25. Loans and advances to customers

Accounting policies

Loans and advances to customers include financial assets which are not derivatives, with determined or possible to be determined payments, which are not quoted on an active market. The group includes loans and advances granted, financial lease receivables, corporate and municipal debt securities which based on the entity’s decision are classified to this category, and receivables due from repurchase agreements, where the bank is not a counterparty to the transaction.

At initial recognition they are measured at fair value plus transaction costs, which can be directly attributed to purchase or issuance of a financial asset.

After initial recognition, these assets are measured at amortized cost using the effective interest rate method, less impairment allowances. In case of loans and advances for which it is not possible to reliably estimate the schedule of future cash flows and the effective interest rate, they are measured at amount due.

Finance lease receivables are recognised as receivables in the amount equal to the current contractual value of the lease payments plus the potential unguaranteed residual value attributed to the lessor, determined as at the date of inception of the lease. Lease payments on financial leases are divided between interest income and a reduction in the balance of receivables in a manner enabling achieving a fixed interest rate on the remaining receivables.

Buy-sell-back securities are recognised under amounts due from customers if a counterparty to the transaction is other than a bank. Receivables due from repurchase agreements are measured at amortized cost. The difference between the purchase price and the repurchase (sale) price is recognised as interest income and it is settled over the term of the contract using the effective interest rate.

Estimates and judgements – impairment allowances

An impairment loss is incurred when there is objective evidence of impairment due to one or more events that occurred after the initial recognition of the asset (‘a loss event’), and the event has a reliably measurable impact on the expected future cash flows from the financial asset or a group of financial assets. Future cash flows are assessed by the Group on the basis of estimates based on historical parameters.

The Group performs a monthly review of loan exposures in order to identify loan exposures exposed to potential impairment, measure the impairment of loan exposures and recognise impairment allowances on loans and advances or provisions for off-balance sheet exposures.

The process of determining impairment allowances on loans and advances and provisions includes the following stages:

  • identifying impairment triggers and events significant from the perspective of identifying those triggers,
  • registering in the Group’s IT systems the events that are significant from the perspective of identifying impairment trigger of loan exposures,
  • determining the method of measuring impairment,
  • measuring impairment and determining an impairment allowance or provision, 
  • verifying and aggregating the results of the impairment measurement,
  • recording the results of impairment measurement.

The method of determining the amount of impairment allowances depends on the type of impairment triggers identified and the individual significance of a given loan exposure. The loss events considered as impairment triggers are, in particular, as follows:

  • breach of the contract by the borrower, i.e. for example, delay in the payment of principal or interest longer than 90 days (when determining the loan overdue period, the Group takes into account the amounts of overdue interest or principal instalments exceeding the fixed threshold values),
  • a decline in debtor’s rating to a level indicating a significant threat to the repayment of debt (with respect to non-financial clients ‘H1’ rating, with respect to financial institutions – G, H rating) resulting from significant financial difficulties of the debtor,
  • entering into restructuring agreement or granting a concession concerning debt repayment (the impairment trigger is recognised if the concessions are granted to the client for legal or economic reasons resulting from financial difficulties),
  • high probability of bankruptcy or reorganization of the debtor,
  • the debt being declared as due and payable,
  • enforcement proceedings against the debtor,
  • declaration of the debtor’s bankruptcy or filling a motion to declare bankruptcy,
  • the amount of the debt being challenged by the debtor,
  • commencement of corporate recovery proceedings against the debtor,
  • establishing imposed administration over the debtor or suspending the debtor’s activities,
  • additional impairment triggers identified for exposures to housing cooperatives arising from housing loans of the ‘old portfolio’, covered by State Treasury guarantees.

