62. Risk management of foreign currency mortgage loans for individuals

As the result of the abandonment of EUR/CHF peg by the Swiss National Bank in January 2015 there was a significant appreciation of the Swiss franc against foreign currencies, including the Polish zloty. In 2016 Swiss franc exchange rate maintained a similar level as in 2015. The Group constantly analyses the impact of these events on the financial results including the risk of deterioration in the quality of the portfolio of mortgage loans denominated in CHF. The risk is partly mitigated by a decline in reference interest rates, CHF LIBOR.

Due to the fact that the significant appreciation of the CHF against Polish zloty results in risk of an excessive burden for household which took mortgage loans indexed to CHF, thus timely debt service, from the beginning of 2015 the public debate continues on how to reduce the risk of insolvency of these borrowers. Emerging proposals for system solutions, submitted in form of civil or parliamentary bills, as well as presented by the public and supervisory authorities, may result in incurring losses by the Group on this portfolio in the future periods.

The Group has taken a number of actions designed to help the clients and at the same time to reduce the growth of the credit risk associated with the appreciation of the CHF – among other, lowering transaction exchange rates CHF/PLN at which amount payable in CHF is converted (i.e. currency spread) and taking into account the negative LIBOR for all customers.

The Group analyses its portfolio of foreign currency mortgage loans to households in a specific manner. The Bank constantly monitors the quality of the portfolio on a current basis and analyses the risk of deterioration of the quality of the portfolio. Currently, the quality of the portfolio is at an acceptable level. The Bank takes

into consideration the risk of foreign currency mortgage loans for households in the capital adequacy and own fund management.

The following tables present qualitative analysis of the loans denominated in CHF

Loans and advances to customers in CHFby impairment calculation method (translated into PLN)31.12.2016
 Financial institutionsCorporatesHouseholdsTotal
     
Assessed on an individual basis, of which:-247.4165.8413.2
impaired-220.3137.2357.5
Assessed on a portfolio basis, impaired-26.01 184.51 210.5
Assessed on a group basis (IBNR)4.8360.729 361.229 726.7
     
Loans and advances to customers gross 4.8 634.1 30 711.5 31 350.4
     
Impairment allowances on exposures assessed on an individual basis, of which:-(89.6)(64.4)(154.0)
impaired-(63.4)(64.1)(127.5)
Impairment allowances on exposures assessed on a portfolio basis-(19.5)(792.7)(812.2)
Impairment allowances on exposures assessed on a group basis (IBNR)-(2.2)(69.3)(71.5)
     
Allowances - total - (111.3) (926.4) (1 037.7)
     
Loans and advances to customers net 4.8 522.8 29 785.1 30 312.7

CHF exchange rate as at 31 December 2016 was equal to PLN 4.1173.

   

Loans and advances to customers in CHFby impairment calculation method (translated into PLN)31.12.2015
 Financial institutionsCorporatesHouseholdsTotal
     
Assessed on an individual basis, of which:-171.0223.6394.6
impaired-134.7208.1342.8
Assessed on a portfolio basis, impaired-32.01 126.51 158.5
Assessed on a group basis (IBNR)6.1372.330 309.130 687.5
     
Loans and advances to customers gross 6.1 575.3 31 659.2 32 240.6
     
Impairment allowances on exposures assessed on an individual basis, of which:-(45.6)(95.9)(141.5)
impaired-(45.2)(93.7)(138.9)
Impairment allowances on exposures assessed on a portfolio basis-(18.2)(699.2)(717.4)
Impairment allowances on exposures assessed on a group basis (IBNR)(0.2)(2.7)(100.4)(103.3)
     
Allowances - total (0.2) (66.5) (895.5) (962.2)
     
Loans and advances to customers net 5.9 508.8 30 763.7 31 278.4

CHF exchange rate as at 31 December 2015 was equal to PLN 3.9394.

Loans and advances to customers assessed on a group basis (IBNR)31.12.2016
 PLNCHFOther currencies
    
Gross loans and advances to customers147 632.229 726.717 516.6
past due3 149.2657.6509.9
not past due144 483.029 069.117 006.7
Impairment on exposures assessed on a group basis (IBNR)(457.6)(71.5)(99.5)
past due(147.8)(34.6)(10.7)
not past due(309.8)(36.9)(88.8)
    
Net loans and advances to customers  147 174.6 29 655.2 17 417.1
     
Loans and advances to customers assessed on a group basis (IBNR)31.12.2015
 PLNCHFOther currencies
    
Gross loans and advances to customers137 684.330 687.415 091.4
past due2 215.4719.7241.2
not past due135 468.929 967.714 850.2
Impairment on exposures assessed on a group basis (IBNR)(414.3)(103.2)(51.7)
past due(153.2)(49.8)(8.4)
not past due(261.1)(53.4)(43.3)
    
Net loans and advances to customers  137 270.0 30 584.2 15 039.7
 
Loans and advances to customers assessed on a group basis (IBNR) subject to forbearance by currencies31.12.2016
 PLNCHFOther currencies
    
Gross loans and advances to customers forbearance941.1557.0162.0
Impairment on exposures assessed on a group basis (IBNR) forbearance(33.5)(20.7)(6.7)
    
Net loans and advances to customers subject to forbearance 907.6 536.3 155.3
 
Loans and advances to customers assessed on a group basis (IBNR) subject to forbearance by currencies31.12.2015
 PLNCHFOther currencies
    
Gross loans and advances to customers forbearance1 718.8776.567.8
Impairment on exposures assessed on a group basis (IBNR) forbearance(51.6)(35.9)(2.2)
    
Net loans and advances to customers subject to forbearance 1 667.2 740.6 65.6
 

As at 31 December 2016, the average LTV for loan portfolio in CHF amounted to 82.7% - compared to the average LTV for the whole portfolio amounting to 69.5%.

The share of foreign currency denominated housing loans extended in the years 2007 and 2008 in the foreign currency denominated housing loans for the household portfolio of the PKO Bank Polski Group as at 31 December 2016 amounted to 44.02% and related to the portfolio of companies operating in the territory of the Republic of Poland.

On 13 January 2017 the Financial Stability Committee adopted Resolution No. 14/2017 on the recommendation relating to restructuring of the housing loan portfolio in foreign currencies and recommended:

1) The Minister responsible for financial institutions:

  • an increase in risk weight to 150% for foreign currency exposures fully secured with mortgage on residential property,
  • an increase of the minimum LGD parameter by banks which apply IRB for foreign exposures secured with mortgage on residential property,
  • a change in the principles of operation of the Borrowers’ Support Fund,
  • neutralization of tax effects for borrowers and banks which decide to convert housing loans into another currency,
  • imposing a systemic risk buffer of 3%.

2) Polish Financial Supervision Authority:

  • updating the supervisory review and evaluation process (SREP) methodology and expanding it by principles which enable attributing an appropriate level of capital charge,
  • supplementing the additional capital requirements currently used under Pillar 2, related to operations, market and credit risk,
  • issuing a supervisory recommendation on best practices in restructuring the portfolios of foreign currency housing loans.

3) The Bank Guarantee Fund: accounting for the risks related to foreign currency housing loans in the method for determining contribution to the bank guarantee fund.