Notes to the consolidated financial statements

47c. Market risk

Download note 47c in XLS

Market risk arises from the current and future performance of the Bank and the Capital Group as well as their equity being exposed to unfavorable changes in on- and off-balance sheet items due to changes in interest rates and foreign exchange rates.

The primary objective of market risk management in the Bank and in the Group is to optimize the exposure management process and protect the financial performance at the same time.

The Group’s market risk is managed at the level of the Bank as the market risk assumed by the subsidiaries is immaterial considering the nature of their business.

Market risk management in the Bank is based on written policies and procedures defining the objectives of market risk management as well as the methods of identification, measurement, monitoring, limiting and reporting of market risk. The regulations determine also the scope of competencies assigned to each unit of the Bank in the market risk management process.

In order to ensure high standards of market risk management, compliant with best banking practices, once a year the Bank reviews the applicable policies and procedures.

The Bank has separate organizational units in charge of market risk control, monitoring and management.

Market risk reports present separately the interest rate risk related to the banking book, the trading book and the currency risk. Daily reports are used for operational market risk management purposes, while periodic reports are prepared for management purposes.

The Capital Group does not use hedge accounting for market risk management.

Interest rate risk

Interest rate risk results from the exposure of the Bank and the Group’s financial performance and equity to adverse changes in interest rates.
The interest rate risk arises from:

• the risk of a mismatch of revaluation dates – a mismatch between the amount of assets, liabilities and off-balance sheet items revalued at a certain time; the risk represents a threat to the Bank’s revenue, mostly interest income, in case of adverse changes in market interest rates or significant changes in the on-balance sheet items revaluation structure resulting in changes in the net interest income;
• basis risk arising from imperfect correlation between interest rates on products that generate interest income and expense and have the same revaluation dates;
• yield curve risk, where the relationship between interest rates for different periods but the same index or market changes;
• option risk arising when clients change the amount and time schedule of cash flows related to assets, liabilities and off-balance sheet items, to which they are entitled under the loan or deposit agreement at no additional cost, and various types of debt instruments with embedded call or put option, which enables them to redeem the instrument early.

The Bank adapts its interest rate risk management to the type and scale of its business. Interest rate risk in the Bank may be related to the banking book and to the trading book.

The objective of interest rate risk management is to build a structure of assets and liabilities ensuring protection of the present value and the net interest income of the Bank for the banking book and to obtain financial benefits through transactions on interest rate instruments concluded on own account in the trading book, with the accepted interest rate risk level.

Interest rate risk management in the Bank is based on written policies and procedures, which define the methods of:

• risk identification;
• risk measure calculation (risk measurement);
• risk exposure limiting – determining the acceptable risk level;
• monitoring items and changes in each book, portfolio, and the limit use levels;
• risk exposure reporting;
• hedging exposures against interest rate risk.

Interest rate risk related to the banking book is measured and monitored with the use of such risk measures as:

• BPV (Basis Point Value) – interest rate risk expressed as a monetary value, related to maintaining a given position when interest rates change by one basis point;
• NII (net interest income) – a change in the net interest income representing the difference between interest income and expense with an interest rate change at a specified level;
• BPV gap value in each revaluation range;
• duration – a measure of interest rate risk interpreted as the average duration of an instrument or portfolio;
• early repayment of loans and withdrawal of deposits ratios for each type of products and entities.

Interest rate risk related to the trading book is measured and monitored with the use of such risk measures as:

• BPV and BPV gap value in each revaluation range;
• Value at Risk (VaR).

Additionally, the Bank performs stress tests involving sensitivity analysis and examining the effects of interest rate changes on the present value of risk-exposed items based on specified changes in the yield curve, and the effects of changes in interest rates on the net interest income of the Bank.
The Bank prepares the following cyclical reports on interest rate risk exposure related to the banking and trading book:

• daily report for the ALCO, Management Board and Treasury Department;
• monthly report for the ALCO and the Management Board;
• quarterly report for the Supervisory and Management Board.

The following tables present the interest rate risk level for the banking book (BPV and stress tests) as at 31 December 2013 and 31 December 2012.

BPV for the banking book

	BPV (1 b.p.)
	Balance as at 31 December 2013	Balance as at 31 December 2012 (restated)
	PLN ‘000	PLN ‘000
banking book	40	61

Stress test results for +/- 200 b.p.

	Change in the present value of the banking book
	Balance as at 31 December 2013	Balance as at 31 December 2012 (restated)
	PLN ‘000	PLN ‘000
200 b.p. down	(7,837)	(11,802)
200 b.p. up	8,374	13,052

The following table presents the interest rate risk level for the trading book (BPV) as at 31 December 2013 and 31 December 2012.

BPV for the trading book

	BPV (1 b.p.)
	Balance as at 31 December 2013	Balance as at 31 December 2012 (restated)
	PLN ‘000	PLN ‘000
trading book	0	0

Presented below are the Group’s assets, liabilities and off-balance sheet items classified based on the interest rate risk criterion – revaluation date for floating rate items or maturity for fixed rate items – as at 31 December 2013 and 31 December 2012.

Balance as at 31 December 2013	Up to 1 month, inclusive	Above 1 month and up to 3 months, inclusive	Above 3 months to and up to 1 year, inclusive	Above 1 year and up to 5 years, inclusive	Above 5 years	Assets/ liabilities (non- interest bearing)	Total
Assets	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Cash in hand and deposits with the Central Bank	321,958	0	0	0	0	5,284	327,242
Receivables from other banks	0	0	30,000	0	0	6,329	36,329
Financial assets held for trading	0	0	0	0	0	1,369	1,369
Loans and advances granted to clients	2,614,914	1,826,064	611,496	3,229	9	0	5,055,712
Investment securities available for sale	895,000	0	219,000	318,364	10,000	12,654	1,455,018
Investment securities held to maturity	5,000	10,000	52,000	307,271	0	12,747	387,018
Property, plant and equipment	0	0	0	0	0	44,666	44,666
Intangible assets	0	0	0	0	0	30,215	30,215
Current income tax receivables	0	0	0	0	0	98	98
Net deferred tax asset (asset items)	0	0	0	0	0	18,004	18,004
Other assets	0	0	0	0	0	27,074	27,074
Total assets	3,836,872	1,836,064	912,496	628,864	10,009	158,440	7,382,745

 

Balance as at 31 December 2013	Up to 1 month, inclusive	Above 1 month and up to 3 months, inclusive	Above 3 months to and up to 1 year, inclusive	Above 1 year and up to 5 years, inclusive	Above 5 years	Assets/ liabilities (non- interest bearing)	Total
Liabilities	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Liabilities to the Central Bank	0	0	0	0	0	11	11
Liabilities to other banks	18,000	20,000	0	0	0	3,762	41,762
Liabilities arising from sold securities (repo)	49,599	0	0	0	0	11	49,610
Financial liabilities held for trading	0	0	0	0	9	17	17
Liabilities to clients	4,573,462	625,067	688,607	324,451	237	18,754	6,230,578
Provisions	0	0	0	0	0	3,419	3,419
Current income tax liabilities	0	0	0	0	0	3,138	3,138
Other liabilities	0	0	0	0	0	88,821	88,821
Liabilities arising from issue of debt securities	230,000	0	197,850	0	0	3,747	431,597
Subordinated liabilities	90,340	0	50,000	0	0	1,687	142,027
Equity	0	0	0	0	0	391,765	391,765
Total liabilities and equity	4,961,401	645,067	936,457	324,451	237	515,132	7,382,745
Gap	(1,124,529)	1,190,997	(23,961)	304,413	9,772	(356,692)	0
Off-balance sheet items	0	0	0	0	0	0	0
Interest rate transactions:	0	0	0	0	0	0	0
Assets	0	0	50,000	50,000	0	0	100,000
Liabilities	50,000	0	50,000	0	0	0	100,000
Gap	(50,000)	0	0	50,000	0	0	0
Total gap	(1,174,529)	1,190,997	(23,961)	354,413	9,772	(356,692)	0