The Group categorizes its loans and advances based on the exposure amounts. The Group applies three methods of estimating impairment:

  • an individual basis applied in respect of individually significant loans, for which the objective evidence of impairment was identified or requiring individual assessment due to the transactions specifics and resulting from events determining the repayment of exposure. In the portfolio of individually significant loan exposures, each individual loan exposure is subject to individual assessment on impairment triggers and the level of recognised loss.
  • a portfolio basis applied in respect of individually insignificant loans, for which the objective evidence of individual impairment was identified. For individually insignificant exposures recognition and measurement of loss are made using portfolio risk parameters estimated with statistical methods. If loss is recognised for an individual loan exposure, the adequate impairment allowance is recognised.
  • a group basis (IBNR) applied in respect of the loans, for which the objective evidence of impairment was not identified, but there is a possibility of losses incurred but not recognised. If for individual loan exposure loss is not recognised, the exposure is classified to a portfolio of assets with similar characteristics which is assessed on a group basis and is a subject to impairment allowance set up for the given group due to incurred but not reported losses (IBNR allowance).

Loan exposures, in respect of which no objective evidence of individual impairment was identified, or in spite of their occurrence no impairment loss was recognised, are assessed for impairment on a basis of exposures with the same characteristics.

Impairment allowance in respect of a loan exposure corresponds to the difference between the carrying amount of the exposure and the present value of the expected future cash flows from a given exposure:

  • while assessing impairment allowances on an individual basis, the expected future cash flows are estimated for each loan exposure individually, taking into account the possible scenarios relating to contract execution, weighted by the probability of their realization,
  • an impairment allowance in respect of loan exposures assessed on portfolio basis or a group basis corresponds to the difference between the carrying amount of the exposures and the present value of the expected future cash flows (excluding future credit losses that have not been incurred).

Future cash flows of a group of financial assets assessed for impairment on a collective basis are estimated on the basis of cash flows resulting from loan agreements and historical recovery parameters generated from assets with similar risk characteristics.

Historical recovery parameters are adjusted on the basis of data from current observations, so as to take into account the impact of current conditions and exclude factors that were relevant in the past but which currently do not occur. In subsequent period, if the amount of impairment loss is reduced because of an event subsequent to the impairment loss being recognised (e.g. improvement in debtor's credit rating) the impairment loss that was previously recognised is reversed by making an appropriate adjustment to impairment allowances balance. The amount of the reversal is recognised in the income statement.

IBNR allowance is estimated using the portfolio parameters. These parameters are estimated for the group of exposures with the same risk characteristics.

The calculation of the present value of estimated cash flows relating to financial assets for which collateral is held takes into account cash flows arising from the foreclosure of the collateral, less costs to foreclose and sell.

The adopted methodology used for estimating impairment allowances will be developed in line with the further possibilities of gathering information on impairment from the existing and implemented applications and information systems. As a consequence, new data obtained could influence the level of impairment allowances in the future. The methodology and assumptions used in the estimates are reviewed on a regular basis to minimise the differences between the estimated and actual loss amount.

Financial information

Loans and advances to customers31.12.201631.12.2015
 GrossImpairment allowancesNetGrossImpairment allowancesNet
       
Loans 189 736.2 (7 478.1) 182 258.1 183 176.5 (8 013.4) 175 163.1
housing108 321.5(2 200.2)106 121.3103 005.8(2 337.2)100 668.6
corporate56 722.0(3 807.1)52 914.956 641.6(4 106.9)52 534.7
consumer24 692.7(1 470.8)23 221.923 529.1(1 569.3)21 959.8
       
Debt securities 4 948.2 (77.5) 4 870.7 5 356.3 (71.7) 5 284.6
debt securities (corporate)2 352.1(69.3)2 282.82 660.9(69.0)2 591.9
debt securities (municipal)2 596.1(8.2)2 587.92 695.4(2.7)2 692.7
Receivables due from repurchase agreements 1 339.0 - 1 339.0 4 432.2 - 4 432.2
Finance lease receivables 12 585.8 (447.1) 12 138.7 5 735.9 (202.1) 5 533.8
       
