23. Derivative hedging instruments

Accounting Policies

The use of hedge accounting

The Group applies hedge accounting when all the terms and conditions below have been met:

1) upon setting up the hedge, a hedge relationship, the purpose of risk management by the entity and the hedging strategy were officially established,

2) a hedge is expected to be highly effective,

3) the planned hedged transaction must be highly probable and must be exposed to variability of cash flows which may, as a result, have an impact on the income statement,

4) the effectiveness of a hedge may be reliably assessed,

5) the hedge is assessed on a current basis and its high effectiveness in all reporting periods for which the hedge had been established is confirmed

As at 31 December 2016 and as at 31 December 2015, the Group did not use fair value hedges.

Discontinuing hedge accounting:

  • A hedge instrument expires, is sold, released or exercised - accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective are recognised in a separate item in other comprehensive income until the planned transaction occurs,
  • The hedge ceases to meet the hedge accounting criteria - accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective are recognised in a separate item in other comprehensive income until the planned transaction occurs,
  • The planned transaction is no longer considered probable - all the accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective, are recognised in the income statement,
  • Cancellation of hedging relationship - the accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective, are recognised in a separate item in other comprehensive income until the planned transaction occurs.

Cash flow hedges

Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognised directly in other comprehensive income in respect of the portion constituting the effective portion of the hedge. The ineffective portion of a hedge is recognised in the income statement in the item ‘Net income from financial instruments designated at fair value’.

Amounts transferred directly to other comprehensive income are transferred to the income statement in the same period or periods in which the hedged planned transaction affects the income statement. Interest and foreign exchange differences are shown in the income statement, in ‘Net interest income’ and ‘Net foreign exchange gains (losses)’, respectively.

All types of hedging relationships applied by the Group are cash flow hedge accounting (macro cash flow hedge).

The effectiveness tests comprise the valuation of hedging transactions, net of interest accrued and currency translation differences on the nominal value of the hedging transactions (in case of CIRS transactions).

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. Tests are performed on a monthly basis.

Types of hedging strategies applied by the group

Strategy 1Hedges against fluctuations in cash flows from mortgage loans in CHF and negotiated term deposits in PLN, resulting from the risk of fluctuations in interest rates and in foreign exchange rates, using CIRS transactions
Description of hedge relationshipelimination of the risk of cash flow fluctuations generated by floating interest rate loans denominated in CHF and negotiated term deposits in PLN, resulting from fluctuations in reference interest rates in CHF and PLN, and changes in foreign exchange rates CHF/PLN using CIRS transactions during the hedged period.
Hedged riskcurrency risk and interest rate risk
Hedging instrumentCIRS transactions where the Group pays coupons based on 3M CHF LIBOR, and receives coupons based on 3M WIBOR on the nominal value defined in CHF and PLN respectively.
Hedged positionthe portfolio of floating interest rate mortgage loans denominated in CHF and the portfolio of short-term negotiated term deposits, including renewals in the future (high probability of occurrence). The Group designated the hedged position according to the regulations of IAS 39 AG 99C as adopted by the European Union
 Periods in which cash flows are expected and in which they should have an impact on the financial result: January 2017 – October 2026

Strategy 2Hedges against fluctuations in cash flows from floating interest rate loans in PLN, resulting from the risk of fluctuations in interest rates, using IRS transactions
Description of hedge relationshipelimination of the risk of cash flow fluctuations generated by floating interest rate PLN loan portfolio resulting from the interest rate risk using IRS transactions in the period covered by the hedge
Hedged riskinterest rate risk
Hedging instrumentIRS transactions where the Group pays coupons based on floating 3M WIBOR rate, and receives coupons based on a fixed rate on the nominal value for which they were concluded
Hedged positionthe portfolio of loans in PLN indexed to the floating 3M WIBOR rate
 Period in which cash flows are expected and in which they should have an impact on the financial result: January 2017 – December 2021

Strategy 3Hedges against fluctuations in cash flows from floating interest rate loans in EUR, resulting from the risk of fluctuations in interest rates, using IRS transactions
Description of hedge relationshipelimination of the risk of cash flow fluctuations generated by floating interest rate EUR loan portfolio resulting from the interest rate risk using IRS transactions in the period covered by the hedge
Hedged riskinterest rate risk
Hedging instrumentIRS transactions, where the Group pays coupons based on floating 3M EURIBOR rate, and receives coupons based on a fixed rate on the nominal value for which they were concluded
Hedged positionthe portfolio of loans in EUR indexed to the floating 3M EURIBOR rate
 Periods in which cash flows are expected and in which they should have an impact on the financial result: January 2017 - June 2022

Strategy 4 Hedges against fluctuations in cash flows from floating interest rate loans in CHF, resulting from the risk of fluctuations in interest rates, using IRS transactions
Description of hedge relationshipelimination of the risk of cash flow fluctuations generated by floating interest rate CHF loan portfolio resulting from the interest rate risk using IRS transactions in the period covered by the hedge
Hedged risk interest rate risk
Hedging instrumentIRS transactions where the Group pays coupons based on floating 3M CHF LIBOR rate, and receives coupons based on a fixed rate on the nominal value for which they were concluded
Hedged positionthe portfolio of loans in CHF indexed to the floating 3M CHF LIBOR rate
 As at 31 December 2016, the Group had no active hedging relationships based on this strategy. As at 31 December 2015 the nominal value of hedging instruments amounted to CHF 250 million.

