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Notes to the consolidated financial statements

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46.1 Credit risk

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.

When developing its current credit risk management policy, the Group aims to maintain the risk appetite level, i.e. NPL, NPL cover ratio and the vintage curve. Other factors taken into account include maintaining an appropriate level of equity, compliance with the credit limits set by the Group, analyzing both strengths and weaknesses of the Group’s lending process and anticipating 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 adopted the following principles for the credit risk management process:

• analyzing credit risk of individual exposures, the entire portfolio and the capital requirement related to credit risk,
• applying internal and external limits arising from risk appetite in various areas of the credit portfolio and from the Banking Law and implemented recommendations of Polish Financial Supervision Authority, respectively;
• functions related to direct analysis of applications, risk assessment and credit related decision making are separated from those focused on customer attraction (sales of banking products);
• credit capacity and creditworthiness are the main criteria underlying all credit transactions with customers,
• 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,
• from conclusion to full settlement, each credit transaction is monitored in terms of utilization, timely repayment, legal security, equity and organizational relationships of the obligor and, in the case of institutional customers, also in terms of their current economic and financial position,
• the financial and economic standing of each insurance company supplying credit collateral, as well as delivery of insurance policies and assignment of rights related thereto by customers are monitored on a regular basis,
• 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. 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 (PD);
• recovery rate (RR);
• loss given default (LGD);
• loss identification period (LIP);
• share and structure of non-performing loans (NPL);
• coverage of non-performing loans with impairment losses (NPL coverage);
• scoring model efficiency measures (among others GINI, PSI ratio);
• cost of risk.

The Group carries out regular review of implementation of the adopted credit risk management policy. The following systems and ratios are subject to review and modification:

• internal regulations regarding customer’s credit risk assessment and monitoring, as well as verification of the value of legal security, which are adjusted to changing market conditions, business specifics of each customer type (group), loan purpose and determination of the minimum requirements regarding the obligatory forms of legal security;
• internal system of limiting credit activities and determining decision-making powers regarding loans;
• a system of identifying, assessing and reporting credit risk to Credit Committees, Management and Supervisory Board of the Bank;
• maximum adequacy levels of ratios used to assess credit risk and acceptable forms of own contribution for retail housing loans;
• scoring models and IT tools used in the credit risk management process.

The Group’s reporting system includes among others:

• reporting on credit risk level, to include vintage analyses, information regarding the use of limits, quality and efficiency of credit processes;
• reports on stress tests, limit review and back-test analyses for impairment losses;
• analyses of real property market and verification of the current value of security for credit exposures;
• review of implemented credit risk policy.

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 (by classes of financial instruments)

Geographical structure of the credit portfolio (net carrying amounts)

Geographical structure of the credit portfolio (net off-balance sheet amounts)

The net value of off-balance sheet exposure regarding loans and advances includes the amount of provisions for off-balance sheet exposures, presented in Note 34.

Industry structure of the credit portfolio

The following table presents the Group’s exposure concentration by industry. The Group’s portfolio is dominated by loans granted to individuals.

Group’s gross exposure to ten key customers 

Quality structure

The Group has identified the following quality structure of financial assets:

• current, no indications of impairment;
• overdue, no indications of impairment;
• with indications of impairment, but no impairment has been detected;
• with indications of impairment identified, impairment detected, the related loss recognized.

The following tables present the summary of the above quality classes of each financial assets type as at 31 December 2016 and 31 December 2015.

