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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:

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:

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:

The Group’s reporting system includes among others:

The Group prepares the following cyclical reports on its credit risk exposure:

 

Maximum credit risk exposure (by classes of financial instruments)

Additionally, the Group is exposed to credit risk arising from concluded transactions recognized as extended off-balance sheet liabilities. The maximum exposure to credit risk related to the said transactions is expressed by their off-balance sheet value presented in Note 40.

In order to prevent overly concentration of exposures, the Group applies internal and external limits arising from risk appetite in various areas of the credit portfolio and Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (“CRR”) and from the Banking Law and implemented recommendations of the Polish Financial Supervision Authority. The detailed list of lending limits adopted and monitored by the Group has been determined by internal regulations on lending limits. The Group applies internal exposure concentration limits and reference levels for an individual:

  • industry type;
  • collateral type;
  • product type;
  • customer type.

Individual limits are monitored on a monthly basis and appropriate credit risk management reports are drawn up regularly. The Group reviews and, wherever necessary, changes and specifies appropriate limit parameters reflecting the current and target credit portfolio structure in accordance with the risk appetite assumed.

The Group operates only in Poland. The following tables present balance sheet and off-balance sheet exposure regarding loans and advances granted to customers in each province.

 

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:

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

 

 

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.

 

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.

 

 

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:

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:

The Group applies the following forms of debt forbearance:

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:

 

 

Interest income on forborne exposures in 2016 and 2015: