under paragraph d) of paragraph 2 of Article 37 of Law No. 1/92, dated January 3 – Organic Law of the Bank, combined with Article 64 of Law No. 15/99, dated November 1 – Law on Credit Institutions and Financial Companies, updated by Law No. 9/2004, dated July 21, determines:

1. The Regulation on the Own Funds of Credit Institutions, attached to this Notice and forming an integral part thereof, is approved.

2. This Notice enters into force on the date of its publication and revokes Notice No. 14/GBM/2013, dated December 31.

[Signature] Rogério Lucas Zandamela Governor

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Bank of Mozambique Governor

REGULATION ON THE OWN FUNDS OF CREDIT INSTITUTIONS

Article 1 (Scope)

1. This Regulation applies to all credit institutions subject to the supervision of the Bank of Mozambique.

2. The institutions referred to in the preceding paragraph that, according to Articles 3 and 8 of Notice No. 4/GBM/2007, dated May 2, do not prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), shall equally apply the provisions of this Regulation with the necessary adaptations.

Article 2 (Composition of Own Funds)

Own funds consist of positive and negative elements, as defined in Articles 3 and 4 of this Regulation.

Article 3 (Positive elements of own funds)

1. The following are considered positive elements of own funds: a) Paid-up capital, including the portion represented by non-convertible preference shares; b) Share and other issuance premiums; c) Legal, statutory, and other reserves formed from undistributed profits; d) Positive results carried forward from previous financial years;

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Bank of Mozambique Governor

e) Positive results of the last financial year, under the conditions referred to in paragraph 1 of Article 10;
f) Provisional positive results of the current financial year, under the conditions referred to in paragraph 1 of Article 10;
g) Foreign exchange translation reserves and hedging reserves for net investments in foreign operational units;
h) Portion of reserves and results corresponding to deferred tax assets;
i) Elements characterized in Article 11, subject to approval by the Bank of Mozambique;
j) Elements characterized in Article 12;
k) Provisions for general credit risks, up to a maximum limit of 0.0125% of risk-weighted credit assets, as provided in Notice No. 11/GBM/2013, dated October 25;
l) Reserves arising from the revaluation of tangible fixed assets, carried out under the authorizing legal instrument;
m) Other positive revaluation reserves, for amounts resulting from the application of Article 5 and paragraphs g) and h) of Article 17;
n) Other eligible elements, defined in paragraph 5 of Article 5 and without prejudice to Articles 11 and 12;
o) Subordinated loans, under the conditions referred to in Article 13;
p) Released portion of convertible preference shares.

2. The elements provided for in paragraphs g), h) and i) of the preceding paragraph do not apply to credit institutions that do not prepare their individual financial statements in accordance with IFRS, as per Notice No. 4/GBM/2007, dated May 2.

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Bank of Mozambique Governor

Article 4 (Negative elements of own funds)

1. The following are considered negative elements of own funds: a) Own shares, at their book value; b) Other elements qualifying under Article 3, at their book value; c) Intangible assets; d) Negative results carried forward from previous financial years; e) Negative results of the last financial year; f) Negative results of the current financial year, at month-end; g) Negative revaluation reserves, under the conditions listed in Article 5; h) Positive differences from equity method revaluation; i) Amount corresponding to deficiencies in the establishment of provisions, as defined by the Bank of Mozambique, representing the positive difference between regulatory provision amounts resulting from the minimum provisions regime and credit impairment/provisions for off-balance sheet operations resulting from IFRS application; j) Amounts of negative actuarial deviations and past service costs associated with post-employment benefits granted by the entity, which, according to International Accounting Standard 19 (IAS 19) – Employee Benefits, have not been recognized in current year results, carried forward results, or reserves.

2. The provision in paragraph g) of the preceding paragraph applies only to institutions that prepare their individual financial statements in accordance with IFRS.

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Bank of Mozambique Governor

Article 5 (Elements excluded from own funds)

1. The provisions of this article apply only to institutions that prepare their individual financial statements in accordance with IFRS, which must also observe the following paragraphs.

