64. Currency risk management

Currency risk management

Definition

Currency risk is the risk of incurring losses due to unfavourable exchange rate changes. The risk is generated by maintaining open currency positions in a given foreign currency.

Management objective

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

Risk identification and measurement

The Group utilizes the following currency rate risk measures: value at risk (VaR) and stress tests.

Control

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

Forecasting and monitoring of risk

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

  • the level of currency risk,
  • the degree of utilization of the strategic limit of currency risk tolerance,
  • the degree of utilization of internal limits and threshold values relating to currency risk.

Reporting

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

Management actions

Main tools used in currency risk management in the Group include:

  • procedures for currency risk management,
  • limits and thresholds for currency risk,
  • defining allowable types of transactions in foreign currencies and the exchange rates used in such transactions.

The Group has set limits and threshold values for currency risk for i.a.: currency positions, Value at Risk calculated for a 10-day time horizon and daily loss from transactions on currency market.

Financial information

Sensitivity measures

VaR of the Bank and stress-tests analysis of the Bank’s exposure to currency risk are stated cumulatively for all currencies in the table below:

Name of sensitivity measure31.12.201631.12.2015
VaR for a 10-day time horizon at the confidence level of 99% (in PLN million)*9.525.4
Change in CUR/PLN by 20% (in PLN million) (stress-test)**24.61.9

*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 Parent company 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 0.35 million as at 31 December 2016 and PLN 4.8 million as at 31 December 2015.

** The table presents the value of the most adverse stress-test of the scenarios: PLN appreciation by 20% and PLN depreciation by 20%.

Currency position

The Group’s currency positions are presented in the table below:

Currency position31.12.201631.12.2015
EUR(170.1)94.1
USD29.9(87.3)
CHF(36.5)(72.5)
GBP8.6(1.8)
Other (Global Net)88.7171.1

The volume of currency positions is a key factor determining the level of currency risk on which the Group is exposed (except for volatility of foreign exchange rates). The level of currency positions is determined by all foreign currency transactions, which are concluded by the Group, both in the statement of financial position and off-balance sheet transactions. The Bank’s exposure to currency risk is low (with reference to own funds, VaR for a 10-day time horizon for the Bank’s currency position as at 31 December 2016 amounted to ca. 0.03% and as at 31 December 2015 0.09% respectively).

Currency Structure

 Currency translated to PLN - 31.12.2016
 PLNEURCHFOtherTotal
      
Cash and balances with the Central Bank11 928.1718.278.7600.113 325.1
Amounts due from banks1 980.12 160.3502.8702.45 345.6
Loans and advances to customers158 630.815 407.731 268.43 302.3208 609.2
Securities48 216.51 532.31 031.4968.851 749.0
Tangible assets12 843.2--150.412 993.6
Other assets and derivative financial instruments7 933.7222.23.2132.28 291.3
Total assets (gross)241 532.420 040.732 884.55 856.2300 313.8
Depreciation / amortisation / impairment(12 891.6)(313.3)(1 005.1)(531.1)(14 741.1)
      
Total assets (net) 228 640.8 19 727.4 31 879.4 5 325.1 285 572.7
      
Amounts due to the Central Bank4.1---4.1
Amounts due to banks1 220.42 682.815 238.866.419 208.4
Amounts due to customers180 146.514 079.62 550.38 290.0205 066.4
Liabilities related to insurance activities2 942.11.4-0.12 943.6
Debt securities in issue4 678.35 571.7-4 243.214 493.2
Subordinated liabilities1 616.6-922.4-2 539.0
Provisions215.95.31.26.2228.6
Other liabilities and derivative financial instruments7 857.1443.32.8217.68 520.8
Equity32 568.6---32 568.6
Total liabilities and equity 231 249.6 22 784.1 18 715.5 12 823.5 285 572.7
      
Off-balance sheet liabilites granted50 440.14 001.1188.93 445.058 075.1

 Currency translated to PLN - 31.12.2015
 PLNEURCHFOtherTotal
      
Cash and balances with the Central Bank12 562.5727.361.9392.213 743.9
Amounts due from banks1 949.91 677.0113.0813.14 553.0
Loans and advances to customers149 855.313 527.632 243.83 074.2198 700.9
Securities41 330.11 674.8993.6591.144 589.6
Tangible assets12 072.8--127.012 199.8
Other assets and derivative financial instruments7 287.4216.441.884.27 629.8
Total assets (gross)225 058.017 823.133 454.15 081.8281 417.0
Depreciation / amortisation / impairment(12 024.0)(276.2)(963.7)(1 213.2)(14 477.1)
      
Total assets (net) 213 034.0 17 546.9 32 490.4 3 868.6 266 939.9
      
Amounts due to the Central Bank4.2---4.2
Amounts due to banks1 068.12 522.914 372.3325.518 288.8
Amounts due to customers175 739.510 993.32 453.26 572.5195 758.5
Liabilities related to insurance activities2 396.53.9-0.12 400.5
Debt securities in issue1 251.23 240.71 000.03 941.09 432.9
Subordinated liabilities1 616.6-882.6-2 499.2
Provisions242.95.41.02.7252.0
Other liabilities and derivative financial instruments7 424.4459.124.7130.78 038.9
Equity30 264.9---30 264.9
Total liabilities and equity 220 008.3 17 225.3 18 733.8 10 972.5 266 939.9
      
Off-balance sheet liabilites granted48 406.63 970.9187.94 506.457 071.8