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Notes to the consolidated financial statements

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46.2 Liquidity risk

 

Liquidity risk is the risk of the Group’s losing the capacity to pay its liabilities on a timely basis due to an unfavorable structure of its assets and liabilities. Liquidity risk may arise from a cash flow mismatch, sudden withdrawal of deposits, concentration of funding sources and the credit portfolio, inadequate level of liquid assets, limited liquidity of assets, the Bank’s customers’ default on their obligations or other unexpected developments in the financial market.

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

Maintaining an appropriate liquidity level requires determining an optimal balance between liquidity needs of the Bank, i.e. its demand for cash and the amount and cost of maintaining liquidity provisions which allow for generating cash surpluses. The objective of liquidity risk management is to balance proceeds and payments of funds under on- and off-balance sheet transactions in order to ensure cost-effective funding sources, generating of cash surpluses and their appropriate use. The Bank builds the structure of its assets and liabilities so as to ensure the achievement of defined financial ratios with the liquidity risk level acceptable for the Bank and in accordance with the risk appetite defined by the Supervisory Board and the liquidity risk tolerance specified by the Management Board.

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

• maintaining an acceptable liquidity level based on an appropriate portfolio of liquid assets,
• stable funds being the key source of funding for the Bank’s assets;
• undertaking initiatives aimed at maintaining the liquidity risk level within the accepted risk profile;
• maintaining supervisory liquidity measures above the defined limits.

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

The Bank’s Supervisory Board supervises compliance of the liquidity risk management policy with the financial strategy and plan and defines the liquidity risk appetite. The Management Board is responsible for organizing effective liquidity management and monitoring its efficiency. It also manages liquidity and determines tolerance for liquidity risk based on the assumed liquidity risk appetite and approves types and amounts of internal liquidity limits and thresholds for individual liquidity measures. The Asset-Liability Committee (ALCO) directly supervises the liquidity risk. It is also responsible for the Bank’s financing strategy, it approves the types and amounts of internal liquidity limit and thresholds, monitors supervisory liquidity measures on a daily basis, determines transfer rate adjustments in the internal fund system, directly supervises liquidity if an emergency plan is put into action. Risk and Capital Management Department is responsible for liquidity risk assessment and reporting. Liquidity risk management operations are managed in the Treasury Department for short-term liquidity and in the Controlling Department for medium-term and long-term liquidity.

In order to ensure high standards of liquidity risk management, compliant with best banking practices, at least once a year the Bank reviews and verifies the policies and procedures, including internal liquidity limits.

In order to determine the liquidity risk level, the Bank uses a number of measurement and assessment methods, such as:

• contractual and actual liquidity gap method,
• deposit base stability and concentration check,
• surplus of liquid assets over unstable liabilities,
• structural limits;
• stress testing.

Liquidity risk motoring includes a number of stress tests. On a daily basis the Bank carries out standard stress tests for two periods (7 days and 1 month) and for three different scenarios (“bank run”, “market crisis” and “mixed scenario”), analyzed in the “severe” and "less severe" variants.

The following table presents the results of standard daily stress tests performed as at 31 December 2016 and 31 December 2015 and compliant with the requirements for credit institutions imposed by the amended Recommendation P.

The “bank run” scenario is based on the loss of confidence in the Bank among market participants, which results in an outflow of customer funds including an increased amount of unsecured products not renewed by customers and an outflow of a portion of funds which contractual maturity falls outside the time horizon of the scenario. The amount of outflowing customer funds depends on the customer type, type of funds and type of product. The Bank assumes, for example, that funds deposited online and products with non-standard interest rates are more likely to be withdrawn.

The “market crisis” scenario assumes limited available financing on wholesale markets and a drop in financial assets combined with an increased demand for cash among customers using contingent commitments of the Bank. Additionally, the scenario assumes FX restrictions, stress conditions for many currencies and limited availability of financing in the banking sector, which translates into outflowing funds of customers, who are unable to obtain credit financing in the sector.