Total 208 609.2 (8 002.7) 200 606.5 198 700.9 (8 287.2) 190 413.7

Loans and advances to customers by method of calculating impairment allowances31.12.201631.12.2015
 GrossImpairment allowancesNetGrossImpairment allowancesNet
       
individual basis, of which:6 550.7(2 608.3)3 942.47 549.7(2 895.8)4 653.9
impaired5 048.9(2 593.9)2 455.05 412.8(2 882.4)2 530.4
not impaired1 501.8(14.4)1 487.42 136.9(13.4)2 123.5
portfolio basis7 183.0(4 765.8)2 417.27 688.1(4 822.2)2 865.9
impaired7 171.2(4 765.6)2 405.67 688.1(4 822.2)2 865.9
not impaired11.8(0.2)11.6---
group basis (IBNR)194 875.5(628.6)194 246.9183 463.1(569.2)182 893.9
       
Total 208 609.2 (8 002.7) 200 606.5 198 700.9 (8 287.2) 190 413.7

Loans and advances to customers - the Group’s exposure to credit risk31.12.201631.12.2015
 GrossImpairment allowancesNetGrossImpairment allowancesNet
       
impaired, of which12 220.1(7 359.5)4 860.613 100.9(7 704.6)5 396.3
assessed on an individual basis5 048.9(2 593.9)2 455.05 412.8(2 882.4)2 530.4
not impaired, of which196 389.1(643.2)195 745.9185 600.0(582.6)185 017.4
with recognised individual impairment trigger1 452.0(14.6)1 437.42 043.1(13.4)2 029.7
not past due1 199.1(13.3)1 185.81 605.4(11.9)1 593.5
past due252.9(1.3)251.6437.7(1.5)436.2
without recognised individual impairement trigger/IBNR194 937.1(628.6)194 308.5183 556.9(569.2)182 987.7
not past due190 628.1(436.1)190 192.0180 382.1(357.2)180 024.9
past due4 309.0(192.5)4 116.53 174.8(212.0)2 962.8
       
Total 208 609.2 (8 002.7) 200 606.5 198 700.9 (8 287.2) 190 413.7

Loans and advances to customers by client segment   31.12.201631.12.2015
      
Loans and advances to customers, gross, of which:   208 609.2198 700.9
mortgage banking   101 389.196 060.7
corporate   53 170.151 171.5
retail and private banking   24 700.623 529.1
small and medium enterprises   27 997.123 497.2
receivables due from repurchase agreements   1 339.04 432.2
other receivables   13.310.2
Impairment allowances on loans and advances   (8 002.7)(8 287.2)
      
Loans and advances to customers, net    200 606.5 190 413.7

Loan quality ratios (in %)   31.12.201631.12.2015
      
share of impaired loans   5.9%6.6%
coverage ratio of impaired loans*65.5%63.3%
share of loans overdue more than 90 days in relation to the gross amount of loans and advances4.4%4.9%

* The coverage ratio of impaired loans and advances to customers is calculated as the ratio of total impairment allowance (both on impaired loans and advances to customers and IBNR) to the total gross exposure of impaired loans and advances to customers.

Impairment allowances on loans and advances to customers – reconciliation of movements in 2016Value at the beginning of the periodRecognised during the periodReversed during the periodDerecognition of assets and settlementOther, of which arising from business combinationsValue at the end of the periodNet- impact on the income statement
        
housing loans2 337.21 239.7(893.9)(487.6)4.82 200.2(345.8)
corporate loans4 106.92 271.0(1 483.9)(967.3)(119.6)3 807.1(787.1)
consumer loans1 569.31 143.1(798.2)(397.3)(46.1)1 470.8(344.9)
debt securities (corporate)69.00.2--0.169.3(0.2)
debt securities (municipal)2.75.5---8.2(5.5)
finance lease receivables202.1121.4(101.3)(14.5)239.4447.1(20.1)
        
Total 8 287.2 4 780.9 (3 277.3) (1 866.7) 78.6 8 002.7 (1 503.6)

