Risk management is one the most important internal processes in PKO Bank Polski SA, including in abroad branch and as well as in other companies of the PKO Bank Polski SA Group. Risk management aims at ensuring profitability of business activity, with ensuring control of risk level and maintaining it within the risk tolerance and limits system applied by the Bank, in the changing macroeconomic and legal environment. The level of the risks plays an important role in the planning process.
In the PKO Bank Polski SA Group the following types of risk have been identified, which are subject to management (risks considered material were underlined): credit, credit risk concentration currency mortgage loans risk, interest rate, currency, liquidity (including financing risk), commodity price, price equity securities, other price risk, derivative, operational, lack of compliance and conduct risk, macroeconomic changes, models, business (including strategic risk), loss of reputation, conduct risk, capital, excessive leverage and insurance.1
1. The risk relates to the Bank Group’s companies.
A detailed description of management policies for particular risks was presented in the Report on Capital Adequacy and Other Information Subject to Publication.
Specific activities in the area of risk management in the Bank, undertaken in 2016
PKO Bank Polski SA’s priority is to maintain its strong equity position, including effective capital adequacy management, supporting Polish entrepreneurship, customer satisfaction, engaging in creating new standards on a market scale, counteracting cyberthreats, while maintaining the priorities of efficiency and effective cost control and appropriate risk assessment.
In this respect, the Bank took i.a. the following actions in 2016:
- in 2016 turned the maturing own short-term bonds, on bonds in the amounts PLN 1 billion (in May) and PLN 815 million (in November),
- in April 2016 turned the maturing own short-term bonds, on bonds with a maturity to one year in the amounts EUR 200 million,
- in connection with the acquisition of 100% shares in Raiffeisen-Leasing Polska SA by PKO Leasing on 1 December 2016, a decision was taken not to pay dividend from the Bank’s profits earned in 2015 and retained earnings.
In 2016, the Bank conducted operating risk management-related preparatory work for starting operations of the Bank’s new branch in the Czech Republic, the opening of which is planned for March 2017.
As part of this work, in November 2016, the Bank filed an application with the Polish Financial Supervision Authority requesting consent for joint application of advanced measurement approach (AMA) and basic indicator approach (BIA) consisting of the Bank’s calculating the requirements relating to own funds in respect of operational risk using the BIA method in respect of the operations of the Bank’s branch in the Federal Republic of Germany and in the Czech Republic, and using the AMA approach in the remaining operations of the Bank.
In the fourth quarter of 2016, the Bank introduced changes to the process of managing the exposure concentration risk, which constitute the fulfilment of the requirements of Resolution No. 351/2016 of the Polish Financial Supervision Authority dated 24 May 2016 on issuing Recommendation C and include: concentration risk management objectives and process, new measures of tolerance to concentration risk, including internal limits mitigating the risk of excessive concentration and the method of performing stress tests regarding concentration risk.
In the fourth quarter of the year, the Bank updated and considerably simplified the method of assessing credited entrepreneurs in the formula of specialist financing, which allows an adequate credit risk assessment of large projects involving financing income-generating residential and commercial real estate.
In the first half of 2016, the Bank and PKO Bank Hipoteczny SA continued work related to model risk management in the process of adapting to the requirements of Recommendation W on risk management in banks, issued by the Polish Financial Supervision Authority in July 2015. As of 30 June 2016 the process of model risk management in the Bank and in PKO Bank Hipoteczny SA is conducted pursuant to the requirements of Recommendation W.
Within the Group, mortgage loan portfolios which had been extended by PKO Bank Polski SA are gradually transferred to PKO Bank Hipoteczny SA. The nominal value of the portfolio transferred in 2016 amounted to PLN 5.8 billion.
In the first half of 2016, PKO Bank Hipoteczny SA conducted two issues of mortgage bonds addressed to institutional investors, in the total amount of PLN 1 billion, with a maturity period of 5 years and 1 day as of the date of issue. Among the institutions which purchased mortgage bonds are both domestic and foreign investors. Mortgage bonds of PKO Bank Hipoteczny are one of the safest debt instruments on the Polish financial market. Moody’s rating of Aa3, which is the highest rating achievable by Polish securities, attests to this.
In the second half of 2016 PKO Bank Hipoteczny SA conducted 1 benchmark foreign issue of mortgage bonds addressed to institutional investors, with a value of EUR 0.5 billion and period to redemption of 5 years and 8 months. The securities bear an interest rate of 0.125 p.p. and yield of 0.178 p.p. Among the institutions which purchased mortgage bonds are both domestic and foreign investors, including the European Bank of Reconstruction and Development.
Credit risk is defined as a risk of occurrence of losses due to counterparty’s default of payments to the Bank or as a risk of decrease in economic value of amounts due to the Bank as a result of deterioration of counterparty’s ability to repay amounts due to the Bank.
The objective of credit risk management is to minimize losses on the credit portfolio as well as to minimize the risk of occurrence of loans threatened with impairment exposure, while keeping expected level of profitability and value of credit portfolio at the same time.
The Bank and subsidiaries of the Group are primarily driven by the following principles of credit risk management:
- each loan transaction is subject to comprehensive credit risk assessment, which is reflected in an internal rating or credit scoring,
- credit risk relating to loan transactions is measured on the stage of examining loan application and on a regular basis, as part of the monitoring process taking into consideration changes in external conditions and in the financial standing of the borrowers,
- credit risk assessment of exposures which are significant due to their risk levels or its value is subject to additional verification by credit risk assessment teams, which are independent of the business teams,
- terms of loan transactions that are offered to a customer depend on the assessment of credit risk level or its value generated by the transaction,
- loan granting decisions are made only by authorized persons,
- credit risk is diversified particularly by geographical location, by industry, by product and by customers,
- expected credit risk level is mitigated by collateral received by the Bank, margins from customers and allowances (provisions) for credit losses.
