Interest rate risk management

**Definition**

The interest rate risk is a risk of incurring losses on the Bank's statement of financial position and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in the interest rates on the market.

**Management objective**

Mitigate the risk of incurring potential losses arising from market interest rate changes to an acceptable level by appropriate shaping the structure of statement of financial position and off-balance sheet items.

**Risk identification and measurement**

The Group utilizes such interest rate risk measures as: sensitivity of interest income, sensitivity of economic value, value at risk (VaR), stress tests and repricing gap.

**Control**

Control over interest rate risk covers determining interest rate risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to interest rate risk.

**Forecasting and monitoring of risk**

The following are monitored by the Group on a regular basis:

- the level of interest rate risk,
- the degree of utilization of the strategic limit of interest rate risk tolerance,
- the degree of utilization of internal limits and threshold values relating to interest rate risk.

**Reporting**

The reports on interest rate risk are developed on a daily, weekly, monthly and quarterly basis.

**Management actions**

The main tools used in interest rate risk management in the Group include: procedures for interest rate risk management, limits and thresholds for interest rate risk.

The Group established limits and thresholds for interest rate risk comprising i.a. the following: price sensitivity, sensitivity of the economic value and loss.

Financial information

**The repricing gap**

The repricing gap shows the difference between the present value of assets and liabilities exposed to interest rate risk, subject to revaluation in a given time range, and these balances are recognised on the transaction date.

Repricing Gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |

PLN (in PLN million) | 31.12.2016 | |||||||

The Group - Period gap | 57 494.7 | 15 015.7 | (16 037.3) | (7 718.7) | (12 247.3) | (25 600.4) | 5 938.7 | 16 845.4 |

The Group - Cumulative gap | 57 494.7 | 72 510.4 | 56 473.0 | 48 754.3 | 36 507.0 | 10 906.6 | 16 845.4 | - |

PLN (in PLN million) | 31.12.2015 | |||||||

The Group - Period gap | 42 011.9 | 47 479.4 | (20 914.6) | (22 134.4) | (9 126.2) | (17 943.5) | 3 141.7 | 22 514.3 |

The Group - Cumulative gap | 42 011.9 | 89 491.3 | 68 576.7 | 46 442.3 | 37 316.1 | 19 372.6 | 22 514.3 | - |

Repricing Gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |

USD (in USD million) | 31.12.2016 | |||||||

The Group - Period gap | 731.0 | (828.9) | (159.4) | 104.5 | 175.1 | 7.7 | (123.4) | (93.4) |

The Group - Cumulative gap | 731.0 | (97.9) | (257.3) | (152.8) | 22.3 | 30.0 | (93.4) | - |

USD (in USD million) | 31.12.2015 | |||||||

The Group - Period gap | 300.1 | (376.1) | (51.9) | 137.3 | 15.0 | (17.8) | (127.4) | (120.8) |

The Group - Cumulative gap | 300.1 | (76.0) | (127.9) | 9.4 | 24.4 | 6.6 | (120.8) | - |

Repricing Gap | 0-1month | 1-3months | 3-6months | 6-12months | 1-2 years | 2-5 years | >5 years | Total |

EUR (in EUR million) | 31.12.2016 | |||||||

The Group - Period gap | 2 640.7 | (959.7) | (611.0) | (116.9) | (132.6) | (833.6) | 70.1 | 57.0 |

The Group - Cumulative gap | 2 640.7 | 1 681.0 | 1 070.0 | 953.1 | 820.6 | (13.0) | 57.0 | - |

EUR (in EUR million) | 31.12.2015 | |||||||

The Group - Period gap | (21.3) | 416.1 | 214.5 | (191.6) | (381.8) | (825.8) | 212.4 | (577.5) |

The Group - Cumulative gap | (21.3) | 394.8 | 609.3 | 417.7 | 35.9 | (789.9) | (577.5) | - |

Repricing Gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |

CHF (in CHF million) | 31.12.2016 | |||||||

The Group - Period gap | 119.2 | 2 961.8 | 159.5 | (1 839.3) | 1.6 | (324.9) | (676.7) | 401.2 |

The Group - Cumulative gap | 119.2 | 3 081.0 | 3 240.5 | 1 401.2 | 1 402.8 | 1 077.9 | 401.2 | - |

CHF (in CHF million) | 31.12.2015 | |||||||

The Group - Period gap | (370.1) | 3 651.3 | 124.2 | (1 808.4) | (74.7) | (416.7) | (715.9) | 389.7 |

The Group - Cumulative gap | (370.1) | 3 281.2 | 3 405.4 | 1 597.0 | 1 522.3 | 1 105.6 | 389.7 | - |

As at the end of 2016 and 2015, PKO Bank Polski SA Group had a positive cumulative gap in PLN in all the time horizons.

**Sensitivity measures**

Exposure of PKO Bank Polski SA Group to interest rate risk was within accepted limits as at 31 December 2016. The Group was mainly exposed to PLN interest rate risk. Among all applied stress tests by the Group involving a parallel shift of interest rate curves, the most unfavourable for the Bank was the scenario of a parallel shift of interest rate curves in PLN.

Interest rate risk generated by the Group entities with regard to PLN, EUR and CHF did not have a significant effect on the interest rate risk of the entire Group and therefore did not significantly affect its risk profile. Interest rate risk with regard to USD was significantly altered by exposure of the Group entities, in which the biggest part has the exposure of KREDOBANK SA.

VaR of the Bank and stress-tests analysis of the Group’s exposure to the interest rate risk are presented in the table below:

Name of sensitivity measure | 31.12.2016 | 31.12.2015 |

VaR for a 10-day time horizon at the confidence level of 99% (in PLN million)* | 268.8 | 271.7 |

Parallel movement of interest rate curves by 200 b.p. (in PLN million) (stress-test)** | 2 058.8 | 2 013.8 |

*Due to the nature of the activities carried out by the other Group entities generating significant interest rate risk as well as a the specific nature of the market on which they operate, the Group does not calculate consolidated VaR. These companies apply their own risk measures in the interest rate risk management. KREDOBANK SA uses the 10-day interest rate VaR for the main currencies, which amounted to approx. PLN 8.9 million as at 31 December 2016 and PLN 11.5 million as at 31 December 2015.

** The table presents the value of the most adverse stress-test of the scenarios: movement of interest rate curves in particular currencies by 200 b.p. up and by 200 b.p. down.

As at 31 December 2016, the Bank’s interest rate VaR for the 10-day time horizon (10-day VaR) amounted to PLN 268.8 million, which accounted for approximately 0.9% of the Bank’s own funds. As at 31 December 2015, VaR for the Bank amounted to PLN 271.6 million, which accounted for approximately 1.00% of the Bank’s own funds.