 

Balance as at 31 December 2012 (restated)	Up to 1 month, inclusive	Above 1 month and up to 3 months, inclusive	Above 3 months to and up to 1 year, inclusive	Above 1 year and up to 5 years, inclusive	Above 5 years	Assets/ liabilities (non- interest bearing)	Total
Assets	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Cash in hand and deposits with the Central Bank	926,904	0	0	0	0	7,839	934,743
Receivables from other banks	0	0	20,000	0	0	9,849	29,849
Financial assets held for trading	0	0	0	0	0	766	766
Loans and advances granted to clients	2,940,196	1,410,678	246,945	1,282	19	425	4,599,545
Investment securities available for sale	220,000	0	654,000	175,000	371	11,854	1,061,225
Investment securities held to maturity	0	0	20,000	359,271	0	13,491	392,762
Property, plant and equipment	0	0	0	0	0	44,213	44,213
Intangible assets	0	0	0	0	0	27,339	27,339
Current income tax receivables	0	0	0	0	0	61	61
Net deferred tax asset (asset items)	0	0	0	0	0	14,871	14,871
Other assets	0	0	0	0	0	15,279	15,279
Total assets	4,087,100	1,410,678	940,945	535,553	390	145,987	7,120,653

 

Balance as at 31 December 2012  (restated)	Up to 1 month, inclusive	Above 1 month and up to 3 months, inclusive	Above 3 months to and up to 1 year, inclusive	Above 1 year and up to 5 years, inclusive	Above 5 years	Assets/ liabilities (non- interest bearing)	Total
Liabilities	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
Liabilities to the Central Bank	0	0	0	0	0	6	6
Liabilities to other banks	0	0	0	0	0	2,824	2,824
Financial liabilities held for trading	0	0	0	0	0	17	17
Liabilities to clients	4,573,462	376,916	1,183,741	376,108	107	18,754	6,317,949
Provisions	0	0	0	0	0	3,995	3,995
Current income tax liabilities	0	0	0	0	0	7,826	7,826
Other liabilities	0	0	0	0	0	77,393	77,393
Liabilities arising from issue of debt securities	0	0	200,000	0	0	6,282	206,282
Subordinated liabilities	43,000	50,000	47,340	0	0	2,551	142,891
Equity	0	0	0	0	0	361,470	361,470
Total liabilities and equity	4,405,162	426,916	1,431,081	376,108	0	481,279	7,120,653
Gap	(318,062)	983,762	(490,136)	159,445	107	(335,292)	0
Off-balance sheet items
Interest rate transactions:
Assets	0	0	0	50,000	0	0	50,000
Liabilities	0	50,000	0	0	0	0	50,000
Gap	0	(50,000)	0	50,000	0	0	0
Total gap	(318,062)	1,033,762	(490,136)	109,445	283	(335,292)	0

Currency risk

Currency risk arises from the current and future performance of the Bank and the Capital Group as well as their equity being exposed to adverse changes in foreign exchange rates.

The objective of currency risk management is to protect the exchange gain and obtain financial benefits through transactions concluded in FX instruments on own account, with the accepted risk level.

In the process of currency risk management, the said risk in the Bank is measured through:

• calculation of the total position of the Bank;
• calculation of the position in each currency;
• calculation of Value at Risk (VaR);
• stress tests.

Value at Risk (VaR) is defined as the maximum loss which may be incurred by the Bank within a specified time horizon and with a specified probability. The Bank calculates VaR using the historical simulation method assuming a 99.2% confidentiality range and a 10-day position maintenance period.

Stress tests are complementary to VaR for the currency risk and they are performed to estimate the loss which may be incurred by the Bank in case of extremely adverse (stress) changes in foreign exchange rates.