The above-mentioned principles are executed by the Bank through the use of advanced credit risk management methods, both on the level of individual credit exposures and on the level of the whole credit portfolio of the Bank. These methods are verified and developed to ensure compliance with the internal rating method– based requirements (IRB), i.e. advanced credit risk measurement method, which can be used while calculating requirements as regards own funds for credit risk after being approved by the Polish Financial Supervision Authority.
The Group entities, which have significant credit risk levels (the KREDOBANK SA Group, the PKO Leasing SA Group, PKO Bank Hipoteczny SA and a subsidiary: Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o.) manage their credit risk individually, but the methods used by them for credit risk assessment and measurement are adjusted to the methods used by PKO Bank Polski SA, taking into account the specific nature of the activities of these companies.
Any changes to the solutions used by the Group’s subsidiaries are agreed every time with the Bank's units responsible for risk management.
The PKO Leasing SA Group, the KREDOBANK SA Group and the subsidiaries: Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. and PKO Bank Hipoteczny SA regularly measure credit risk, and submit the results of such measurements to the Bank.
The KREDOBANK SA Group and the PKO Leasing SA Group have organizational units responsible for risk in their organizational structures, which are in particular responsible for:
- developing methods of credit risk assessment, recognizing provisions and allowances,
- controlling and monitoring credit risk during the lending process,
- the quality and efficiency of restructuring and enforcement of the amounts due from customers.
In these companies, the credit decision limits depend primarily on: the amount of the exposure to a given customer, the amount of an individual credit transaction and the period of credit transaction.
The process of credit decision-making in the KREDOBANK SA Group, the PKO Leasing SA Group is supported by credit committees, which are involved in the case of credit transactions which generate increased credit risk level.
Appropriate organizational units of the Risk Management Area participate in managing the credit risk in the Group entities by giving their opinions on projects and periodically reviewing internal regulations of these companies relating to the assessment of credit risk and preparation of recommendations relating to amendments in the drafts of regulations. The Bank supports implementation of the recommended changes in principles for assessing credit risk in the Group entities.
Measurement and assessment of credit risk
Credit risk measurement and assessment methods
In order to assess the level of credit risk and profitability of loan portfolios, the Bank uses different credit risk measurement and valuation methods, including:
- Probability of Default (PD),
- Expected Loss (EL),
- Unexpected Loss (UL),
- Loss Given Default (LGD),
- Credit Value at Risk (CVaR),
- share and structure of impaired loans,
- ratio of impaired loans (under IAS) to impairment allowances (coverage ratio),
- cost of credit risk.
The Bank extends regularly the scope of credit risk measures used, taking into account the internal rating-based method (IRB) requirements, and extends the use of risk measures to fully cover the whole Bank’s loan portfolio with these methods.
The portfolio credit risk measurement methods allow i.a. to reflect the credit risk in the price of products, determine the optimum conditions of financing availability and determine rates of impairment allowances.
The Bank performs analysis and stress-tests regarding the influence of potential changes in macroeconomic environment on the quality of Bank’s loan portfolio. The test results are reported to the Bank’s authorities. The above-mentioned information enables to identify and take measures to limit the negative influence of unfavourable market changes on the Bank’s performance.
Rating and scoring methods
The Bank assesses the risk of individual credit transactions with the use of scoring and rating methods, which are created, developed and supervised by the Banking Risk Division. These methods are supported by specialist IT application software. The scoring method is defined by Bank’s internal regulations whose main aim is to ensure uniform and objective assessment of credit risk during the lending process.
The Bank assess the credit risk of retail customers in two dimensions: creditworthiness assessed quantitatively and qualitatively. The quantitative assessment of creditworthiness consists of evaluation of the financial situation, whereas the qualitative assessment involves scoring and evaluating the customer’s credit history obtained from internal records of the Bank and external databases.
In the case of corporate customers from the small and medium enterprises segment that meet certain criteria, the Bank assesses credit risk using the scoring method. Such assessment refers to low-value, uncomplicated loan transactions and it is performed in two dimensions: customer’s borrowing capacity and his creditworthiness. The assessment of borrowing capacity involves examination of the customer’s economic and financial situation, whereas the creditworthiness assessment involves scoring and evaluation of the customer’s credit history obtained from internal records of the Bank and external databases.
In other cases, rating method is widely used.
The evaluation of credit risk related to financing corporate customers is performed in two dimensions: in respect of the customer and of the transaction. The assessment measures comprise the assessment of the credibility of the customer, i.e. rating: and the assessment of the transaction, i.e. liability repayment capacity in the specified amount and timing.
Rating models for corporate customers were prepared using internal data of the Bank which ensures that they are tailored to the risk profile of the Bank's customers. Models are based on a statistical dependence analysis between the default and a customer's risk scoring. Scoring includes an assessment of the financial indicators, qualitative factors and evaluation of behavioural factors. The customer's risk assessment depends on the size of the enterprise for which analysis is made. In addition, the Bank uses a model for assessment of credited entrepreneurs in the formula of specialist financing, which allows adequate credit risk assessment of large projects involving real estate financing (e.g. office space, retail areas, industrial areas) and infrastructure projects (e.g. telecommunications, industrial, public utility infrastructure).
The rating models are implemented in the IT tool supporting the Bank’s credit risk assessment related to financing institutional customers.
In order to examine the correctness of functioning of method applied in the Bank, the methodologies of credit risk assessment connected with individual credit exposures are subject to periodical reviews.
