Risk management

Risk management is one of the key internal processes, both in PKO Bank Polski and other entities of the Group.

Annual Report

The risk management system is aimed at ensuring the profitability of business activities while ensuring control over the risk level and maintaining it within the risk tolerance limits and other limits adopted by the bank and the Group in the changing macroeconomic and legal environment.

The primary objective of risk management of the Group is to ensure adequate management of all types of risk related to its business. As part of the risk management system, the Group manages risk by identifying, measuring or assessing, controlling, forecasting, monitoring and reporting risk, and management actions.

The risk management system covers:

  • organizational structure, allocation of duties and responsibilities,
  • internal regulation system,
  • tools, including information databases.
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Risk management at the bank’s Group is based, in particular, on the following principles:

  • the bank’s Group manages all identified types of risk,
  • the risk management process is appropriate from the perspective of the scale of operations and materiality, scale and complexity of a given risk, and adjusted on an on-going basis to take account of new risks and their sources,
  • risk management methods (especially models and their assumptions) and risk management measurement or assessment systems are tailored to the scale and complexity of individual risks, the current and planned operations of the bank’s Group and its operating environment, and are periodically verified and validated,
  • the area of risk management remains organizationally independent from business activities,
  • risk management is integrated into the planning and controlling systems,
  • the level of risk is monitored and controlled on an on-going basis,
  • the risk management process supports the implementation of the bank’s strategy in compliance with the Risk Management Strategy, in particular with respect to the level of risk tolerance.

The bank regularly, at least annually, assesses the materiality of the identified risks. Some of them have a material impact on the profitability and capital necessary to cover the exposure. Internal capital is assessed for risks that are regarded as material. All risks classified as material for PKO Bank Polski are also material for the bank’s Group. In 2019, the bank recognized the currency risk of mortgage loans for households as material.

Below is a list of all risks regarded as material in PKO Bank Polski.

  • credit risk – the risk of incurring losses due to the customer’s default in payments to the bank’s Group or as a risk of a decrease in the economic value of amounts due to the bank’s Group as a result of a deterioration in the customer’s ability to repay amounts due to the bank,
  • risk of foreign currency mortgage loans for households – the risk of incurring losses due to the customer’s default in payments related to a foreign currency mortgage loan,
  • currency risk – the risk of incurring losses due to unfavourable exchange rate changes, generated by maintaining open currency positions,
  • interest rate risk – the risk of incurring losses on the bank’s Group’s statement of financial position and off-balance sheet items sensitive to interest rate changes, as a result of changes in interest rates on the market,
  • liquidity risk, including financing risk – the lack of possibility to pay debts on time due to the lack of liquid assets. Lack of liquidity may result from an inappropriate structure of the statement of financial position, mismatch of cash flows, payments not received from counterparties, sudden withdrawal of cash by customers or other market events. The bank’s Group also 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,
  • operational risk – the risk of losses being incurred due to a failure or unreliability of the internal processes, people and systems or due to external events. Operational risk includes legal risk, and does not include reputation risk and business risk,
  • business risk – the risk of failing to achieve the adopted financial targets, including incurring losses, due to adverse changes in the business environment, making bad decisions, incorrectly implementing the decisions made, or not taking appropriate actions in response to changes in the business environment,
  • macroeconomic risk – the risk of deterioration in the Group’s financial situation as a result of an adverse impact of changes in macroeconomic conditions,
  • model risk – the risk of losses resulting from taking incorrect business decisions based on the models in place. Model risk is managed within the Group both at the level of the given member of the Group (the model owner) and at the level of the bank as the Group’s parent company.

Specific risk management activities undertaken by the Group in 2019

In 2019, the Group issued short-term bonds (mainly 3-6-month bonds) and mortgage covered bonds. It made early repayment of the financing received from the European Investment bank, and repayment of maturing own issues under the EMTN programme, as well as repayment of a loan instalment for the Council of Europe Development bank.

In September 2019, PKO Leasing carried out the largest transaction of securitization of its assets on the domestic market. The transaction involved the sale of a high-quality lease receivables portfolio with a total value of PLN 2.5 billion.