2. In determining the elements listed in Articles 3 and 4, the following shall be excluded: a) Unrealized losses and gains on financial liabilities measured at fair value through profit or loss that represent own credit risk; b) Unrealized gains and losses from cash flow hedging of covered elements measured at amortized cost and future transactions; c) Without prejudice to paragraph e) of this section, unrealized gains on loans and other receivables classified as financial assets held for trading or as financial assets at fair value through profit or loss, where applicable; d) Without prejudice to paragraph e) of this section, unrealized gains and losses that do not represent impairment on debt securities, loans, and other receivables classified as available-for-sale assets; e) When the assets referred to in paragraphs c) and d) are involved in fair value hedging relationships, only the corresponding gains, or the corresponding gains and losses related to the non-hedged portion or the ineffective portion of such hedging relationship, shall be excluded.

3. Without prejudice to the exclusions established in paragraph 1, the elements provided for in paragraph m) of Article 3(1) correspond to: a) Unrealized gains on available-for-sale assets, up to 45% of their value; b) Unrealized gains from cash flow hedging of available-for-sale assets, up to 45% of their value (based on the net hedging effect amount).

4. When unrealized gains referred to in paragraph a) of section 2 occur on assets with impairment recognition, the amounts of unrealized gains and impairment shall be treated together for the application of Articles 3 and 4.

5. The elements provided for in paragraph n) of Article 3(1) and paragraph g) of Article 4(1) correspond, respectively, to the sum of individual amounts of unrealized gains and losses on financial instruments, with no offsetting permitted between these amounts.

Article 6 (Basic and supplementary own funds)

1. The amount corresponding to the sum of the elements indicated in paragraphs a) to h) of Article 3(1), minus the sum of the elements indicated in paragraphs a), c) to j) of Article 4(1), constitutes basic own funds.

2. The amount corresponding to the sum of the elements indicated in paragraphs i) to p) of Article 3(1), minus the elements indicated in paragraph b) of Article 4(1), constitutes supplementary own funds.

3. Only for institutions that do not prepare their individual financial statements in accordance with IFRS, the amount corresponding to the sum of the elements indicated in paragraphs a) to f) of Article 3(1), minus the sum of the elements indicated in paragraphs a), c) to j) of Article 4(1), constitutes basic own funds.

Article 7 (Calculation of own funds)

1. The total own funds of credit institutions are determined by the sum of basic and supplementary own funds, minus the amounts referred to in Article 8.

2. For banks, the elements provided for in paragraphs 1 and 3 of Article 8 shall be deducted by 80% from basic own funds and by 20% from supplementary own funds, after applying the limits for the eligibility of supplementary own funds relative to basic own funds.

3. For other credit institutions, the elements provided for in paragraphs 1 and 3 of Article 8 shall be deducted by 50% from basic own funds and by 50% from supplementary own funds, after applying the limits for the eligibility of supplementary own funds relative to basic own funds.

4. For the purposes of paragraphs 2 and 3, if supplementary own funds are lower than the deduction amount, the remaining amount shall be deducted from basic own funds.

Article 8 (Elements to be deducted from own funds)

1. The amount corresponding to shares, other securities, and other values qualifying under Article 3, issued or contracted by credit institutions and other financial institutions supervised by the Bank of Mozambique, which are held by the institution, shall be deducted at their respective net book value, under the following conditions: a) In cases where the institution holds a participation exceeding 10% of the share capital of one of these institutions, the total amount of that participation shall be deducted, as well as the value represented by other equity elements held in respect of the same institution; b) The global amount of the remaining participations and other equity elements referred to in this section, not covered by the preceding paragraph, shall be deducted only to the extent that it exceeds 10% of the institution's own funds, calculated before applying the deductions provided in the preceding paragraph.

2. The amount of value adjustments safeguarding risks incurred in securitization operations, to the extent that these are not safeguarded in the institution's accounts, shall also be deducted, whenever the Bank of Mozambique's requirements for recognizing significant credit risk transfers are not met.

