Notes to the consolidated financial statements

47a. Credit risk

Download note 47a in XLS

Credit risk is the risk assumed by the Group under credit transactions and resulting in its inability to recover the amounts disbursed, loss of income or a financial loss. It is the outcome of credit product development and launch as well as the lending process on the one hand and measures employed with a view to reducing the probability of losses, on the other. The Group’s credit risk includes both counterparty and settlement risk.

While developing its current credit risk management policy, the Group aims to maintain the risk appetite defined in its strategy and measured with the NPL ratio and the specified cost of risk as well as an appropriate level of equity, comply with the credit limits set by the Group, analyze both strengths and weaknesses of the Group’s lending process and anticipate the opportunities and threats for its further growth. The Group’s acceptable credit risk policy also takes into account cyclicality of economic processes and changes in the credit portfolio itself.

The Group has reviewed methodologies and all parameters in order to adapt them to changing market conditions.

The following principles have been adopted for the credit risk management process:

• analyzing credit risk of individual exposures, the entire portfolio and the capital requirement related to credit risk;
• using internal and external limits determined by the risk appetite in various areas of the credit portfolio, the Banking Law and recommendations of the Polish Financial Supervision Authority, respectively. The types and levels of the limits used by the Group with regard to lending are determined by internal regulations on credit limits related, among other things, to large exposure concentration, industry concentration, exposure concentration based on type of collateral and product;
• functions related to direct analysis of applications, risk assessment and credit decisions are separated from those focused on acquisition of clients (sales of banking products);
• credit capacity and creditworthiness are the main criteria underlying all credit transactions with clients;
• credit decisions are made in the Group in accordance with procedures and competencies determined in internal regulations on credit risk assessment and credit decision making;
• each credit transaction is monitored from its conclusion to full settlement in terms of utilization, timely repayment, legal security, equity and organizational relationships of the obligor and, in the case of institutional clients, also in terms of their current economic and financial position;
• developments in the real estate market as well as the legal and economic assumptions and framework for valuation of property provided as collateral for credit exposures are monitored on a periodic basis.

Credit risk management in the Group is based on written instructions and procedures defining the methods of identification, measurement, monitoring, limiting and reporting of credit risk. At least once a year, the Group reviews and verifies these instructions, procedures and credit risk limits. The regulations determine the scope of competencies assigned to each unit of the Group in the credit risk management process.

In order to determine the credit risk level, the Group uses the following measures:

• probability of default;
• recovery rates;
• share and structure of impaired loans;
• coverage of impaired loans with impairment losses;
• scoring model efficiency measures;
• cost of risk.

The Group prepares the following cyclical reports on its credit risk exposure:

• monthly report for the Management Board and Credit Committee of the Bank;
• quarterly report for the Supervisory and Management Board.

Maximum credit risk exposure, excluding collateral (by classes of financial instruments)

	Net carrying amount
	Balance as at 31 December 2013	Balance as at 31 December 2012 (restated)
	PLN ‘000	PLN ‘000
Cash in hand and deposits with the Central Bank	327,242	934,743
Receivables from other banks	36,329	29,849
Financial assets held for trading	1,369	766
Loans and advances granted to clients, including:	5,055,712	4,613,934
Overdraft facilities	71,625	64,384
Term loans, including:	4,984,087	4,549,550
- individuals	4,018,533	3,510,320
- institutional clients	608,964	626,210
- local authorities	356,590	413,020
Investment securities available for sale	1,455,018	1,061,225
Quoted	615,185	891,297
Unquoted	839,833	169,928
Investment securities held to maturity	387,018	392,762
Quoted	372,080	392,762
Unquoted	14,938	0
Other assets	37,284	15,279
Total	7,299,972	7,048,558

Additionally, the Group is exposed to credit risk arising from concluded transactions recognized as off-balance sheet liabilities. The maximum exposure to credit risk related to the said transactions is expressed by their off-balance sheet value presented in Note 41.