The credit risk assessment process in Bank takes into account the requirements of the Polish Financial Supervision Authority as defined in the Recommendation S, relating to best practices for the management of mortgage-secured loan exposures and Recommendation T relating to best practices for the management of retail credit exposures.
The information about ratings and scoring is widely used in the Bank for the purposes of credit risk management, the system of credit decision making powers, determining the conditions in which credit assessment services are activated and in the credit risk assessment and reporting system.
Monitoring of credit risk
Monitoring of credit risk is performed at individual credit transaction level and at portfolio level.
Monitoring of credit risk at the individual credit transaction level is governed, in particular, by the Bank’s internal regulations concerning:
- the principles for the recognition of impairment allowances for credit exposures and write-downs of loans payable in respect of unsettled forward transactions;
- the rules of functioning of the Early Warning System in the Bank;
- early monitoring of delays in the collection of receivables;
- the principles for the classification of credit exposures and determining the level of specific provisions.
In order to shorten the time of reaction to the warning signals observed, signalling an increase in the credit risk level, the Bank uses and develops an IT application, an Early Warning System (EWS).
Monitoring of credit risk at the portfolio level consists of:
- supervising the level of the portfolio credit risk on the basis of the adopted tools used for measuring credit risk, taking into consideration the identified sources of credit risk and analyzing the effects and actions taken as part of system management,
- recommending preventive measures in the event of identifying an increased level of credit risk.
The Bank’s exposure to credit risk Credit risk reporting
The Bank prepares monthly and quarterly credit risk reports. The reporting of credit risk covers specifically cyclic information on the risk exposure of the credit portfolio. In addition to the information concerning the Bank, the reports also contain information about the credit risk level for the Group subsidiaries (i.a. KREDOBANK SA Group and the PKO Leasing SA Group), which have significant credit risk levels.
Management actions concerning credit risk
Basic credit risk management tools used by the Bank include:
- minimum transaction requirements (risk parameters) determined for a given type of transaction (e.g. minimum LTV value, maximum loan amount, required collateral),
- the principles of defining credit availability, including cut-offs – the minimum number of points awarded in the process of creditworthiness assessment with the use of a scoring system (for retail customers and SMEs) or the customer’s rating class (for corporate customers), which a customer must obtain to receive a loan,
- concentration limits – the limits defined in article 395, item 1 of the CRR Regulation and in the Banking Law,
- industry-related limits – limits which reduce the risk level related to financing institutional customers that conduct business activities in industries characterized by high level of credit risk,
- limits on credit exposures related to the Bank's customers– the limits defining the appetite for credit risk as result of among others the recommendations S and T,
- credit limits defining the Bank’s maximum exposure to a given customer or country in respect of wholesale operations and settlement limits and limits for the period of exposure,
- competence limits – they define the maximum level of credit decision-making powers with regard to the Bank’s customers, the limits depend primarily on the amount of the Bank’s exposure to a given customer (or a group of related customers) and the loan transaction period, the competence limit depends on the credit decision-making level (in the Bank’s organizational structure),
- minimum credit margins – credit risk margins relating to a given credit transaction concluded by the Bank with a given corporate customer, but the interest rate offered to a customer cannot be lower than the reference rate plus credit risk margin.
Use of credit risk mitigation techniques - Collateral
Collateral management policy as regards credit risk plays a significant role in establishing minimum transaction terms. The Bank and the entities of the Group’s collateral management is meant to secure properly the credit risk, to which the Group is exposed, including first of all the fact of establishing collateral that will ensure the highest possible level of recovery in the event of realization of debt collateral activity
In assessing collateral, the following factors are taken into account in particular:
- the economic and financial or social and financial situation of the entities providing personal guarantees,
- the condition and market value of the assets accepted as collateral and their vulnerability to depreciation in the period of maintaining the collateral (the impact of the technological wear and tear of a collateralized asset on its value),
- potential economic benefits of the Bank resulting from a specific method of securing receivables, including, in particular, the possibility of reducing impairment allowances,
- the method of establishing collateral, including the typical duration and complexity of formalities, as well as the necessary costs (the costs of maintaining collateral and the enforcement against the collateral), using the Bank’s internal regulations concerning the assessment of collateral,
- the complexity, time-consuming nature and economic and legal conditions of the effective realization of collateral, in the context of enforcement restrictions and the applicable principles for the distribution of the sums obtained from individual enforcement or in the course of bankruptcy proceedings, the ranking of claims.
The type of collateral depends on the product and the customer segment. The policy regarding collateral is defined by the internal regulations of the Group subsidiaries.
The structure of loan portfolio and impairment allowances of the PKO Bank Polski SA Group (in PLN million)
|Loans and advances to customers|
|the individualized method, incuding:||6 551||-2 608||3 942||7 550||-2 896||4 654|
|impaired||5 049||-2 594||2 455||5 413||-2 882||2 530|
|no identified impairment||1 502||-14||1 487||2 137||-13||2 124|
|the portfolio method||7 183||-4 766||2 417||7 688||-4 822||2 866|
|Impaired||7 171||-4 766||2 406||7 688||-4 822||2 866|
|No identified impairment||12||0||12||0||0||0|
|to the group method (IBNR)||194 876||-629||194 247||183 463||-569||182 894|
|Loans and advances to customers - net||208 609||-8 003||200 607||198 701||-8 287||190 414|
In 2016 the gross value of loans extended by the Group, assessed using the individual method decreased by PLN 999 million, and assessed using the portfolio method decreased by PLN 505 million, while those assessed using the group method increased by PLN 11 412 million.