Impairment allowances on loans and advances to customers – reconciliation of movements in 2015Value at the beginning of the periodRecognised during the periodReversed during the periodDerecognition of assets and settlementOther, of which arising from business combinationsValue at the end of the periodNet- impact on the income statement
        
housing loans2 307.71 137.3(846.1)(368.8)107.12 337.2(291.2)
corporate loans4 111.32 601.0(1 837.5)(729.9)(38.0)4 106.9(763.5)
consumer loans1 322.91 045.2(707.2)(396.3)304.71 569.3(338.0)
debt securities (corporate)92.92.7(25.7)-(0.9)69.023.0
debt securities (municipal)2.8-(0.1)--2.70.1
finance lease receivables184.8103.2(77.6)(8.3)-202.1(25.6)
        
Total 8 022.4 4 889.4 (3 494.2) (1 503.3) 372.9 8 287.2 (1 395.2)

Reclassification of securities

In 2012 due to the change of intention as regards holding of the selected portfolio of non-treasury securities classified upon initial recognition as available for sale, the Group reclassified them to loans and advances to customers category. As a result of the reclassification of the portfolio, the valuation methods for the portfolio have changed, i.e. from measured at fair value to measured at amortized cost.

Portfolio reclassified in 2012 as at31.12.201631.12.2015
 fair valuecarrying amountfair valuecarrying amount
     
Municipal bonds622.7628.0741.7747.7
Corporate bonds8.28.2591.4537.7
     
Total 630.9 636.2 1 333.1 1 285.4

Portfolio reclassified in 2012 as at the reclassification datenominal valuefair valuecarrying amount
    
Municipal bonds1 219.21 237.41 237.4
Corporate bonds1 288.81 293.51 293.5
    
Total 2 508.0 2 530.9 2 530.9

Change in fair value which would have been recognised in the income statement and/or in other comprehensive income if there was no reclassification, would amount to PLN (39) million for the period from the date of reclassification until 31 December 2016 (31 December 2015 PLN (4.7) million). As at 31 December 2016, the average effective interest rate for the debt securities portfolio was 3.30% (as at 31 December 2015 was 3.26%).

Calculation of estimates – impairment allowances

The impact of an increase/decrease in cash flows for the Group’s loans and advances portfolio assessed for impairment on the basis of individual analysis of future cash flows arising both from own payments and foreclosure of collaterals, i.e. the exposures for which an individual method is applied and the impact of an increase/decrease in the portfolio parameters for the Group’s loans and advances portfolio assessed on a portfolio and group basis is presented in the table below:

Estimated change in impairment allowances on loans and advances resulting from:31.12.2016 31.12.2015 
 +10% scenario -10% scenario+10% scenario -10% scenario
     
change in the present value of estimated cash flows for the Bank’s loans and advances portfolio assessed on an individual basis (individually determined to be impaired)(196)320(204)364
change in probability of default49(49)60(60)
change in recovery rates(353)353(435)435

Finance lease receivables

The Group conducts lease activities through the entities from the PKO Leasing SA Group.

Gross lease investments and minimum lease payments as at 31 December 2016Gross lease investmentPresent value of minimum lease paymentsUnrealized income
    
Gross lease receivables:   
up to 1 year5 120.54 651.1469.4
from 1 year to 5 years7 858.57 286.8571.7
over 5 years710.0647.962.1
Gross total13 689.012 585.81 103.2
Impairment allowances(447.1)(447.1)-
    
Net total 13 241.9 12 138.7 1 103.2

Gross lease investments and minimum lease payments as at 31 December 2015Gross lease investmentPresent value of minimum lease paymentsUnrealized income
    
Gross lease receivables:   
up to 1 year2 317.12 100.2216.9
from 1 year to 5 years3 483.83 204.2279.6
over 5 years477.4431.545.9
Gross total6 278.35 735.9542.4
Impairment allowances(202.1)(202.1)-
    
Net total 6 076.2 5 533.8 542.4

As at 31 December 2016 and 31 December 2015, there are no unguaranteed residual values attributable to the lessor.