The currency risk management process includes daily monitoring of:

• the value of positions in each currency;
• VaR and total currency position limits;
• daily, weekly and monthly stop-loss limits.

VaR statistics for currency risk in 2013 and as at 31 December 2013 and 31 December 2012

	Minimum value	Maximum value	Average value	Balance as at 31 December 2013	Balance as at 31 December 2012 (restated)
	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000	PLN ‘000
VaR	7	322	34	28	13

The Bank prepares the following cyclical reports on its currency risk exposure:

• daily report for the ALCO, Management Board and Treasury Department;
• monthly report for the ALCO and the Management Board;
• quarterly report for the Supervisory and Management Board.

The table below presents the values of currency positions for USD, EUR, GBP and CHF in 2013 and as at 31 December 2013 and 31 December 2012. The maximum and average values have been presented for absolute position values (in thousands).

	Minimum value	Maximum value	Average value	Balance as at 31 December 2013	Balance as at 31 December 2012 (restated)
	‘000	‘000	‘000	‘000	‘000
USD	0	1,073	91	(12)	8
EUR	19	1,402	315	(445)	(247)
GBP	0	612	34	36	12
CHF	0	511	91	128	64

In 2013 and 2012, the Group's currency risk was very low due to an insignificant share of foreign currency assets and liabilities in the balance sheet total (below 2%). The value of the total currency position did not exceed 2% of equity, which did not generate a capital requirement with respect to this risk type. In 2013, the Group started trading in JPY, NOK and CZK.

The following table presents assets, liabilities and off-balance sheet items of the Group as at 31 December 2013 and 31 December 2012 by currency.

Currency
Balance as at 31 December 2013	PLN	EUR		USD		CHF		Other currencies	Total
		translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN
Assets	PLN ‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	PLN ‘000
Cash in hand and deposits with the Central Bank	324,928	2,125	512	152	50	0	0	37	327,242
Receivables from other banks	32,270	762	184	1858	617	264	78	1,175	36,329
Financial assets held for trading	1,369	0	0	0	0	0	0	0	1,369
Loans and advances granted to clients	5,049,486	6,058	1461	0	0	168	50	0	5,055,712
Investments in financial assets	1,842,028	8	0	0	0	0	0	0	1,842,036
- available for sale	1,455,010	8	2	0	0	0	0	0	1,455,018
- held to maturity	387,018	0	0	0	0	0	0	0	387,018
Property, plant and equipment	44,666	0	0	0	0	0	0	0	44,666
Intangible assets	30,215	0	0	0	0	0	0	0	30,215
Current income tax receivables	98	0	0	0	0	0	0	0	98
Net deferred tax asset (asset items)	18,004	0	0	0	0	0	0	0	18,004
Other assets	26,966	108	26	0	0	0	0	0	27,074
Total assets	7,370,030	9061	2,183	2,010	667	432	128	1,212	7,382,745

 

Currency
Balance as at 31 December 2013	PLN	EUR		USD		CHF		Other currencies	Total
		translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN
Liabilities	PLN ‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	PLN ‘000
Liabilities to the Central Bank	11	0	0	0	0	0	0	0	11
Liabilities to other banks	41,762	0	0	0	0	0	0	0	41,762
Financial liabilities held for trading	17	0	0	0	0	0	0	0	17
Liabilities arising from sold securities (repo)	49,610	0	0	0	0	0	0	0	49,610
Liabilities to clients	6,220,432	7,945	1,916	1,798	597	0	0	403	6,230,578
Provisions	3,419	0	0	0	0	0	0	0	3,419
Current income tax liabilities	3,138	0	0	0	0	0	0	0	3,138
Other liabilities	87,009	1,721	415	91	30	0	0	0	88,821
Liabilities arising from issue of debt securities	431,597	0	0	0	0	0	0	0	431,597
Subordinated liabilities	142,027	0		0	0	0	0		142,027
Total liabilities	6,979,022	9,666	2,331	1,889	627	0	0	403	6,990,980
Equity	391,765	0	0	0	0	0	0	0	391,765
Total equity and liabilities	7,370,787	9,666	2,331	1,889	627	0	0	403	7,382,745
Net exposure	(757)	(605)	(148)	121	40	432	128	809	0
Off-balance sheet items	287,627	20,941	5,050	0	0	0	0	0	308,568
Assets	287,627	20,941	5,050	0	0	0	0	0	308,568
Equity and liabilities	0	0	0	0	0	0	0	0	0
Gap	286,870	20,336	4,902	121	40	432	128	809	308,568