 

A. Quality structure of receivables from other banks

 

 

B. Quality structure of investment assets

 

C. Quality structure of loans and advances granted to customers

Balance as at	Gross carrying amount	Allowance	Net carrying amount	Share in net on-balance sheet exposure	Gross off-balance sheet amount	Provision	Net off-balance sheet amount	Share in net off-balance sheet exposure
31 December 2016
	PLN’000	PLN’000	PLN’000	%	PLN’000	PLN’000	PLN’000	%
Current loans and advances with no impairment indication	4 737 389	13 343	4 724 046	91,7%	182 300	161	182 139	99,4%
Overdue loans and advances with no impairment indication	220 881	24 395	196 486	3,8%	1 033	29	1 004	0,5%
Loans and advances with indications of impairment, but no impairment detected	27 711	229	27 482	0,5%	28	0	28	0,0%
Loans and advances with indications of impairment identified, impairment and the related loss recognized	486 171	279 846	206 325	4,0%	331	58	273	0,1%
Total	5 472 152	317 813	5 154 339	100,0%	183 692	248	183 444	100,0%

 

 

Balance as at	Gross carrying amount	Allowance	Net carrying amount	Share in net on-balance sheet exposure	Gross off-balance sheet amount	Provision	Net off-balance sheet amount	Share in net off-balance sheet exposure
31 December 2015
	PLN’000	PLN’000	PLN’000	%	PLN’000	PLN’000	PLN’000	%
Current loans and advances with no impairment indication	4 929 904	10 812	4 919 092	92,6%	215 815	276	215 539	99,5%
Overdue loans and advances with no impairment indication	194 318	14 790	179 528	3,4%	549	18	531	0,2%
Loans and advances with indications of impairment, but no impairment detected	28 429	439	27 990	0,5%	247	2	245	0,1%
Loans and advances with indications of impairment identified, impairment and the related loss recognized	389 838	203 566	186 272	3,5%	539	110	429	0,2%
Total	5 542 489	229 607	5 312 882	100,0%	217 150	406	216 744	100,0%

Loans and advances granted to customers: current, no impairment indication

Loans and advances granted to customers, not overdue and without impairment indication, bear an acceptable level of credit risk. The Group does not apply internal ratings to determine capital requirements for credit risk, hence a more detailed quality structure of the current portfolio (using internal ratings) is not presented.

	Balance as at	Balance as at
	31 December 2016	31 December 2015
	PLN’000	PLN’000
individuals	4 112 245	4 219 741
- overdraft facilities	21 853	24 495
- cash loans and installment loans	1 717 382	1 721 316
- mortgage loans	160 717	177 782
- real estate loans	2 200 775	2 284 290
- credit card debt	11 518	11 858
institutional clients	419 598	457 321
local authorities	205 546	252 842
Total	4 737 389	4 929 904
Allowance	13 343	10 812
Total net amount	4 724 046	4 919 092
Off-balance sheet gross amount	182 300	215 815
Off-balance sheet allowance	161	276
Off-balance sheet net amount	182 139	215 539

 

Loans and advances granted to customers: overdue, no impairment indication

The following tables present the aging analysis of overdue loans and advances granted to customers with no indications of impairment.

Balance as at
31 December 2016	1 – 30 days	31 – 60 days	61 – 90 days	Total
	PLN’000	PLN’000	PLN’000	PLN’000
individuals	161 215	36 933	19 529	217 677
- overdraft facilities	760	136	124	1 020
- cash loans and installment loans	105 210	28 895	16 621	150 726
- mortgage loans	12 918	1 658	906	15 482
- real estate loans	41 638	6 049	1 733	49 420
- credit card debt	689	195	145	1 029
institutional clients	2 944	258	2	3 204
local authorities	0	0	0	0
Total gross amount	164 159	37 191	19 531	220 881
Allowance	10 437	7 366	6 592	24 395
Total net amount	153 722	29 825	12 939	196 486
Off-balance sheet gross amount	916	94	23	1 033
Off-balance sheet allowance	19	7	3	29
Off-balance sheet net amount	897	87	20	1 004

 