The share of impaired loans and advances in the PKO Bank Polski SA Group and the coverage ratio to total allowances
The share of impaired loans of the PKO Bank Polski SA Group in gross loan portfolio as at 31 December 2016 amounted to 5.8% and dropped by 0.7 p.p. y/y compared with 31 December 2015.
The coverage ratio of impaired loans for the PKO Bank Polski SA Group as at 31 December 2016 amounted to 65.5%, compared with 63.3% as at 31 December 2015.
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. The bank 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 is a risk arising of an excessive burden for household which took mortgage loans indexed to CHF, thus timely debt service, from the beginning of the 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 Bank on the portfolio in the future periods.
The Group has taken a number of actions designed to help the customers 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 monitors the volatility of the exchange rate of the CHF, the value of the portfolio of housing loans denominated in CHF and the impact of the changes in the foreign exchange rates on the capital adequacy on a current basis.
As at the end of 2016 the value of the Bank’s portfolio of loans for denominated in CHF granted to households amounted to PLN 29.8 billion compared to PLN 30.8 billion as at the end of 2015.
Interest rate risk
|Definition||The interest rate risk is a risk of incurring losses on the Group’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 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:
|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|
The following, in particular, are monitored by the Group on a regular basis:
|Reporting||The reports on interest rate risk are developed on a daily, weekly, monthly and quarterly basis.|
The main tools used in interest rate risk management in the Group include:
The Group established limits and thresholds for interest rate risk comprising i.a. the following:
Methods of managing interest rate risk in Group subsidiaries are determined by internal regulations introduced by the companies for which the interest rate risk measures are significantly high. These regulations are developed after the Bank’s opinion has been sought and in consideration of the recommendations addressed to the companies by the Bank.
As at 31 December 2016, the exposure of PKO Group Polski SA to interest rate risk within the accepted limits. The Group within adopted limits was mainly exposed to PLN interest rate risk. Of all employed by the Group stress tests involving a parallel shift of interest rate curves, most unfavorable for the Group was the scenario of a parallel shift in PLN interest curves.
The effect of the materialization of this scenario at 31 December 2016 amounted to approx. PLN 1.75 billion, while as at 31 December 2015 this figure amounted to approx. PLN 1.6 billion. 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 PKO Bank Polski SA and stress-tests analysis of the Group's exposure to the interest rate risk
|Name of sensitivity measure||31.12.2016||31.12.2015|
|VaR for a 10-day time horizon (in PLN milion)*||269||272|
|Parallel movement of the interest rate curves by 200 b.p. (in PLN milion) (stress-test)**||2 059||2 014|
*Due to the nature of the activities carried out by the other Group entities generating significant interest rate risk as well as 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. The KREDOBANK SA uses the 10-day interest rate VaR for the main currencies. As at 31 December 2016 the value of VaR in the KREDOBANK SA amounted to approx. PLN 8.9 million 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 a 10-day time horizon (10-day VaR) amounted to PLN 269 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 272 million, which accounted for approximately 1.00% of the Bank’s own funds.
|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:
|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|
The following, in particular, are monitored by the Group on a regular basis:
|Reporting||The reports on currency risk are developed on a daily, weekly, monthly and quarterly basis.|
Main tools used in currency risk management in the Group include:
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. Methods of currency risk management in the Group’s subsidiaries are defined by internal regulations implemented by these entities, which are characterized by the significant values of currency risk measures. The regulations are developed after consultation with the Bank and taking into account recommendations issued to the entities by the Bank.
VaR PKO Bank Polski SA and stress-tests of the Group’s exposure to the currency risk, cumulatively for all currencies
|Name of sensitivity measure||31.12.2016||31.12.2015|
|VaR for a 10-day time horizon (in PLN milion)*||10||25|
|Change in CUR/PLN rates by 20% (in PLN milion) (stress-test)**||25||2|
the nature of the activities carried out by the other Group entities generating significant currency risk as well as the specific nature of the market on which they operate, the Bank does not calculate consolidated VaR. These entities apply their own risk measures in the currency risk management. The KREDOBANK SA Group uses the 10-day VaR, which amounted to approx. PLN 0.35 million as at 31 December 2015 and approx. PLN 4.8 million as at 31 December 2014.
** The table presents the value of the most adverse stress-test of the scenarios: PLN appreciation by 20% and PLN depreciation by 20%.
The currency position for particular currencies in the Group
|Other (global net)||88.7||171.1|
The amount of foreign currency positions is the key (apart from volatility of foreign exchange rates) factor determining the level of foreign currency risk to which the Group is exposed. All foreign currency transactions concluded, both balance-sheet and off-balance sheet have an impact on the foreign exchange position. The Bank’s exposure to foreign exchange risk is low (in respect of the Bank’s own funds as at 31 December 2016 10-day VaR for the Bank’s foreign exchange position amounted to approx. 0.03%).
The liquidity risk is defined as the lack of possibility to pay the debts on time due to the lack of liquid assets. Lack of liquidity may arise from inappropriate structure of the statement of financial position, misfit of cash flows, not received payments from counterparties, sudden withdrawal of cash by customers or other market events.
The Bank manages the financing risk, which takes into account the risk of loss of financing sources and the lack of opportunities to renew matured funding, or loss of access to new financing sources.
|Management objective||Ensure the necessary level the funds to pay present and future debts (also potential) on time, taking into account the nature of performed activities and requirements which may occur due to changes in market environment, by shaping the structure statement of financial position and off-balance sheet liabilities.|
|Risk identification and measurement|
The Group makes use of the following liquidity risk measures:
|Control||Control over liquidity risk covers determining liquidity risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to liquidity risk.|
|Forecasting and monitoring of risk|
The Group regularly monitors:
|Reporting||Liquidity reports are developed: on a daily, weekly, monthly and quarterly basis and, once a year, an in-depth long-term liquidity analysis is conducted.|
The main tools for liquidity risk management in the Group are as follows:
Methods of liquidity risk management in the subsidiaries of the Group are defined by internal regulations implemented by the entities which are characterized by the significant value of liquidity risk measures. These regulations are developed after consultation with the Bank and take into account recommendations issued to the entities by the Bank.