3. Regarding non-qualifying financial participations referred to in paragraph a) of section 1, the amount resulting from applying the minimum regulatory provisions regime shall be deducted.

4. The following are also deducted: a) Net book value of non-financial assets: i. Received in reimbursement of own credit, calculated at an annual rate of 20% from the moment two years have elapsed since the acquisition date of the relevant non-financial asset; ii. Investment properties; iii. Other assets. b) The amount the institution intends to allocate exclusively to cover specific risks, notably those related to loans, other financial assets, and tangible fixed assets; c) The portion exceeding the risk concentration limits defined in the regime established by the Notice on prudential ratios and limits; d) Value of other deductions resulting from measures established by the Bank of Mozambique in specific Notices; and e) The value of assets to be deducted under paragraphs a) to c) corresponds to their book value, except for non-listed available-for-sale assets in an active market, which shall be deducted net of unrealized gains (ineligible), according to IAS 39 – Financial Instruments: Recognition and Measurement.

Article 9 (Exceptions in the treatment of deduction values for own funds)

1. Only for institutions that prepare their individual financial statements in accordance with IFRS, the value of assets to be deducted under section 1 of Article 8 corresponds to their net book value, except for: a) Assets classified as available-for-sale associated with unrealized gains and losses excluded from own funds determination, which shall be deducted by such gains or added by such losses, as per paragraph d) of section 2 of Article 5; b) Assets classified as available-for-sale associated with unrealized gains considered a positive element of own funds, which shall be deducted by the ineligibility portion of such gains, as per paragraph a) of section 3 of Article 5; c) Assets reclassified from available-for-sale to other categories associated with unrealized gains and losses excluded from own funds determination, which shall be deducted by such gains or added by such losses; d) Participations subject to the equity method, which shall exclude revaluation-equity differences indicated in paragraph h) of Article 4(1), when included in that value.

2. The provisions of section 3 of Article 8 do not apply to elements covered by this article.

Article 10 (Treatment of results in own funds)

1. Provisional positive results of the current financial year or positive results of the last financial year shall only be considered as own funds if the following conditions are met: a) They have been determined after accounting for all costs attributable to the reference period and complying with all rules regarding the establishment of provisions (or impairment, where applicable) and amortization allocations; b) They have been reduced by the value of foreseeable taxes and dividends, calculated proportionally to the period they relate to; c) They have been accepted by the Bank of Mozambique, without prejudice to external audit by an auditor approved by the Bank.

2. For institutions preparing individual financial statements in accordance with IFRS, the results referred to in the preceding paragraph are those resulting from corrections inherent to applying relevant provisions of this Regulation for determining positive and negative own fund elements. If the application of these principles results in a negative value, it shall be considered in computing paragraphs e) and/or f) of Article 4(1).

Article 11 (Treatment of amounts from securities issuance and non-securitized loans)

The elements referred to in paragraph i) of Article 3(1) consist of amounts from securities issuance, notably with indefinite maturity, and non-securitized loans, whose contracts, in addition to the subordination clause referred to in paragraph b) of Article 13, provide:

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Bank of Mozambique Governor

a) That they can only be repaid at the initiative of the issuing or borrowing institution and with prior Bank of Mozambique approval;
b) The option for the institution to defer interest payments;
c) That outstanding capital and unpaid interest may be called upon to absorb losses, allowing the institution to continue its operations.

Article 12 (Other eligible equity elements to be incorporated into own funds)

Equity elements satisfying the following requirements may be included in supplementary own funds: a) They can be freely used to cover risks normally associated with the institution's activities without losses or write-downs having been identified; b) They are reflected in the institutions' accounts; c) Their amounts are verified by an external auditor approved by the Bank of Mozambique; and d) They have been authorized by the Bank of Mozambique.