In 2019, PKO Bank Hipoteczny conducted two issues of mortgage covered bonds in PLN addressed to institutional investors with a total nominal value of PLN 500 million and redemption period of approx. 5 years from the date of issue. Both domestic and international institutional investors acquired these mortgage covered bonds. PKO Bank Hipoteczny’s mortgage covered bonds are among the safest debt instruments on the Polish financial market. This is reflected in the highest possible rating which can be obtained by Polish securities of Aa3 assigned by Moody’s. Moreover, in 2019, PKO Bank Hipoteczny carried out one issue of mortgage covered bonds denominated in EUR, addressed to institutional investors, with a total nominal value of EUR 600 and redemption period of approx. 3 years from the date of issue, and an issue of the second tranche of Series 1 mortgage covered bonds of 2016 with a nominal value of EUR 100 million.

As part of the monitoring of the credit loss estimation model the bank’s Group updated its assumptions for LGD and PD parameters. In the LGD parameter the recoveries at the long end of the curve have been corrected and the historical data line has been shortened to better reflect the current economic situation. Also the method of determining the PD parameter for retail portfolios, as well as companies and enterprises portfolios, was changed to take more account of the value of exposure to liabilities that are becoming overdue.

A detailed description of the principles of managing material risks, including risk mitigation techniques, hedges used and hedging accounting policy is provided in Note 21 and Notes 54-67, and in the Capital Adequacy Report, as well as other disclosures of the PKO Bank Polska Group as at 31 December 2019.

The comprehensive stress tests (CST) take account of the risks identified in the activities of the bank and the bank’s Group, in the first instance the risks considered to be material and supplement the stress tests specific for individual risks. The tests are the tool for evaluating the potential impact of unfavourable changes in the macroeconomic environment and the operation of the Group on the Group’s financial position, and in particular on the capital standing of the Group. Calculations are made using the bank’s internal models, taking into account the macroeconomic assumptions adopted.

Comprehensive stress tests include periodic tests and supervisory tests. Periodic tests are carried out once a year and are used to evaluate the risk of macroeconomic changes, and for the purposes of preparing recovery plans. Supervisory tests are carried out on the request of external supervisory authorities, in accordance with the assumptions provided by them.

Reverse stress tests (RST) complement the results of the comprehensive stress tests and are aimed at assessing the bank’s resilience to macroeconomic changes. Reverse stress tests are conducted in the form of sensitivity analyses and consist in defining potential adverse scenarios, and then identifying events which contribute to their materialization.

In 2019, the bank carried out the RTS, periodical and supervisory tests on the request of the Polish Financial Supervision Authority.

Capital adequacy management is a process intended to ensure that the level of risk which the PKO Bank Polski and the bank’s Group take in connection with the development of their business may be covered with their capital, taking into account a specific risk tolerance level and time horizon. The process of managing capital adequacy comprises, in particular, compliance with the applicable regulations of the supervisory and control authorities, as well as the risk tolerance level determined within the bank and the bank’s Group, and the capital planning process, including the policy concerning the sources of acquisition of capital.

The objective of capital adequacy management is to maintain own funds at all times at a level that is adequate for the scale and risk profile of the bank’s Group’s business.

In the year 2019 the bank’s Group maintained a safe capital base exceeding the supervisory and regulatory limits.

On 4 November 2019, PKO Bank Polski received a letter from the bank Guarantee Fund regarding the plan of achieving the minimum requirement for own funds and eligible liabilities (MREL). The amount of MREL determined for the bank at the consolidated level is 14.376% of the sum of total liabilities and own funds (“TLOF”), which corresponds to 22.807% of the total risk exposure (“TRE”). This requirement must be satisfied from 1 January 2023. The BGF indicated the path to attaining the target MREL level which showed that at the end of 2019 the level of MREL in relation to TLOF is 9.316% on the consolidated level, which corresponds to 14.779% of TRE.

The amount of MREL determined for the bank at the entitiy level is 13.726% TLOF  that corresponds to 23.014% TRE. This requirement must be satisfied from 1 January 2023. The BGF indicated the path to attaining the target MREL level, which showed that at the end of 2019 the level of MREL in relation to TLOF is 8.923% on the entity level, which corresponds to 14.961% of TRE.

A detailed description of capital adequacy management is provided in the Consolidated financial statements of the PKO Bank Polski Group for the year ended 31 December 2019, in Note 65 and in the Capital Adequacy Report, and other disclosures of the PKO Bank Polski Group as at 31 December 2019.

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