The Group policy concerning liquidity is based on keeping a portfolio of appropriate level of liquidity surplus through an increase in portfolio of liquid securities and stable sources of financing (stable deposit base, in particular). In liquidity risk management money market instruments, including NBP open market operations are also used.
The Bank’s Group liquidity reserve and excess liquidity as at 31 December 2016 and 31 December 2015 are shown in the Table below.
Liquidity reserve and excess liquidity of PKO Bank Polski SA Group (in PLN billion)
|Name of sensitivity measure||31.12.2016||31.12.2015|
|Liquidity reserve up to 1 month*||31||30|
|Overliquidity in a horizon of up to 30 days**||13||15|
* Liquidity reserve equals the gap between the most liquid assets and expected and potential liabilities which mature in a given period of time.
** Excess liquidity – excess liquidity determines the Bank’s ability to maintain liquidity on each day during the period called the ‘horizon of survival’ if predefined stress test scenarios occur.
The Group’s supervisory liquidity measured as at 31 December 2016 and 31 December 2015 are shown in the Table below.
Supervisory liquidity measures
|Supervisory liquidity measures||31.12.2016||31.12.2015|
|M1||24 464||18 907|
In the period from 31 December 2015 to 31 December 2016 ratios supervisory measures remained above the supervisory limits. Indicated in the table, the LCR indicator shows the value for the Group.
As at 31 December 2016 the level of permanent balances on deposits constituted approx. 93.8% of all deposits in the Bank (excluding interbank market), which means a decrease by approximately 0.3 p.p. as compared to the end of 2015.
Other market risks
Commodity price risk
|Definition||Commodity price risk is the risk of incurring a loss due to changes in commodity prices, generated by maintaining open positions on particular types of goods.|
|Management objective||Reduce potential losses resulting from changes in commodity prices to the acceptable level by shaping the appropriate structure of these items.|
|Risk identification and measurement||In respect of the measurement of the prices of commodities in the other companies of the Group, information on the positions taken by the Group in particular commodities is utilized.|
|Control||Control of commodity prices covers determining respective limits and threshold levels tailored to the scale and complexity of the Group’s operations.|
|Forecasting and monitoring||In respect of the commodity price risk the Group regularly monitors, in particular open commodity positions, if they arise.|
|Reporting||Reports on commodity price risks are developed on a daily, weekly, monthly and quarterly basis.|
|Management actions||Commodity price risk is managed by imposing limits on instruments generating the commodity price risk, monitoring their use and reporting the risk level. The effect of commodity price risk on the Group's financial position is immaterial. Currently, commodity risk in the remaining Group companies is non-existent.|
Price risk of equity securities
|Definition||The price risk of equity securities is the risk of incurring a loss due to changes in the prices of equity securities on the public market or stock exchange indices, generated by maintaining open positions in instruments sensitive to changes in these market parameters. The price risk of equity securities results from operations conducted as part of trading activities of the Bank’s Brokerage House, investing activities and from other operations as part of banking activities generating a position in equity securities.|
|Management objective||Limiting possible losses due to changes in the prices of equity securities on the public market or stock exchange indices to acceptable level, by optimizing the positions taken in instruments sensitive to changes in these market parameters.|
|Risk identification and measurement|
For the purpose of equity securities price risk management the Group utilizes:
|Control||Control over equity securities risk covers determining equity securities risk limits and thresholds tailored to the scale and complexity of the Group’s operations.|
|Forecasting and monitoring||The Group regularly monitors the level of price risk of equity securities and the level of utilization of the limits on positions taken in the equity securities portfolio.|
|Reporting||Reports on the risk of equity securities are prepared on a monthly and quarterly basis.|
|Management actions||The risk is managed by imposing limits on the activities of the Bank’s Brokerage House and by monitoring the utilization thereof. The effect of the price risk of equity securities on the financial position of the Group was assessed as immaterial. The positions taken in equity securities and index instruments are limited, and are not expected to increase significantly.|
Derivative instruments risk
|Definition||The risk of derivative instruments is a risk resulting from the Bank’s taking up a position in financial instruments.|
|Management objective||Limiting potential losses in respect of changes in factors specific for derivatives (other than foreign currency rates or interest rates) to acceptable levels by appropriate formation of the structure of positions taken in those instruments.|
|Risk identification and measurement|
For the purpose of managing derivatives risk, the Group uses:
|Control||Control over derivatives risk covers determining derivatives risk limits and thresholds tailored to the scale and complexity of the Group’s operations.|
|Forecasting and monitoring||Monitoring the risk of derivative instruments takes place as part of monitoring of other types of financial and credit risk. The Bank puts particular emphasis to monitor financial risk related to the maintenance of currency options portfolio and customer credit risk resulting from amounts due to the Bank in respect of derivative instruments.|
|Reporting||In the Group the reports on risk are developed on a daily, weekly, monthly and quarterly basis|
The main tools used in derivative risk management are as follows:
Risk management is carried out by imposing limits on the derivative instruments, monitoring limits and reporting risk level.
The derivative risk management process is integrated in the Bank with management of the following types of risk: interest rate, currency, liquidity and credit risk. However, due to the specific nature of derivatives it is subject to special control specified in the internal regulations of the Bank.