Strategy 5Hedges against fluctuations in cash flows from floating interest rate loans in foreign currencies, resulting from the risk of fluctuations in interest rates and from foreign exchange rate risk and hedges against fluctuations in cash flows from fixed interest rate financial liability in foreign currency, resulting from foreign exchange rate risk, using CIRS transactions
Description of hedge relationshipelimination of the risk of cash flow fluctuations of floating interest rate loans in foreign currencies, resulting from the risk of fluctuations in interest rates and from foreign exchange rate risk and elimination of the risk of cash flow fluctuations of fixed interest rate financial liability in foreign currency, resulting from foreign exchange rate risk, using CIRS transactions in the period covered by the hedge
Hedged riskcurrency risk and interest rate risk
Hedging instrumentCIRS transactions, where the Group pays coupons based on floating 3M CHF LIBOR rate, and receives coupons based on a fixed USD rate on the nominal value, for which they were concluded
Hedged positionthe portfolio of floating interest rate mortgage loans denominated in CHF and fixed interest rate financial liability denominated in USD
 Period in which cash flows are expected and in which they should have an impact on the financial result: January: 2017 - September 2022

STRATEGY 6Hedges against fluctuations in cash flows from mortgage loans in foreign currencies other than CHF and negotiated term deposits in PLN, resulting from the risk of fluctuations in interest rates and in foreign exchange rates, using CIRS transactions
Description of hedge relationshipelimination of the risk of cash flow fluctuations generated by floating interest rate loans denominated in convertible currencies other than CHF and negotiated term deposits in PLN, resulting from fluctuations in reference interest rates, and changes in foreign exchange rates using CIRS transactions in the period covered by the hedge
Hedged riskcurrency risk and interest rate risk
Hedging instrumentCIRS transactions where the Group pays coupons based on 3M EURIBOR rate, and receives coupons based on 3M WIBOR rate on the nominal value for which the transaction was concluded
Hedged positionthe portfolio of floating interest rate mortgage loans denominated in EUR and the portfolio of short-term negotiated term deposits, including renewals in the future (high probability of occurrence). The Group designated the hedged position according to the regulations of IAS 39 AG 99C as adopted by the European Union.
 Period in which cash flows are expected and in which they should have an impact on the financial result: January 2017 – March 2021

Financial information

Carrying amount/fair value of derivative instruments hedging cash flows associated with the interest rate and/or foreign exchange rate31.12.201631.12.2015
 AssetsLiabilitiesAssetsLiabilities
     
IRS90.432.3269.1-
CIRS291.71 102.9239.6998.5
     
Total 382.1 1 135.2 508.7 998.5

Nominal value of hedging instruments by maturity as at 31 December 2016 up to 1 month1 - 3 months3 months - 1 year1 - 5 yearsover 5 yearsTotal
       
IRS PLN fixed - float-250.09 030.06 845.6- 16 125.6
IRS EUR fixed - float (original currency)----498.5 498.5
       
CIRS float CHF/float PLN      
float CHF300.0--1 720.025.0 2 045.0
float PLN1 098.6--6 170.788.1 7 357.5
CIRS fixed USD/float CHF      
fixed USD----875.0 875.0
float CHF----814.5 814.5
CIRS float EUR/float PLN      
float EUR---125.0- 125.0
float PLN---545.2- 545.2

Nominal value of hedging instruments by maturity as at 31 December 2015 up to 1 month1 - 3 months3 months - 1 year1 - 5 yearsover 5 yearsTotal
       
IRS PLN fixed - float1 680.02 910.0984.04 670.0- 10 244.0
IRS EUR fixed - float (original currency)35.0368.058.0-- 461.0
IRS CHF fixed - float (original currency)--250.0-- 250.0
       
CIRS float CHF/float PLN      
float CHF150.0-250.01 520.0300.0 2 220.0
float PLN465.8-914.65 421.61 039.0 7 841.0
CIRS fixed USD/float CHF      
fixed USD----875.0 875.0
float CHF----814.5 814.5
CIRS float EUR/float PLN      
float EUR---200.0- 200.0
float PLN---851.7- 851.7

Change in other comprehensive income related to cash flow hedges31.12.201631.12.2015
   
Other comprehensive income at the beginning of the period, gross (71.2) 6.4
Gains/losses transferred to other comprehensive income in the period(50.5)(689.1)
Amount transferred from other comprehensive income to income statement, of which:(12.2)611.5
- interest income(340.1)(450.9)
- net foreign exchange gains327.91 062.4
Accumulated other comprehensive income at the end of the period, gross (133.9) (71.2)
Tax effect25.413.5
   
Accumulated other comprehensive income at the end of the period, net (108.5) (57.7)
   
Impact on other comprehensive income in the period, gross (62.7) (77.6)
Tax effect11.914.7
   
Impact on other comprehensive income in the period, net (50.8) (62.9)

Calculation of estimates

Estimated change in valuation with parallel shift of yield curves:31.12.2016 31.12.2015 
 +50 b.p. scenario-50 b.p. scenario+50 b.p. scenario-50 b.p. scenario
     
IRS(143)146(61)63
CIRS(88)91(95)99
     
Total (231) 237 (156) 162