“Mixed scenario” combines both scenarios in question. It assumes in particular the occurrence of the “market crisis" (systemic crisis) and extraordinarily difficult situation of the Bank accompanied by an increased outflow of customer funds.

Standard stress tests are complemented by sensitivity analyses, assessing the impact of changes in the assumptions on each scenario. Standard tests are also supplemented by historical stress tests, which enable monitoring risks in various timeframes (from a few days to one year) and in various stress levels. Additionally, the Group carries out quarterly reverse stress tests, which consist in determining significant adverse outcomes and then determining the related reasons and effects. At least annually the Bank carries out comprehensive internal stress tests to assess how the stressors will affect the financial condition, liquidity and equity in order to plan possible action steps mitigating the negative impact of the crisis scenarios.

Stress tests carried out in the Bank are applied to determine the Bank's demand for liquid assets in current operations and in financial plans, where the minimum amount of liquid assets is determined in line with projections based on stress test outcomes. Stress test results provide additional information on the Bank’s sensitivity to analyzed stressors and are used in the process of determining liquidity limits.

The Bank has also developed a set of Early Warning Signals to identify increased risks or weaknesses in the liquidity position or a potential increase in the demand for liquidity. Early Warning Signals identify adverse trends, enable risk assessment and identification of possible risk mitigants. Consequently, not only stress tests results but also changes in risks trigger application of contingency funding plans to mitigate liquidity risk.

With a view to mitigating the liquidity risk, the Bank uses liquidity limits and thresholds for selected measures, including liquidity ratios or the mismatch between accumulated actual cash flows generated by assets and liabilities in individual time ranges.

Pursuant to Resolution No. 386/2008 of the Polish Financial Supervision Authority of 17 December 2008 on liquidity requirements for banks (as amended), the Bank monitors and complies with requirements concerning supervisory liquidity ratios. In 2016, the Bank fulfilled the requirements concerning the minimum supervisory liquidity ratios as specified in the aforesaid Resolution.

Since October 2015 the Bank has been obliged to maintain minimum liquidity coverage ratio ("LCR”) under Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No. 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for credit institutions and in conjunction with Regulation of the European Parliament and of the Council (EU) no. 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending the Regulation (EU) No. 648/2012. Minimum LCR applicable to the Bank has been 60% as from 2015, 70% - from 1 January 2016, 80% - from 1 January 2017 and 100% from 1 January 2018.

As at 31 December 2016, liquidity ratios remained within the valid risk limits.  The following table presents supervisory liquidity measures as at 31 December 2016 and 31 December 2015.

	Balance as at	Balance as at	Limit
	31 December 2016	31 December 2015
M1 (PLN’000)	885 293	520 331	0
M2	2,48	1,60	1
M3	4,13	4,85	1
M4	1,18	1,16	1
LCR	148%	131%	70%*

* The minimum supervisory requirement was 60% in the period from 1 October 2015 to 31 December 2015.

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

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

The Bank has defined contingency plans to address sudden changes in the deposit base. An analysis of immediately available funding sources shows that in case of a sudden liquidity drop, the Bank is able to obtain sufficient funds without the need to implement its contingency plans. As at 31 December 2016, the Bank’s portfolio of liquid assets was sufficient to deal with an actual crisis.

Excess liquidity defined in accordance with the amended Recommendation P:

Realigned liquidity gaps

The following table presents realigned liquidity gaps for the Group as at 31 December 2016 and 31 December 2015.

Balance as at	Up to 1 month	From 1 month to 3 months	From 3 months to 6 months	From 6 months to 1 year	From 1 year to 5 years	Over 5 years
31 December 2016
	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
Total on-balance sheet assets	1 395 066	243 959	336 799	607 205	2 679 431	3 108 046
Total on-balance sheet liabilities	517 159	286 061	287 381	406 901	3 906 989	1 717 182
Realigned balance sheet gap	877 907	(42 102)	49 418	200 304	(1 227 558)	1 390 864
Accumulated balance sheet gap	877 907	835 805	885 223	1 085 527	(142 031)	1 248 833
Off-balance sheet liabilities	15 893	12 000	7 099	13 014	14 442	0
Total realigned gap	862 014	(54 102)	42 319	187 290	(1 242 000)	1 390 864
Total accumulated gap	862 014	807 912	850 231	1 037 521	(204 479)	1 186 385

 

Balance as at	Up to 1 month	From 1 month to 3 months	From 3 months to 6 months	From 6 months to 1 year	From 1 year to 5 years	Over 5 years
31 December 2015
	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
Total on-balance sheet assets	1 342 562	258 419	361 249	610 610	2 677 533	3 183 901
Total on-balance sheet liabilities	615 658	251 060	254 226	539 085	3 939 032	1 648 998
Realigned balance sheet gap	726 904	7 359	107 023	71 525	(1 261 499)	1 534 903
Accumulated balance sheet gap	726 904	734 263	841 286	912 811	(348 688)	1 186 215
Off-balance sheet liabilities	20 934	8 113	7 395	18 111	2 375	0
Total realigned gap	705 970	(754)	99 628	53 414	(1 263 874)	1 534 903
Total accumulated gap	705 970	705 216	804 844	858 258	(405 616)	1 129 287

Group’s financial assets and liabilities by maturity based on contractual non-discounted payments

Balance as at	Up to 1 month inclusive	From 1 to 3 months	From 3 months to 1 year	Total up to 1 year	From 1 year to 5 years	Over 5 years	Total over 1 year	With undetermined maturity	Total
31 December 2016
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	65 365	0	0	65 365	0	0	0	0	65 365
Receivables from other banks	5 702	0	10 036	15 738	30 160	0	30 160	0	45 898
Financial assets held for trading	0	0	0	0	695	0	695	0	695
Financial hedges	0	0	1 146	1 146	0	0	0	0	1 146
Loans and advances granted to clients	103 653	89 867	379 738	573 258	1 519 915	2 919 666	4 439 581	141 500	5 154 339
Investments in financial assets:	92 988	0	284 765	377 753	1 054 479	28 306	1 082 785	4 019	1 464 557
- available for sale	92 988	0	274 668	367 656	775 705	28 306	804 011	4 019	1 175 686
- held to maturity	0	0	10 097	10 097	278 774	0	278 774	0	288 871
Other assets	37 549	385	5 919	43 853	2 530	0	2 530	66	46 449
Total assets	305 257	90 252	681 604	1 077 113	2 607 779	2 947 972	5 555 751	145 585	6 778 449
Originated off-balance sheet liabilities	10 114	5 587	73 686	89 387	18 433	0	18 433	86 984	194 804

 

Balance as at	Up to 1 month inclusive	From 1 to 3 months	From 3 months to 1 year	Total up to 1 year	From 1 year to 5 years	Over 5 years	Total over 1 year	With undetermined maturity	Total
31 December 2016
Liabilities	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
Liabilities to the Central Bank	2	0	0	2	0	0	0	0	2
Liabilities to other banks	21 856	0	0	21 856	0	0	0	0	21 856
Liabilities from securities sold under repo and sell-buy-back agreements	1 040	0	0	1 040	0	0	0	0	1 040
Financial liabilities held for trading	205	0	0	205	0	0	0	0	205
Financial hedges	0	0	0	0	932	0	932	0	932
Liabilities to clients	494 979	464 933	713 338	1 673 250	564 690	6 153	570 843	3 518 921	5 763 014
Liabilities arising from issue of debt securities	0	0	913	913	354 728	0	354 728	0	355 641
Subordinated liabilities	0	0	0	0	0	142 818	142 818	0	142 818
Other liabilities	107 835	463	404	108 702	382	285	667	0	109 369
Total liabilities	625 917	465 396	714 655	1 805 968	920 732	149 256	1 069 988	3 518 921	6 394 877
Received off-balance sheet liabilities	1 964	178	2 561	4 703	7 125	0	7 125	0	11 828

 