Master agreements concluded by the Bank with the major business partners based on the standards developed by the Polish Banks Association (domestic banks) and ISDA (foreign banks and credit institutions), which allow offsetting mutual liabilities, both due (mitigation of settlement risk) and not yet due (mitigation of pre-settlement risk), are particularly important for mitigating the risk associated with derivative instruments. Additional collateral for exposures, resulting from derivative instruments are collateral deposits escrowed by counterparties as a part of CSA agreement (Credit Support Annex).
Methods of derivative risk management in the Group’s subsidiaries are defined by internal regulations implemented by these entities which take up positions in derivative instruments or plan to take positions in such instruments. These regulations are developed after consultation with the Bank and take into account the recommendations issued to entities by the Bank.
Positions taken by the other Group entities in particular derivative instruments are determined in a similar manner to positions taken by the Bank in such instruments, taking into account the specified economic activity of the entities.
Other price risks
Taking into consideration other price risks, at the end of the year 2016, the Bank was exposed to price risk of investment fund participation units in collective investment funds. Influence of this risk to the Bank’s financial situation is immaterial.
|Definition||Operational risk is defined as the risk of occurrence of a loss due to non-compliance or unreliability of internal processes, people and systems or external events. Operational risk takes into account legal risk, and does not include reputational risk and business risk.|
The objective of operational risk management is to enhance collateral of the operational activity pursued by the Bank by improving the efficient, tailored to the profile and the scale of operations mechanisms of identification, assessment and measurement, controlling, monitoring reduction and reporting of operational risk.
The Group companies manage operational risk in accordance with the management risk policies binding in PKO Bank Polski SA, taking into account the scope and type of relations between the entities comprising the Group, the specific nature and scale of operations of particular companies.
|Risk identification and measurement|
Operational risk management comprises the identification of operational risk in particular through:
In order to manage the operational risk, the Bank gathers internal and external data about operational events and the causes and consequences of their occurrence, data on the factors of the business environment, results of operational risk self-assessment, data on KRI and data related to the quality of internal functional controls.
The operational risk self-assessment comprises identification and assessment of operational risk for Bank’s products, processes and applications as well as organizational changes and it is conducted cyclically and before the introduction of new or changed Bank’s products, processes and applications.
The measurement of operational risk comprises:
|Control||Control of operational risk includes setting tailored to the scale and complexity of the Group’s activities risk controls in the form of limits on operational risk, in particular the strategic limits of tolerance and operational risk, losses limits, KRI with thresholds and critical values.|
|Forecasting and monitoring|
The Bank regularly monitors:
Information relating to the Group’s operational risk is reported for the purpose of senior management, the Operational Risk Committee, the Risk Committee, the Management Board and the Supervisory Board.
Quarterly reports include in particular information on:
Management actions are taken in the following cases:
Especially when the risk level is elevated or high, the Bank uses the following approach:
1) risk reduction – mitigating the impact of risk factors or the consequences of its materialization by introducing or strengthening various types of instruments for managing operational risk such as:
2) risk transfer – transfer of responsibility for covering potential losses on a third-party:
Compliance risk and conduct risk
The non-compliance risk is the risk of legal sanctions, financial losses, or loss of reputation or credibility, if the Group, Group’s staff or entities acting on behalf of the Group fail to comply with the universally applicable provisions of law, internal regulations, or market standards adopted by the Group.
Conduct risk means a risk which arises on the part of: 1) the customer, 2) the Group, including its credibility, 3) financial markets, with regard to their credibility, as a result of inappropriate action (also unintentional) or any omission by the Group, its staff or related entities, with regard to offering purchase and provision of financial services.
|Risk identification and measurement||Identification and asses through information on cases of non-compliance and the reasons for their occurrence, including information as a result of an internal audit, a functional internal control and external controls is used|
|Forecasting and Monitoring|
|Reporting||In the form of quarterly management reports designated for the Risk Committee, the Management Board, the Supervisory Board Risk Committee, and the Supervisory Board, as well as information submitted for the purposes of external supervision and control authorities.|
The management comprises, in particular, the following issues:
|Definition||Business risk is the risk of incurring losses due to adverse changes in the business environment, taking bad decisions, the incorrect implementation of decisions taken, or not taking appropriate actions in response to changes in the business environment; this includes in particular strategic risk.|
|Management objective||Maintaining, on an acceptable level, the potential negative financial consequences resulting from adverse changes in the business environment, making adverse decisions, improper implementation of adopted decisions or lack of appropriate actions, which would be a response to changes in the business environment.|
|Risk identification and measurement|
Identification is to recognize and determine factors both current and potential, resulting from current and planned activities of the Group and which may significantly affect the financial position of the Group, generating or change in the Group’s income and expense. Business risk identification is performed by identifying and analyzing the factors that had an impact on the significant deviations of realization of income and expense from their forecasted values.
Measurement of business risk is aimed at defining the scale of threats related to the existence of business risk with the use of defined risk measures. The measurement of business risk includes: calculation of internal capital, conducting stress-tests.
|Control||Control of the business risk is aimed at striving to maintain the business risk at an acceptable level. Involves setting and periodic review of the risk controls in the form of tolerance limits on the business risk along with its thresholds and critical values, adequate to the scale and complexity of the Group.|
|Forecasting and Monitoring|
Forecasting of the business risk is aimed at determining an anticipated scenario of changes in the income and expense items in the income statement. The forecast is prepared once a quarter on a yearly basis and includes forecasting the level of business risk and internal capital.
Once a quarter, the verification of a business risk forecast (so-called backtesting) is performed.
Monitoring of the business risk is aimed at diagnosing the areas which require management actions.