Geographical structure of the credit portfolio

	Term loans, including:
Balance as at 31 December 2013	Overdraft facilities	individuals - consumer loans	individuals - real estate loans	individuals - credit card debt	institutional clients	local authorities	Total
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Dolnośląskie	7,884	149,411	215,008	888	59,507	51,835	484,533
Kujawsko-pomorskie	6,980	139,811	309,928	1,112	51,375	32,236	541,442
Lubelskie	4,691	67,966	65,649	557	22,030	11,826	172,719
Lubuskie	1,681	66,745	77,411	597	23,474	9,756	179,664
Łódzkie	8,433	101,319	151,041	723	62,118	19,288	342,922
Małopolskie	3,786	110,616	113,127	918	20,003	40,424	288,874
Mazowieckie	10,370	155,154	400,893	1,222	84,027	16,358	668,024
Opolskie	729	32,535	20,937	262	846	500	55,809
Podkarpackie	829	48,349	38,922	413	4,516	31,643	124,672
Podlaskie	836	26,356	31,272	306	1,458	0	60,228
Pomorskie	2,368	124,415	207,071	955	66,965	8,653	410,427
Śląskie	6,215	224,186	136,240	1,497	28,488	28,157	424,783
Świętokrzyskie	790	28,829	22,806	358	1,143	1,298	55,224
Warmińsko-mazurskie	1,696	76,540	122,882	561	44,458	63,031	309,168
Wielkopolskie	8,788	201,417	311,279	1,905	83,516	35,436	642,341
Zachodniopomorskie	5,504	106,945	113,162	1,075	55,040	6,149	287,875
Not assigned	45	6,907	0	55	0	0	7,007
Total	71,625	1,667,501	2,337,628	13,404	608,964	356,590	5,055,712

	Term loans, including:
Balance as at 31 December 2012 (restated)	Overdraft facilities	individuals - consumer loans	individuals - real estate loans	individuals - credit card debt	institutional clients	local authorities	Total
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Dolnośląskie	4,537	115,304	180,242	642	56,825	64,202	421,752
Kujawsko-pomorskie	6,461	130,361	272,991	1,008	52,502	47,098	510,421
Lubelskie	5,481	60,527	62,162	444	17,665	22,452	168,731
Lubuskie	1,854	59,202	73,486	422	15,833	8,936	159,733
Łódzkie	6,983	87,445	127,773	543	67,502	19,201	309,447
Małopolskie	3,189	84,152	102,627	725	24,094	48,080	262,867
Mazowieckie	8,919	122,686	384,039	857	135,783	21,078	673,362
Opolskie	638	23,606	17,550	179	535	0	42,508
Podkarpackie	970	35,223	35,232	312	4,782	32,296	108,815
Podlaskie	856	21,602	29,698	237	1,530	0	53,923
Pomorskie	2,109	107,664	192,416	754	62,179	9,365	374,487
Śląskie	5,723	149,976	125,971	1,001	20,613	26,525	329,809
Świętokrzyskie	651	21,172	20,989	265	216	3,828	47,121
Warmińsko-mazurskie	1,893	67,311	107,703	425	43,568	41,819	262,719
Wielkopolskie	8,355	178,802	290,650	1,500	66,293	60,288	605,888
Zachodniopomorskie	5,723	89,183	100,594	808	56,274	7,852	260,434
Not assigned	42	7,410	0	60	16	0	7,528
Total	64,384	1,361,626	2,124,123	10,182	626,210	413,020	4,599,545

 

Industry structure of the credit portfolio

The following table presents the Bank’s exposure concentration by industry. Loans granted to individuals represent the major part of the Bank’s credit portfolio.

	Gross value	Net value	Gross value	Net value
	Balance as at            31 December 2013		Balance as at       31 December 2012       (restated)
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Individuals	4,143,382	4,053,386	3,602,473	3,532,413
Property market services on a fee or contract basis	356,408	355,685	335,858	334,988
Public administration, national defense, mandatory social insurance	356,391	356,367	413,499	413,087
Wholesale, excluding motor vehicles	36,006	31,566	20,852	20,072
Other financial services, excluding insurance and pension funds	29,654	29,395	26,641	26,455
Accommodation	26,681	25,181	27,564	25,266
Catering services	18,327	6,824	17,858	7,410
Building construction	17,194	16,007	41,243	40,628
Education	17,030	16,054	22,130	21,984
Retail sale, excluding motor vehicles	17,028	14,402	15,100	14,007
Manufacture of paper and paper products	17,016	16,871	8,060	8,017
Lease and management of own or leased property	15,341	13,399	19,362	17,495
Other activity	130,046	120,575	144,014	137,726
Total	5,180,504	5,055,712	4,694,651	4,599,545

The Group’s gross exposure to ten largest clients (including capital groups)