Balance as at	Up to 1 month inclusive	From 1 to 3 months	From 3 months to 1 year	Total up to 1 year	From 1 year to 5 years	Over 5 years	Total over 1 year	With undetermined maturity	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	426 875	0	0	426 875	0	0	0	0	426 875
Receivables from other banks	5 155	0	0	5 155	40 191	0	40 191	0	45 346
Receivables from securities purchased under reverse repo and buy-sell-back agreements	19 794	0	0	19 794	0	0	0	0	19 794
Financial assets held for trading	0	0	0	0	603	0	603	0	603
Financial hedges	0	0	0	0	1 140	0	1 140	0	1 140
Loans and advances granted to clients	91 086	102 648	382 304	576 038	1 504 579	3 096 723	4 601 302	135 542	5 312 882
Investments in financial assets:	0	35 154	204 815	239 969	953 859	39 395	993 254	14 814	1 248 037
- available for sale	0	0	86 655	86 655	662 483	39 395	701 878	14 814	803 347
- held to maturity	0	35 154	118 160	153 314	291 376	0	291 376	0	444 690
Other assets	28 407	68	7 290	35 765	2 362	0	2 362	62	38 189
Total assets	571 317	137 870	594 409	1 303 596	2 502 734	3 136 118	5 638 852	150 418	7 092 866
Originated off-balance sheet liabilities	5 270	8 351	47 177	60 798	78 590	0	78 590	111 788	251 176

 

Balance as at	Up to 1 month inclusive	From 1 to 3 months	From 3 months to 1 year	Total up to 1 year	From 1 year to 5 years	Over 5 years	Total over 1 year	With undetermined maturity	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	10	0	0	0	0	10
Liabilities to other banks	34 440	0	0	34 440	0	0	0	0	34 440
Liabilities from securities sold under repo and sell-buy-back agreements	154 017	0	0	154 017	0	0	0	0	154 017
Financial liabilities held for trading	377	0	0	377	0	0	0	0	377
Liabilities to clients	668 986	507 054	918 081	2 094 121	483 638	6 122	489 760	3 158 496	5 742 377
Liabilities arising from issue of debt securities	0	0	148 903	148 903	354 597	0	354 597	0	503 500
Subordinated liabilities	1 260	0	608	1 868	0	140 019	140 019	0	141 887
Other liabilities	76 441	13 200	448	90 089	73	171	244	0	90 333
Total liabilities	935 531	520 254	1 068 040	2 523 825	838 308	146 312	984 620	3 158 496	6 666 941
Received off-balance sheet liabilities	27	0	5 027	5 054	7 637	0	7 637	0	12 691

 

Acquisition of funds

To ensure liquidity sufficient to ensure secure growth, the Bank acquires funds through:

• development of the deposit portfolio in the consumer segment, constituting the key source of funding;
• institutional deposits used as an additional source of funding.

Moreover, depending on the market situation and the demand for deposit products, the Bank may consider issuing short-term bonds.

The Bank also secures long-term financing to improve long-term liquidity through:

• development of the long-term deposit portfolio in the consumer segment;
• issue of long-term treasury bonds.

To ensure optimal alignment of the term structure of the sources of financing with the structure of assets held, the Bank takes into account liquidity measures specified by supervisory bodies and internal liquidity limits when taking decisions on fund acquisition.

The sources of financing are structured to match the lending needs. The following table presents the sources of financing as at 31 December 2016 and 31 December 2015.

	Balance as at		Balance as at
	31 December 2016	Structure	31 December 2015	Structure
	PLN’000	%	PLN’000	%
Client liabilities excluding funds of Poczta Polska and the Group*	5 710 211	82%	5 551 668	77%
Equity	523 442	8%	542 485	8%
Liquid bonds*	355 000	5%	502 850	7%
Subordinated debt*	143 000	2%	140 340	2%
Other liabilities	114 404	2%	84 893	1%
Liabilities of Poczta Polska and its Capital Group*	86 205	1%	217 901	3%
NBP and other banks*	3 059	0%	18 500	0%
Repo transactions	1 245	0%	154 393	2%
Balance sheet total	6 936 566	100%	7 213 030	100%

* capital amount excluding interest accrued, commissions settled with the ESP method, other liabilities and provisions, which have been presented under “Other liabilities”