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Notes to the consolidated financial statements

46.3. Market risk

Download note 46.3 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 Group 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 ratio between the interest rates concerning 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 denoting interest rate risk expressed as a cash value, related to maintaining of 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 Group.
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.

For the purpose of calculating the Banking Book risk measures, the current value of loans and deposits is determined based on reference rates arising from revaluation dates and liquidity adjustment excluding the commercial margin realized on each product. Additionally, stress tests for downward curve shift purposes are based on the assumption
that interest on items sensitive to interest rate risk shall not drop below 0%.
The following tables present the interest rate risk level for the banking book (BPV and stress tests) as at 31 December 2014 and 31 December 2013.

BPV for the banking book
  BPV (1 b.p.)
  Balance as at
31 December 2014		 Balance as at
31 December 2013
  PLN’000 PLN’000
Banking book 17 40
Results of stress tests for +/- 200 b.p. for the banking book
  Change in the present value of the banking book
  Balance as at
31 December 2014		 Balance as at
31 December 2013
  PLN’000 PLN’000
200 b.p. down (1,034) (7,837)
200 b.p. up 4,767 8,374

The following table presents a change in annual net interest income with the rate change by +/-100 b.p. and balance sheet assumed to be stable. The analysis is based on the following assumptions:

  • for rate decrease: interest rates on loans shall not exceed four times the lombard rate and interest rates on deposits (both term and current accounts) shall not drop below 0%;
  • for rate increase: interest on interest-free current accounts shall not increase.

 

Change in annual net interest income with the rate change by +/-100 b.p.

 

  Change in the annual net interest income
  Balance as at
31 December 2014 		 Balance as at
31 December 2013
  PLN’000 PLN’000
100 b.p. down  (51,777)  (18,053)
100 b.p. up 17,494 15,029


In 2014 and 2013, Bank’s trading activities regarding interest rates were limited to transactions on Polish treasury securities denominated in PLN. The Bank did not conclude speculative derivative transactions on its own behalf or derivative transactions with its clients.
The following table presents the interest rate risk level for the trading book (BPV) as at 31 December 2014 and 31 December 2013.

BPV for the trading book
  BPV (1 b.p.)
  Balance as at
31 December 2014 		 Balance as at
31 December 2013
  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 2014 and 31 December 2013.
 

 

Balance as at
31 December 2014		 Up to 1 month From 1 monthto 3 months From 3 monthsup to 1 year From 1 yearto 5 years Over 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 751,268 0 0 0 0 6,375 757,643
Receivables from other banks 0 0 49,000 29,970 69,000 10,299 158,269
Financial assets held for trading 0 0 0 0 0 1,336 1,336
Loans and advances granted to clients 2,138,590 2,281,642 715,752 485 0 15,308 5,151,777
Investment assets available for sale 575,000 0 99,000 405,982 0 20,565 1,100,547
Investment assets held to maturity 5,000 10,000 207,271 175,000 10,000 11,448 418,719
Property, plant and equipment 0 0 0 0 0 47,921 47,921
Intangible assets 0 0 0 0 0 32,401 32,401
Current income tax receivables 0 0 0 0 0 120 120
Net deferred tax asset (asset items) 0 0 0 0 0 21,020 21,020
Other assets 0 0 0 0 0 29,274 29,274
Total assets 3,469,858 2,291,642 1,071,023 611,437 79,000 196,067 7,719,027
Balance as at
31 December 2014		 Up to 1 month From 1 monthto 3 months From 3 monthsup to 1 year From 1 yearto 5 years Over 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 0 0 0 0 0 4,020 4,020
Liabilities arising from securities sold (ssell-buy-back and repo transactions) 173,360 4,314 0 0 0 27 177,701
Financial liabilities held for trading 0 0 0 0 0 94 94
Liabilities to clients 4,370,669 913,790 792,252 377,529 165 37,618 6,492,023
Liabilities arising from issue of debt securities 0 0 317,850 40,000 0 406 358,256
Subordinated liabilities 90,340 0 50,000     1,750 142,090
Current income tax liabilities 0 0 0 0 0 2,979 2,979
Provisions 0 0 0 0 0 2,855 2,855
Other liabilities 0 0 0 0 0 99,366 99,366
Equity 0 0 0 0 0 439,632 439,632
Total liabilities and equity 4,634,369 918,104 1,160,102 417,529 165 588,758 7,719,027
Gap (1,164,511) 1,373,538 (89,079) 193,908 78,835 (392,691) 0
               
Off-balance sheet items              
Interest rate transactions:              
Assets 100,000 0 50,000 20,000 0 0 170,000
Liabilities 0 20,000 150,000 0 0 0 170,000
Gap 100,000 (20,000) (100,000) 20,000 0 0 0
Total gap (1,064,511) 1,353,538 (189,079) 213,908 78,835 (392,691) 0
Balance as at
31 December 2013		 Up to 1 month From 1 monthto 3 months From 3 monthsup to 1 year From 1 yearto 5 years Over 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 assets available for sale 895,000 0 219,000 318,364 10,000 12,654 1,455,018
Investment assets 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 From 1 monthto 3 months From 3 monthsup to 1 year From 1 yearto 5 years Over 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 securities sold (ssell-buy-back and repo transactions) 49,599 0 0 0 0 11 49,610
Financial liabilities held for trading 0 0 0 0 0 17 17
Liabilities to clients 4,573,462 625,067 688,607 324,451 237 18,754 6,230,578
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
Current income tax liabilities 0 0 0 0 0 3,138 3,138
Provisions 0 0 0 0 0 3,419 3,419
Other liabilities 0 0 0 0 0 88,821 88,821
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              
Interest rate transactions:              
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