Balance as at 31 December 2013
No.	Obligor’s name	Industry according to Polish Classification of Activity	Total exposure	Balance sheet exposure (principal)	Off-balance sheet exposure	Share in the gross credit portfolio
			PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
1.	Client 1	Postal and courier services	73,753	0	73,753	1.42%
2.	Client 2	Public administration, national defense, mandatory social insurance	28,750	28,750	0	0.55%
3.	Client 3	Manufacture of paper and paper products	21,618	15,059	6,559	0.42%
4.	Client 4	Property market services	20,736	0	20,736	0.40%
5.	Client 5	Accommodation	17,521	17,472	49	0.34%
6.	Client 6	Public administration, national defense, mandatory social insurance	16,003	16,003	0	0.31%
7.	Client 7	Public administration, national defense, mandatory social insurance	15,098	15,098	0	0.29%
8.	Client 8	Public administration, national defense, mandatory social insurance	14,281	14,281	0	0.28%
9.	Client 9	Property market services	13,762	13,375	387	0.27%
10.	Client 10	Public administration, national defense, mandatory social insurance	12,930	12,930	0	0.25%
			234,452	132,968	101,484	4.53%

 

Balance as at 31 December 2012 (restated)
No.	Obligor’s name	Industry according to Polish Classification of Activity	Total exposure	Balance sheet exposure (principal)	Off-balance sheet exposure	Share in the gross credit portfolio
			PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
1.	Client 1	Head office activities; management consulting	40,882	40,882	0	0.90%
2.	Client 2	Public administration, national defense, mandatory social insurance	33,875	33,875	0	0.70%
3.	Client 3	Postal and courier services	28,044	0	28,044	0.60%
4.	Client 4	Public administration, national defense, mandatory social insurance	21,403	21,403	0	0.50%
5.	Client 5	Accommodation	18,161	18,158	3	0.40%
6.	Client 6	Public administration, national defense, mandatory social insurance	18,000	18,000	0	0.40%
7.	Client 7	Public administration, national defense, mandatory social insurance	17,614	17,614	0	0.40%
8.	Client 8	General construction work related to the construction of buildings	17,339	3,506	13,833	0.40%
9.	Client 9	Financial services, excluding insurance and pension funds	16,688	16,688	0	0.40%
10.	Client 10	Lease and rental	14,200	14,164	36	0.30%
			226,206	184,290	41,916	4.80%

Quality structure
 

Balance as at 31 December 2013		Indications of impairment identified but impairment did not occur and impairment loss is not required, including:				Indications of impairment identified, impairment and the related loss recognized
	No indications of impairment/loss events identified	net carrying amount	exposures where the value of collateral has been taken into account in discounted anticipated future cash flows	financial effect of collateral *)	exposures with principal or interest delinquencies	net carrying amount	financial effect of collateral *)	Total
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Receivables from other banks	36,329	0	0	0	0	0	0	36,329
Overdraft facilities	57,935	4,445	4,467	2,270	0	9,245	2,995	71,625
Term loans, including:	4,793,188	32,844	32,869	15,531	5,788	158,055	32,493	4,984,087
Individuals	3,905,024	0	0	0	0	113,509	3,091	4,018,533
- consumer        loans	1,600,578	0	0	0	0	66,923	3,091	1,667,501
- real estate        loans	2,292,214	0	0	0	0	45,414	0	2,337,628
- credit card        debt	12,232	0	0	0	0	1,172	0	13,404
institutional clients	531,574	32,844	32,869	15,531	5,788	44,546	29,402	608,964
local authorities	356,590	0	0	0	0	0	0	356,590
Investment securities available for sale	1,455,018	0	0	0	0	0	0	1,455,018
Quoted	615,185	0	0	0	0	0	0	615,185
Unquoted	839,833	0	0	0	0	0	0	839,833
Investment securities held to maturity	387,018	0	0	0	0	0	0	387,018
Quoted	372,080	0	0	0	0	0	0	372,080
Unquoted	14,938	0	0	0	0	0	0	14,938
Total	6,729,488	37,289	37,336	17,801	5,788	167,300	35,488	6,934,077

*) the financial effect of collateral takes into account impairment losses on on-balance sheet items and provisions for off-balance sheet liabilities

