Financial results

Download note 47.3 in XLS

47.3 Market risk

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.

As for market risk, in 2015 the Bank started to apply cash flow hedge accounting to WIBOR 3M-based housing loan portfolio using IRS contracts. As at 31 December 2015 the face value of IRS determined for hedge accounting purposes amounted to PLN 140 million.

 

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 customers 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 Asset-Liability Committee, Management Board and Treasury Department;
• monthly report for the Asset-Liability Committee 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 2015 and 31 December 2014.

BPV for the banking book 

 

	BPV (1 p.b.)
	Balance as at	Balance as at
	31 December 2015	31 December 2014
	PLN’000	PLN’000
Banking book	5	17

 

Results of stress tests for +/- 200 b.p. for the banking book

 

	Change in the present value of the banking book
	Balance as at	Balance as at
	31 December 2015	31 December 2014
	PLN’000	PLN’000
200 p.b. down	69	(1 034)
200 p.b.up	1 359	4 767

 

The table below presents the change in the annual net interest income in the 12-month period from the end of the reporting period assuming a change in interest rates of +/- 100 b.p. and an unchanged balance as at the end of the reporting period. The analysis is based on the following assumptions:

• for interest decrease: interest rates on loans shall not exceed the interest rate cap determined in applicable laws 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	Balance as at
	31 December 2015	31 December 2014
	PLN’000	PLN’000
100 p.b. down	(29 045)	(51 777)
100 p.b. up	14 589	17 494

 

Lower fluctuations in the net interest income in the period of 12 months following 31 December 2015 in case of a decrease in interest rates as at 31 December 2015 result from amended principles applicable as of 1 January 2016 determining maximum interest rate and linking it to the NBP reference rate increased by the margin and multiplied by 2. By 31 December 2015 the interest rate cap on credit exposures was not to exceed the four-time lombard rate of the NBP.

In 2015 and 2014, 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 customers.

The following table presents the interest rate risk level for the trading book (BPV) as at 31 December 2015 and 31 December 2014.

BPV for the trading book

 

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 2015 and 31 December 2014.

 

 

 

 

Balance as at	Up to 1 month	From 1 month to 3 months	From 3 months up to 1 year	From 1 year to 5 years	Over 5 years	Assets/	Total
31 December 2014						liabilities (non-interest bearing)
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 (sell-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 customers	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	0	0	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

 

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.

Currency risk management process involves its measurement 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 2015 and as at 31 December 2015 and 31 December 2014

 

	Minimum value in 2015	Maximum value in 2015	Average value in 2015	Balance as at	Balance as at
				31 December 2015	31 December 2014
	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
VaR	11	409	33	409	10

 

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

• daily report for the Asset-Liability Committee, Management Board and Treasury Department;
• monthly report for the Asset-Liability Committee 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 2015 and as at 31 December 2015 and 31 December 2014. The maximum, minimum and average amounts have been presented for absolute position values (in thousands).

 

	Minimum value in 2015	Maximum value in 2015	Average value in 2015	Balance as at	Balance as at
				31 December 2015	31 December 2014
	'000	'000	'000	'000	'000
USD	0	1 560	78	(66)	(9)
EUR	6	3 328	236	3 328	(135)
GBP	21	1 026	43	27	38
CHF	0	57	29	39	(3)

 

In 2015 and 2014, 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 exceeded 2% of equity only on 31 December 2015.

The following table presents assets, liabilities and off-balance sheet items of the Group as at 31 December 2015 and 31 December 2014 by currency.

 

 

	Currency
	PLN	EUR		USD		CHF		Other currencies
Balance as at		translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	Total
31 December 2015
Liabilities	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
Liabilities to the Central Bank	10	0	0	0	0	0	0	0	10
Liabilities to other banks	34 440	0	0	0	0	0	0	0	34 440
Liabilities from securities sold under repo and sell-buy-back agreements	154 017	0	0	0	0	0	0	0	154 017
Financial liabilities held for trading	377	0	0	0	0	0	0	0	377
Liabilities to customers	5 734 759	6 205	1 456	1 374	352	0	0	39	5 742 377
Liabilities arising from issue of debt securities	503 500	0	0	0	0	0	0	0	503 500
Subordinated liabilities	141 887	0	0	0	0	0	0	0	141 887
Current income tax liabilities	2 145	0	0	0	0	0	0	0	2 145
Provisions	1 459	0	0	0	0	0	0	0	1 459
Other liabilities	90 297	29	7	7	2	0	0	0	90 333
Total liabilities	6 662 891	6 234	1 463	1 381	354	0	0	39	6 670 545
Equity	542 485	0	0	0	0	0	0	0	542 485
Total equity and liabilities	7 205 376	6 234	1 463	1 381	354	0	0	39	7 213 030
Net exposure	(35 669)	14 165	3 323	(256)	(65)	156	40	670	(20 934)
Off-balance sheet items	216 522	(636)	(149)	0	0	0	0	0	215 886
Assets	216 845	305	72	0	0	0	0	0	217 150
Equity and liabilities	323	941	221	0	0	0	0	0	1 264
Gap	180 853	13 529	3 174	(256)	(65)	156	40	670	194 952

 

 

	Currency
	PLN	EUR		USD		CHF		Other currencies
Balance as at		translated into PLN	w in foreign currency	translated into PLN	in foreign currency	translated into PLN	in foreign currency	translated into PLN	Total
31 December 2015
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 costumers	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	1100547
- held to maturity	418 719	0	0	0	0	0	0	0	418719
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

 

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. As the scale of derivative transactions which until June 2015 were entered into with banks with investment rating only and which have been concluded solely through KDPW CCP clearing house since July 2015, is inconsiderable, the Group’s measurement of derivatives does not take into account the counterparty credit risk or own credit risk. Such risks are believed to exert a marginal effect on measurement of the Group’s derivatives.