Article 13 (Treatment of subordinated loans in own funds)

Contracts formalizing subordinated loans must respect, at least, the following conditions: a) Approval by the Bank of Mozambique; b) Clear establishment that in case of borrower insolvency or liquidation, the lender's reimbursement is subordinated to the prior reimbursement of all other non-subordinated creditors; c) If an initial repayment term is established, it must be no less than five years. Early repayment may only occur at the initiative of the borrowing institution and after obtaining Bank of Mozambique authorization; d) No early repayment clause regarding the maturity term at the lender's initiative; e) The option for the borrowing institution to defer interest payments; f) Outstanding capital and unpaid interest may be called upon to absorb losses, allowing the borrowing institution to continue its operations.

Article 14 (Restriction on preference shares in own funds)

Amounts corresponding to convertible preference shares with a fixed redemption date are not considered own funds when redemption occurs before five years have elapsed since issuance. Convertible preference shares are those redeemable at a previously stipulated date or when the general assembly so determines.

Article 15 (Reduction period for other securities, convertible preference shares, and subordinated loans in own funds)

The Bank of Mozambique shall establish, for institutions including amounts from other securities with fixed redemption dates and subordinated loans in their own funds, a gradual reduction program for these amounts over the five years preceding the start of their respective repayment.

Article 16 (Method for determining own funds on a consolidated basis)

Without prejudice to Article 17, where own funds calculation is performed on a consolidated basis:

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Bank of Mozambique Governor

1. The elements indicated in the preceding articles are considered at amounts resulting from consolidation, performed according to Bank of Mozambique regulations, with basic own funds: a) Increased by amounts corresponding to: i. Minority interests, considering Articles 5 and 17; ii. Negative first-time consolidation differences; iii. Negative revaluation-equity differences; b) Reduced by amounts corresponding to the differences referred to in items ii) and iii) of the preceding paragraph when positive.

2. For deductions referred to in section 1 of Article 8, participations subject to the equity method are deducted at values recorded in the participating institution's balance sheet, excluding revaluation-equity differences indicated in paragraph b) of the preceding section when included in those values.

Article 17 (Method for determining own funds on an adjusted consolidated basis)

Only for institutions covered by Notice No. 4/GBM/2007, dated May 2, the following shall apply where own funds calculation is performed on a consolidated basis: a) Paragraphs g), h) and m) of Article 3(1) apply; b) Paragraph g) of Article 4(1) applies; c) The amount corresponding to the sum of elements in paragraphs a) to h) of Article 3(1), minus the sum of elements in paragraphs a), c) to j) of Article 4(1), constitutes basic own funds; d) Paragraphs a) to c) of section 1 of Article 9 apply for the value of assets to be deducted under section 1 of Article 8;

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Bank of Mozambique Governor

e) The results referred to in section 1 of Article 10 are those resulting from corrections inherent to applying relevant provisions for determining positive and negative own fund elements. If the application results in a negative value, it shall be considered in computing paragraphs e) and/or f) of Article 4(1);
f) Provisions in sections 2 and 3 of Article 3, section 2 of Article 4, and sections 2 to 5 of Article 5 apply;
g) When applicable, elements in paragraph m) of Article 3(1) include unrealized gains on tangible fixed assets, up to 45% of their value. If the resulting value from applying that percentage is lower than the amount calculated on an individual basis, qualifying under paragraph l) of Article 3(1), the latter amount shall be included up to the concurrence of such unrealized gains;
h) When applicable, unrealized gains on investment properties shall be deducted from elements in Article 3 that have been accounting-recognized and added up to 45% of their value to elements in paragraph m) of Article 3(1).

Article 18 (Deduction of provision insufficiency to own funds on a consolidated basis)

Institutions covered by Notice No. 4/GBM/2007, dated May 2, shall also deduct from consolidated basic own funds the sum of positive differences between regulatory provision values resulting from the minimum provisions regime rules and impairment values, calculated for each entity within the consolidation perimeter subject to that Notice on an individual basis.

Article 19 (Limit for recognizing general credit risk provisions in own funds on a consolidated basis)

1. Institutions covered by Notice No. 4/GBM/2007, dated May 2, may recognize, in consolidated own funds, provided the limits established in paragraphs 4 and 5 of Articles 5 and 6 of Notice No. 9/GBM/2017, dated April 3, are met, the general credit risk provisions constituted by the institutions...