Balance as at
31 December 2015	1 – 30 days	31 – 60 days	61 – 90 days	Total
	PLN’000	PLN’000	PLN’000	PLN’000
individuals	142 860	33 487	14 501	190 848
- overdraft facilities	1 307	267	79	1 653
- cash loans and installment loans	87 136	25 203	12 071	124 410
- mortgage loans	12 595	1 671	313	14 579
- real estate loans	41 180	6 180	1 906	49 266
- credit card debt	642	166	132	940
institutional clients	3 052	188	230	3 470
local authorities	0	0	0	0
Total gross amount	145 912	33 675	14 731	194 318
Allowance	5 712	4 822	4 256	14 790
Total net amount	140 200	28 853	10 475	179 528
Off-balance sheet gross amount	467	67	15	549
Off-balance sheet allowance	11	5	2	18
Off-balance sheet net amount	456	62	13	531

 

Loans and advances granted to customers with indications of impairment, but no impairment detected

The following tables present loans and advances granted to customers, with indication of impairment, but with no impairment detected, including the financial effect of collateral on the impairment loss.

Loans and advances granted to customers with indications of impairment identified, impairment and the related loss recognized

The following tables present loans and advances granted to customers, with indication of impairment, impairment detected and impairment loss recognized, including the financial effect of collateral on the impairment loss.

The financial effect of recovery based on collateral for receivables analyzed on a case-by-case basis amounted to PLN 22.9 million as at 31 December 2016 and PLN 30.4 million as at 31 December 2015. This amount would increase the required impairment losses and provisions if cash flows related to the collateral were not included in the calculation.

In such a case, the total value of impairment losses for the credit portfolio of the Group would amount to PLN 340.7 million as at 31 December 2016 and PLN 260.5 million as at 31 December 2015.

The Group uses the following collateral and other items improving the lending terms:

• mortgage recorded 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;
• blank promissory note with a promissory note agreement for the Group;
• 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 Group’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 rights arising from participation units in an investment fund management company accepted by the Group;
• assignment of rights under an insurance policy taken out from an insurance undertaking accepted by the Group;
• 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 2016 the fair value of mortgage collateral for the related exposures, calculated as the market price in principle determined by an appraiser, amounted to 4,307.8 million compared to PLN 4,479.2 million as at 31 December 2015.

 

Forbearance of loans

Forbearance of selected credit exposures means a forced modification of the initial repayment terms as determined in a loan agreement following a motion of the bank or obligor, resulting from inability to repay the loan on the initial terms due to an event that has deteriorated the financial standing of the obligor and resulted in repayment arrears or adversely affected the repayment projections. The purpose of the forbearance procedures is to:

• adjust the terms of repayment of liabilities arising from a credit transaction to the current solvency level of a debtor;
• allow the debt restructuring by a debtor without the Group's commencing collection procedures that make the entire debt immediately payable and further reduce debtor’s solvency;
• improve the collection standing of the Group through acceptance of additional security;
• allow a debtor to restructure the debt once collection procedures have been undertaken by the Group;
• minimize losses incurred by the Group.

The Group applies the following forms of debt forbearance:

• amending the repayment schedule within the initial repayment period (i.e. temporary reduction in the installment amount to the level proposed by a debtor or determined by its solvency);
• extending the loan period;
• change in the installment repayment date;
• postponing repayment deadlines;
• change in interest terms;
• assuming or accessing the debt by a third party;
• changing the repayment algorithm from decreasing to equal installments;
• determining the repayment schedule for overdrafts and revolving loans or decreasing outstanding balances;
• changing the repayment scheme: principal first, interest later;
• temporary suspension of interest repayment;
• capitalizing interest/principal;
• establishing additional collateral;
• sale of receivables;
• conversion;
• assuming collateral and offsetting it with the debt;
• concluding a new loan agreement/forbearance arrangement;
• other measures aimed at minimizing Group’s losses.