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 2014 and as at 31 December 2014 and 31 December 2013

  Minimum value
in 2014 		 Maximum value
in 2014		 Average value
in 2014		 Balance as at
31 December 2014		 Balance as at
31 December 2013
  PLN’000 PLN’000 PLN’000 PLN’000 PLN’000
VaR 10 210 49 10 28

 
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 2014 and as at 31 December 2014 and 31 December 2013. The maximum, minimum and average amounts have been presented for absolute position values (in thousands).
 

  Minimum value
in 2014		 Maximum value
in 2014		 Average value
in 2014		 Balance as at
31 December 2014		 Balance as at
31 December 2013
  PLN’000 PLN’000 PLN’000 PLN’000 PLN’000
USD 0 1,651 236 (9) (12)
EUR 0 1,384 366 (135) (445)
GBP 5 1,017 104 38 36
CHF 3 1,207 167 (3) 128

In 2014 and 2013, 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.

The following table presents assets, liabilities and off-balance sheet items of the Group as at 31 December 2014 and 31 December 2013 by currency.

Currency
Balance as at
31 December 2014		 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 PLN’000 PLN’000 PLN’000 PLN’000 PLN’000 PLN’000 PLN’000
Cash in hand and deposits with the Central Bank 754,467 2,805 658 361 103 0 0 10 757,643
Receivables from other banks 153,925 1,897 445 1,119 319 705 199 623 158,269
Financial assets held for trading 1,336 0 0 0 0 0 0 0 1,336
Loans and advances granted to clients 5,148,845 2,762 648 0 0 170 48 0 5,151,777
Investments in financial assets: 1,519,257 9 2 0 0 0 0 0 1,519,266
- available for sale 1,100,538 9 2 0 0 0 0 0 1,100,547
- held to maturity 418,719 0 0 0 0 0 0 0 418,719
Property, plant and equipment 47,921 0 0 0 0 0 0 0 47,921
Intangible assets 32,401 0 0 0 0 0 0 0 32,401
Current income tax receivables 120 0 0 0 0 0 0 0 120
Net deferred tax asset (asset items) 21,020 0 0 0 0 0 0 0 21,020
Other assets 29,077 111 26 0 0 0 0 86 29,274
Total assets 7,708,369 7,584 1,779 1,480 422 875 247 719 7,719,027
Currency
Balance as at
31 December 2014		 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 PLN’000 PLN’000 PLN’000 PLN’000 PLN’000 PLN’000 PLN’000
Liabilities to the Central Bank 11 0 0 0 0 0 0 0 11
Liabilities to other banks 4,020 0 0 0 0 0 0 0 4,020
Liabilities arising from sell-buy-back securities sold 177,701 0 0 0 0 0 0 0 177,701
Financial liabilities held for trading 94 0 0 0 0 0 0 0 94
Liabilities to clients 6,482,940 7,544 1,770 1,505 429 0 0 34 6,492,023
Liabilities arising from issue of debt securities 358,256 0 0 0 0 0 0 0 358,256
Subordinated liabilities 142,090 0 0 0 0 0 0 0 142,090
Current income tax liabilities 2,979 0 0 0 0 0 0 0 2,979
Provisions 2,855 0 0 0 0 0 0 0 2,855
Other liabilities 99,129 230 54 7 2 0 0 0 99,366
Total liabilities 7,270,075 7,774 1,824 1,512 431 0 0 34 7,279,395
Equity 439,632 0   0   0     439,632
Total equity and liabilities 7,709,707 7,774 1,824 1,512 431 0 0 34 7,719,027
Net exposure (1,338) (190) (45) (32) (9) 875 247 685 0
Off-balance sheet items 176,074 305 71 0 0 (886) (250) 0 175,493
Assets 176,074 305 71 0 0 0 0 0 176,379
Equity and liabilities 0 0 0 0 0 886 250 0 886
Gap 174,736 115 26 (32) (9) (11) (3) 685 175,493
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 PLN’000 PLN’000 PLN’000 PLN’000 PLN’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 1,858 617 264 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 1,461 0 0 168 50 0 5,055,712
Investments in financial assets: 1,842,028 8 2 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 9,061 2,185 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 PLN’000 PLN’000 PLN’000 PLN’000 PLN’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
Liabilities arising from sell-buy-back securities sold 49,610 0 0 0 0 0 0 0 49,610
Financial liabilities held for trading 17 0 0 0 0 0 0 0 17
Liabilities to clients 6,220,432 7,945 1,916 1,798 597 0 0 403 6,230,578
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
Current income tax liabilities 3,138 0 0 0 0 0 0 0 3,138
Provisions 3,419 0 0 0 0 0 0 0 3,419
Other liabilities 87,009 1,721 415 91 30 0 0 0 88,821
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) (146) 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 4,904 121 40 432 128 809 308,568


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 included in investment ratings 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.

Annual Report 2014 - Bank Pocztowy