Monitoring of business risk includes in particular:
|Reporting||Reporting is performed on a quarterly basis. The reports on the business risk level are addressed to the ALCO, the RC, the Management Board, the Risk Committee of the Supervisory Board, and the Supervisory Board.|
Management actions consist of, in particular:
|Definition||The reputation risk is understood as the risk of deterioration of reputation among customers, counterparties, investors, supervisory and control authorities, and the general public as a result of the Group’s business decisions, operating events, instances of non-compliance or other events.|
|Management objective||Protect the Group’s reputation by counteracting the occurrence of reputation and limiting the negative effect of image-related events on the Group’s reputation.|
|monitoring||Information monitoring of image-related events, taking into account every identified, negative information about the Group, in the form of: information disseminated in the media, information disclosed within the principles of information policy of the Group, evaluation of audits firms, analytical institutions and external supervisory and control authorities, public protests and speeches,|
Reporting the risk of loss of reputation is effected by:
These include, among other things:
|Definition||Model risk is the risk of incurring negative financial effects or reputation as a result of making incorrect business decisions on the basis of the models functioning. As a part of the Group model risk is managed both at the level of the entity of the Group (the owner of the model), and at the level of the Bank as the parent company of the Group.|
|Management objective||Mitigate the level of risk of incurring losses as a result of making incorrect business decisions on the basis of existing models in the Group through a well-defined and implemented process of models management. One of the elements of the model management process is to cover all significant models in the Group with regular, independent validation.|
|Risk identification and measurement||Identification of the model risk consists of, in particular, collecting information about the existing models and models planned to be implemented as well as determining the materiality of the models on a periodical basis. The model risk evaluation is aimed at determining the scale of the threats associated with the occurrence of the model risk. The evaluation is made at the level of each model as well as on an aggregate basis at the level of the individual Group entities.|
|Control||Control of the model risk is aimed at maintaining an aggregated evaluation of the model risk at a level which is acceptable to the Group. Control of the model risk consists of determining the mechanisms used to diagnose the model risk level and tools for reducing the level of this risk. The tools used to diagnose the model risk include, in particular, a strategic limit of tolerance to the model risk and the threshold values of the model risk.|
Monitoring of the model risk on a periodical basis is aimed at diagnosing the areas requiring management actions and includes, in particular:
|Reporting||The results of monitoring the model risk are presented periodically in the reports addressed to the RC, the Management Board, and the Supervisory Board. The reports contain a comprehensive model risk assessment, in particular: information about the degree of utilization of the strategic limit of tolerance to the model risk and about the level of the model risk (from a standalone and consolidated perspective), a model risk map, an evaluation of the effectiveness of the recommendations made to reduce the model risk level, proposed new management actions reducing the model risk (if any).|
|Management actions||The purpose of management actions is to form a model risk management process and to affect the level of this risk, in particular by determining acceptable risk levels and making decisions about the use of tools supporting model risk management.|
Macroeconomic changes risk
|Definition||Risk of macroeconomic changes is a risk of deterioration of the financial situation of the Bank as a result of the adverse impact of changes in macroeconomic conditions.|
|Management objective||Identify macroeconomic factors having a significant impact on the Group's activities and taking actions to reduce the adverse impact of potential changes in the macroeconomic situation on the financial situation of the Group.|
|Risk identification and measurement|
Identification of risk of macroeconomic changes is to determine scenarios of the potential macroeconomic changes and to determine risk factors having the greatest impact on the financial situation of the Group. Risk of macroeconomic changes results from interaction of factors dependent and independent of the Group's activities. The Bank identifies the factors affecting the level of risk of macroeconomic changes during carrying out comprehensive stress-tests.
The risk of macroeconomic changes materializes indirectly through other risks affecting the Group's operations.
For the purpose of measuring the risk of macroeconomic changes the Group uses risk measures based on the results of comprehensive stress-tests, in particular:
Control of the risk of macroeconomic changes is aimed at striving to mitigate the adverse effect of potential changes in the macroeconomic situation on the financial position of the Group.
Control of the risk of macroeconomic changes consists of determining the acceptable risk level tailored to the scale of the Group’s operations, with the level of the risk of macroeconomic changes being assessed on the basis of the results of comprehensive stress tests. An acceptable level of the risk of macroeconomic changes is a situation in which stress test results do not point to the need to take any remedial measures.
Monitoring consists of, among other things, analyzing macroeconomic factors and the economic situation on a current basis and includes in particular:
|Reporting||Reporting is provided in the form of additional information about the risk of macroeconomic changes which accompanies a quarterly report on capital adequacy, in which the stress tests were conducted. The reports are addressed to the ALCO, the RC, the Management Board, and the Supervisory Board.|
Management actions in particular consist of:
|Definition||Capital risk is the risk of failing to ensure an appropriate level and structure of own funds, with respect to the scale of the Bank operations and risk exposure and, consequently, insufficient for the absorption of unexpected losses, taking into account development plans and extreme situations.|
|Management objective||Ensure an appropriate level and structure of own funds, with respect to the scale of the operations and risk exposure of the Group, taking into account of the assumptions of the Bank’s dividend policy as well as supervisory instructions and recommendations concerning capital adequacy.|
The purpose of the capital risk control is to strive to keep the Bank’s and the Group’s capital risk level low, i.e. below specific thresholds of adequacy measures.
The control of the capital risk includes determining risk control measures adapted to the scale and complexity of the Bank’s and the Group’s operations, in the form of strategic tolerance limits and thresholds for capital adequacy measures.