Balance as at 31 December 2012 (restated)		Indications of impairment identified but impairment did not occur and impairment loss is not required, including:				Indications of impairment identified, impairment and the related loss recognized
	No indications of impairment/loss events identified	net carrying amount	exposures where the value of collateral has been taken into account in discounted anticipated future cash flows	financial effect of collateral *)	exposures with principal or interest delinquencies	net carrying amount	financial effect of collateral *)	Total
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Receivables from other banks	29,849	0	0	0	0	0	0	29,849
Overdraft facilities	53,514	513	513	964	0	10,357	3,259	64,384
Term loans, including:	4,367,142	36,862	36,866	20,036	13,698	131,157	19,134	4,535,161
Individuals	3,392,894	4,797	4,800	3,332	4,797	98,240	0	3,495,931
- consumer        loans	1,296,432	4,797	4,800	3,332	4,797	60,397	0	1,361,626
- real estate        loans	2,086,858	0	0	0	0	37,265	0	2,124,123
- credit card        debt	9,604	0	0	0	0	578	0	10,182
institutional clients	561,228	32,065	32,066	16,704	8,901	32,917	19,134	626,210
local authorities	413,020	0	0	0	0	0	0	413,020
Investment securities available for sale	1,061,225	0	0	0	0	0	0	1,061,225
Quoted	891,297	0	0	0	0	0	0	891,297
Unquoted	169,928	0	0	0	0	0	0	169,928
Investment securities held to maturity	392,762	0	0	0	0	0	0	392,762
Quoted	392,762	0	0	0	0	0	0	392,762
Unquoted	0	0	0	0	0	0	0	0
Total	5,904,492	37,375	37,379	21,000	13,698	141,514	22,393	6,083,381

*) the financial effect of collateral takes into account impairment losses on on-balance sheet items and provisions for off-balance sheet liabilities
 

Collateral and other credit risk mitigation forms

Collateral and other items improving the loan terms:

• mortgage placed in the land and mortgage register as a senior lien or junior lien (if the total value of all liens does not exceed 50% of the market value of the property). Liens representing 100% of the transaction value are recorded to collateralize principal increased by at least 60% of the transaction value to secure payment of interest, fees and charges as well as the Bank’s costs related to the obligor’s delinquencies;
• assignment of rights under property insurance policies covering fire and other accidents;
• statement of submission to enforcement proceedings by the obligor (and/or guarantor) up to 150% of the gross loan amount, with the date by which the Bank may apply for a writ of execution;
• statement of submission to enforcement proceedings by the property owner up to the amount of the mortgage lien(s) created on the owned property (properties), with the date by which the Bank may apply for a writ of execution based thereon. The aforesaid date may not be earlier that three years of the last day of the calendar month of the loan term;
• blank promissory note with a promissory note agreement for the Bank;
• for construction of a house/premises – assignment of receivables under the construction contract concluded with the property developer/housing cooperative;
• transfer of the obligor’s cash to the Bank’s account pursuant to Article 102 of the Banking Law (deposits);
• registered pledge blocking the rights attached to securities issued by the State Treasury and the National Bank of Poland (treasury bills and bonds);
• assignment of units in an investment fund management company accepted by the Bank;
• assignment of rights under an insurance policy taken out from an insurance undertaking accepted by the Bank;
• financial pledge, registered pledge, assignment, deposit or blocking of other investment products approved on a case-by-case basis when making the loan decision.

As at 31 December 2013, the fair value of mortgage set up as collateral for the related exposures was to PLN 4.639.5 million compared to PLN 4.469.3 million as at 31 December 2012. The financial effect of recovery based on collateral for receivables analyzed on a case-by-case basis amounted to PLN 53.3 million as at 31 December 2013 and PLN 43.4 million as at 31 December 2012. This amount would increase the required impairment losses if cash flows related to the collateral were not included in the calculation. For receivables analyzed on a case-by-case basis, impairment losses not including the financial effect of recovery based on collateral would be PLN 77.0 million as at 31 December 2013 vs. PLN 60.2 million as at 31 December 2012.

Ageing analysis of past-due financial assets with no impairment losses recognized (by classes of financial instruments)

31 December 2013	up to 30 days	31 – 60 days	61 – 90 days	over 90 days	Total
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Overdraft facilities	2,318	389	82	0	2,789
Term loans, including:	337,100	25,022	6,603	0	368,725
individuals	312,475	25,017	6,603	0	344,095
- consumer loans	199,787	18,960	5,507	0	224,254
- real estate loans	111,926	5,730	962	0	118,618
- credit card debt	762	327	134	0	1,223
institutional clients	18,292	5	0	0	18,297
local authorities	6,333	0	0	0	6,333
Total	339,418	25,411	6,685	0	371,514

 

31 December 2012 (restated)	up to 30 days	31 – 60 days	61 – 90 days	Over 90 days	Total
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Overdraft facilities	2,044	313	160	0	2,517
Term loans, including:	310,620	28,727	8,399	7,242	354,988
individuals	247,393	28,402	8,399	4,703	288,897
- consumer loans	141,878	17,285	4,972	4,703	168,838
- real estate loans	104,977	10,921	3,308	0	119,206
- credit card debt	538	196	119	0	853
institutional clients	30,661	325	0	2,539	33,525
local authorities	32,566	0	0	0	32,566
Total	312,664	29,040	8,559	7,242	357,505