Forbearance may require concluding a new facility agreement. This concerns cases where the previous agreement was terminated and certain indications have occurred that the borrower has regained the full creditworthiness. After the disbursement the facility is marked as forborne exposure. Restructured transactions are recorded and monitored on an ongoing basis. Correct implementation of terms of a restructuring annex / new agreement / forbearance arrangement is monitored in particular for compliance with the debt repayment with deadlines and amounts determined therein. Should a threat to the implementation of a restructuring annex / new agreement / forbearance arrangement occur, the organizational unit monitoring the restructuring terms initiates measures aimed at renegotiation of these terms or commencement of collection proceedings. The record is built and updated on an ongoing basis based on relevant entries in IT systems of the Bank. Results of monitoring transactions subject to restructuring are presented on a quarterly basis at the Bank’s Credit Committee. At the end of each quarter, review of restructured transactions marking is performed under control procedures.

According to Recommendation R, restructuring is an impairment indication for credit exposure, and each restructured exposure is measured for impairment. Restructured exposures can be reclassified to non-impaired exposures after a 12-month grace period when the repayments cannot be overdue by more than 30 days at each month end and during a 24-month conditional period.

The following tables present forborne exposures as at 31 December 2016 and 31 December 2015.

* Repayment terms of exposure may be changed several times.

Forborne exposures by indication of impairment as at 31 December 2016 and 31 December 2015:

Quality structure of forborne exposures as at 31 December 2016 and 31 December 2015:

Changes in carrying amounts of forborne exposures for each reporting period:

	Net value	Gross value of exposures recognized in the period	Gross value of exposures derecognized in the period	Repayment of receivables in the period	zmiana odpisów aktualizujących w okresie	Change in impairment losses in the period Net value
	1 January 2016					31 December 2016
	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
individuals:	7 745	9 694	0	(834)	(3 713)	12 892
- cash loans and installment loans	1 554	8 050	0	(244)	(3 494)	5 866
- mortgage loans	1 507	869	0	(134)	(304)	1 938
- real estate loans	4 684	775	0	(456)	85	5 088
institutional clients:	32 914	878	0	(4 725)	(717)	28 350
- overdraft facilities	2 874	753	0	(1 095)	391	2 923
- operating loans	7 923	56	0	(1 244)	(710)	6 025
- investment loans	19 041	0	0	(2 373)	(284)	16 384
- other loans	3 076	69	0	(13)	(114)	3 018
local authorities	0	0	0	0	0	0
Total	40 659	10 572	0	(5 559)	(4 430)	41 242

 

	Net value	Gross value of exposures recognized in the period	Gross value of exposures derecognized in the period	Repayment of receivables in the period	zmiana odpisów aktualizujących w okresie	Change in impairment losses in the period Net value
	1 January 2015					31 December 2015
	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000	PLN’000
individuals:	5 889	2 262	0	(832)	426	7 745
- cash loans and installment loans	476	1 797	0	(39)	(680)	1 554
- mortgage loans	1 499	0	0	(95)	103	1 507
- real estate loans	3 914	465	0	(698)	1 003	4 684
institutional clients:	34 354	1 235	0	(4 508)	1 833	32 914
- overdraft facilities	2 509	889	0	(841)	317	2 874
- operating loans	8 789	346	0	(2 529)	1 317	7 923
- investment loans	20 133	0	0	(976)	(116)	19 041
- other loans	2 923	0	0	(162)	315	3 076
local authorities	0	0	0	0	0	0
Total	40 243	3 497	0	(5 340)	2 259	40 659

 

Interest income on forborne exposures in 2016 and 2015:

 

	Period	Period
	from 01.01.2016	from 01.01.2015
	to 31.12.2016	to 31.12.2015
	PLN’000	PLN’000
individuals:	416	252
- cash loans and installment loans	377	95
- mortgage loans	21	38
- real estate loans	18	119
institutional clients:	129	830
- overdraft facilities	2	82
- operating loans	17	23
- investment loans	62	598
- mortgage loans	48	0
- other loans	0	127
local authorities	0	0
Total	545	1 082