Maintaining the capital adequacy measures above thresholds ensure an appropriate capital buffer above supervisory minimum levels.
|Risk identification and measurement|
The capital risk level for the Group is determined based on the minimum, threshold and maximum values of capital adequacy measures, amongst others, the total capital ratio and basic capital (Tier 1) ratio. In addition, threshold and maximum values are determined for capital adequacy measures, as an excess over the minimum values constituting strategic tolerance limits for the capital adequacy measures.
The capital risk level is determined as follows:
|Monitoring and reporting|
The Bank regularly monitors and reports the level of capital adequacy measures in order to determine the extent to which the supervisory standards, thresholds and internal strategic limits are met, and to identify cases which require that capital emergency actions be launched.
Reporting the levels of capital adequacy measures is performed on a monthly basis for the Management Board and on a quarterly basis for the Supervisory Board.
Capital risk management is performed by:
The main capital risk management tools include:
|Definition||Insurance risk is a risk of loss or of adverse change in value of insurance liabilities, due to inadequate pricing and provisioning assumptions (in particular for technical provisions).|
|Identification, measurement and risk assessment|
The exposure to insurance risks is monitored and shaped in accordance with the adopted Risk Management Strategy.
In PKO Życie Towarzystwo Ubezpieczeń S.A., the dominant type of insurance risk differs depending on the type of product in the Company’s portfolio:
The Company mitigates its exposure to the risks through:
In 2015 and 2016, the risk of changes in the approach to surrender fees materialized partially. As a result of the proceedings of the UOKiK and the agreements concluded in 2015 and 2016 as a result of these proceedings, the Company estimated the changes in the distribution of future withdrawals. The amounts of the future surrender fees were also adjusted in accordance with the above agreement. The decisions made constitute the continuation of activities conducted by the Company so far, with regard to reducing the total surrender value of selected life insurance contracts with insurance capital funds. Up until the date of this report, no increase in contract withdrawals in excess of the assumptions for determining the Best Reserve Estimate was observed.
PKO Towarzystwo Ubezpieczeń SA (which commenced its operating activities in 2016) is exposed to the following types of insurance risk:
The dominant type of risk is dependent on the type of product:
As to mitigate the insurance risk exposure, PKO Życie uses among others:
Ceded reinsurance of PKO Życie is performed on the basis of:
Facultative reinsurance is applied for all insurance agreements and risks not covered by obligatory – facultative reinsurance agreements, in which the sum on the gross risk exceeds agreed amount.
In case of the new products and the risks, PKO Życie Towarzystwo Ubezpieczeń SA and PKO Towarzystwo Ubezpieczeń SA chose reinsurer, level of protection, conditions of the reinsurance, changes in concluded reinsurance contracts and concluding new reinsurance contracts in relation to the newly introduced to offer or modified insurance products and new risks.
|Reporting||Reporting on insurance risk is provided in the form of periodical reports to the Management Board and for the Asset and Liabilities Committee, the Local Risk Committee, and the Risk Committee of the Supervisory Board.|
|The assets to cover technical reserves (APR) remained at a sufficient level (over 100%) and had an appropriate structure. As at the end of 2016, the aggregate assets to reserves ratio amounted to 103% for PKO Życie Towarzystwo Ubezpieczeń S.A. and 140% for PKO Towarzystwo Ubezpieczeń SA.|
Risk of excessive leverage
|Definition||The risk of excessive financial leverage is the risk resulting from vulnerability to threats due to financial leverage or conditional financial leverage that may require taking unintended action to adjust business plans, including an emergency sale of assets which could result in losses or result in the need for valuation adjustments of other assets.|
|Management objective||The objective of managing the risk of excessive leverage is to ensure an appropriate relationship between the amount of the core capital (Tier 1) and the total of balance sheet assets and off-balance sheet liabilities granted by the Group.|
|Risk identification and measurement||The risk of excessive leverage materializes as a mismatch of scale of activities and structure of the sources of financing and insufficient equipment of Group’s own funds. For the purpose of measuring the risk of excessive financial leverage, a leverage ratio is calculated as a measure of Tier 1 capital divided by the measure of total exposure and is expressed as a percentage rate. The leverage ratio is calculated on the reporting reference date. The leverage ratio is calculated both with reference to Tier 1 capital and in accordance with the transitional definition of Tier 1 capital.|
|Control||The objective of the control of the risk of excessive leverage is to strive to maintain the Bank’s risk of excessive leverage at an acceptable level. It covers a periodical review of the risk control mechanisms in the form of a tolerance limit, including its threshold value.|
|Forecasting and monitoring|
The following parameters are in particular subject to monitoring of the risk of excessive leverage:
|Reporting||Reporting is performed on a quarterly basis. The reports on the level of the risk of excessive leverage are addressed to the RC, the Management Board, the Risk Committee of the Supervisory Board, and the Supervisory Board.|
|Management actions||The management actions concerning the risk of excessive financial leverage are identical to the management actions concerning capital risk. In the event of an increased risk, actions are taken to bring capital adequacy measures to a decreased level, taking into account the assumptions of the dividend policy as well as supervisory suggestions and recommendations concerning capital adequacy.|
Comprehensive stress-tests are an integral part of the Group’s risk management and are complementary to stress-tests specific to particular types of risks. They collectively include the types of risk considered by the Group to be material. They include an analysis of the impact of changes in the environment and the functioning of the Group on the Group’s financial position, in particular: the income statement, statement of financial position, own funds, capital adequacy, including own fund requirements, internal capital, capital adequacy measures, and selected liquidity measures.
Comprehensive stress-tests for the Group’s own use are carried out at least once a year in a three-year horizon, and for the Bank – every six months in a three-year horizon, taking into account changes in the value and structure of balance sheet and income statement items (dynamic tests). Supervisory tests are carried out at the request of the supervisory authorities in accordance with the assumptions provided by the supervisory authorities.