 

Currency
Balance as at 31 December 2012 (restated)	PLN	EUR		USD		CHF		Other currencies	Total
		translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN
Assets	PLN ‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	PLN ‘000
Cash in hand and deposits with the Central Bank	932,961	1,576	385	169	55	0	0	37	934,743
Receivables from other banks	23,668	3,027	740	1,503	485	45	13	1,606	29,849
Financial assets held for trading	766	0	0	0	0	0	51	0	766
Loans and advances granted to clients	4,550,908	48,465	11,855	0	0	172	0	0	4,599,545
Investments in financial assets	1,453,979	8	2	0	0	0	0	0	1,453,987
- available for sale	1,061,217	8	2	0	0	0	0	0	1,061,225
- held to maturity	392,762	0	0	0	0	0	0	0	392,762
Property, plant and equipment	44,213	0	0	0	0	0	0	0	44,213
Intangible assets	27,339	0	0	0	0	0	0	0	27,339
Current income tax receivables	61	0	0	0	0	0	0	0	61
Net deferred tax asset (asset items)	14,871	0	0	0	0	0	0	0	14,871
Other assets	15,275	4	1	0	0	0	0	0	15,279
Total assets	7,064,041	53,080	12,983	1,672	540	217	64	1,643	7,120,653

 

Currency
	PLN	EUR		USD		CHF		Other currencies	Total
Balance as at 31 December 2012 (restated)		translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN
Liabilities	PLN ‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	‘000	PLN ‘000	PLN ‘000
Liabilities to the Central Bank	6	0	0	0	0	0	0	0	6
Liabilities to other banks	2,824	0	0	0	0	0	0	0	2,824
Financial liabilities held for trading	17	0	0	0	0	0	0	0	17
Liabilities arising from issue of debt securities	206,282	0	0	0	0	0	0	0	206,282
Liabilities to clients	6,310,813	5,098	1,247	1,285	415	0	0	753	6,317,949
Provisions	3,995	0	0	0	0	0	0	0	3,995
Current income tax liabilities	7,826	0	0	0	0	0	0	0	7,826
Other liabilities	75,066	2,230	545	97	31	0	0	0	77,393
Subordinated liabilities	142,891	0	0	0	0	0	0	0	142,891
Total Liabilities	6,749,720	7,328	1,792	1,382	446	0	0	753	6,759,183
Equity	361,470	0	0	0	0	0	0	0	361,470
Total equity and liabilities	7,111,190	7,328	1,7920	1,382	446	0	0	753	7,120,653
Net exposure	(47,149)	45,752	11,191	290	94	217	64	890	0
Off-balance sheet items	296,133	(45,586)	(11,450)	0	0	0	0	0	250,547
Assets	296,133	202	50	0	0	0	0	0	296,335
Equity and liabilities	0	45,788	11,500	0	0	0	0	0	45,788
Gap	248,984	166	(259)	290	94	217	64	890	250,547

Financial derivatives
Although its offering includes derivatives, the Group has not actively participated in the market of derivative instruments. The Group’s transactions include those on derivatives concluded for currency and interest rate risk management purposes.
Derivatives are measured on a daily basis using the discounted cash flow model. The measurement is based on commonly available rates and market quotations recorded in the Reuters system. As the scale of derivative transactions, which are entered into with banks only, is inconsiderable, the Group’s measurement of derivatives does not take into account the counterparty credit risk or own credit risk, which the Group believes exerts a marginal effect on measurement of its derivatives.