Market risk means the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of assets, credit spread, value of liabilities and financial instruments.
Market risk types in the PZU Group include:
Concentration risk and credit spread risk are regarded as an integral part of market risk when measuring risk for the purposes of risk profile, risk tolerance, and market risk ratio reporting. The risk management process has, however, a different set of traits from the process of managing the other sub-categories of market risk and has been described in section 126.96.36.199 along with the process for managing counterparty insolvency risk.
The market risk in the PZU Group originates from three major sources:
A number of documents approved by supervisory boards, management boards and dedicated committees govern investment activity in the PZU Group’s companies.
Risk units take part in the risk identification process, measure, monitor and report on the risks. Market risk is measured using the model of calculating economic capital of market risk based on the value at risk method (VaR) or the standard formula in accordance with the principles defined by the Solvency II Directive. In order to effectively manage market risk, risk limits are adopted in a form of a capital amount allocated to each market risk and limits for individual market risk factors.
In Pekao, the market risk management system forms the structural, organizational and methodological framework, which aims to maintain the balance sheet and off-balance sheet structure in line with the accepted strategic objectives. The market risk management process and the governing procedures include the separation into the banking and trading books.
In managing its trading book’s market risk, Pekao strives to optimize the financial performance and ensure the highest possible quality of service of the bank’s clients in respect to market-making, while remaining within the limits approved by the management board and the supervisory board.
When managing interest rate risk in its banking book, Pekao endeavors to secure the economic value of equity and to achieve its intended net interest income target within the accepted limits.
In Alior Bank, the exposure to market and liquidity risk is restricted by the system of periodically updated limits introduced by the resolution of the supervisory board or the management board that include all risk measures. In Alior Bank, there are three types of limits that differ in respect to their functioning – basic, supplementary and stress-test limits. Market risk management focuses on limiting potential adverse changes in economic value of equity and optimizing the financial result.
|Carrying amount||Note||31 December 2019||31 December 2018|
|Assets at Group’s risk||Assets at the client’s risk||Total||Assets at Group’s risk||Assets at the client’s risk||Total|
|including banks’ assets||including banks’ assets|
|Financial assets and cash exposed to interest rate risk||309,124||267,846||1,167||310,291||295,402||252,859||1,303||296,705|
|Fixed-income debt securities||35||62,965||32,858||1,101||64,066||52,534||24,169||1,134||53,668|
|Variable-income debt securities||35||31,144||29,494||15||31,159||31,298||28,333||77||31,375|
|Loan receivables from clients||33||194,868||194,868||-||194,868||182,054||182,054||-||182,054|
|Term deposits with credit institutions||35||1,405||599||49||1,454||2,679||976||90||2,769|
|Financial assets exposed to other price risk||2,163||1,079||4725||6,888||2,347||816||4,209||6,556|
The following table presents financial assets of banks and at client’s risk, by the item in which they are classified in the consolidated financial statements:
|Financial assets of banks and financial assets at client’s risk||Note||31 December 2019||31 December 2018|
|Pekao andAlior Bank||Financial assets at client’s risk||Pekao andAlior Bank||Financial assets at client’s risk|
|Loan receivables from clients||33||194,868||-||182,054||-|
|Investment financial assets||64,334||5,847||53,992||5,482|
|Measured at amortized cost||21,130||49||18,569||90|
|Term deposits with credit institutions||599||49||976||90|
|Measured at fair value through other comprehensive income||41,605||-||34,546||-|
|Quoted on a regulated market||30||-||44||-|
|Not quoted on a regulated market||246||-||212||-|
|Measured at fair value through profit or loss||1,599||5,798||877||5,392|
|Quoted on a regulated market||128||378||68||358|
|Not quoted on a regulated market||53||-||27||-|
|Participation units and investment certificates||29||4,304||5||3,823|
|Quoted on a regulated market||23||81||5||61|
|Not quoted on a regulated market||6||4,223||-||3,762|
|Total financial assets of banks and financial assets at client’s risk||268,925||5,892||253,675||5,512|
In its investing activities, the PZU Group uses derivatives as a tool to mitigate risk (with or without hedge accounting) and to facilitate efficient management of the investment portfolio.
The PZU Group’s exposure to derivatives is presented in section 34.
|Carrying amount of debt securities issued by governments other than the Polish government||31 December 2019||31 December 2018|
|Other||347 1||2,297 2|
1 The Other line item states the countries with respect to which the balance sheet exposure does not exceed the equivalent of PLN 50 million: Australia, Azerbaijan, Bahrain, Belarus, Belgium, Chile, Costa Rica, Côte d’Ivoire, Denmark, Egypt, France, Germany, Ghana, Guatemala, Holland, Honduras, Ireland, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Mexico, Mongolia, Morocco, Namibia, Nigeria, Paraguay, Peru, Qatar, Saudi Arabia, Senegal, Slovenia, Spain, Sri Lanka, Sweden, Trinidad and Tobago, Turkey, Uzbekistan, United Kingdom, United States, Vietnam.
2 The Other line item states Albania, Argentina, Armenia, Australia, Azerbaijan, Belarus, Belgium, Bolivia, Cameroon, Chile, Costa Rica, Côte d’Ivoire, Denmark, Egypt, Ethiopia, France, Germany, Ghana, Greece, Guatemala, Holland, Honduras, India, Ireland, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Morocco, Mexico, Mongolia, Namibia, Nigeria, Paraguay, Peru, Portugal, Senegal, Serbia, Slovenia, Spain, Sri Lanka, Sweden, Trinidad and Tobago, Turkey, United Kingdom, United States, Vietnam.
|Carrying amount of debt securities issued by corporations and local government units||31 December 2019||31 December 2018|
|Domestic local governments||6,199||5,710|
|National Bank of Poland||4,815||2,999|
|Companies from the WIG-Energy Index||2,375||1,183|
|Financial and insurance services||761||725|
|Energy and fuel sector companies (including: WIG-Fuels index companies)||651||1,173|
|Transportation and storage||615||1,232|
|Companies from the WIG-Banks Index||558||452|
|Construction and real estate market service||479||158|
|Public utility services||410||759|
|Professional, scientific and technical activity||410||136|
|Mining and quarrying (including companies included in the WIG-Mining index)||353||130|
|Arts, entertainment and recreation activity (including WIG – hotels and restaurants index companies)||315||188|
|Information and communication (including: WIG – Telecommunications index companies)||201||4|
The following table presents the sensitivity test of the portfolio of financial instruments for which the PZU Group bears the risk (except for loan receivables from clients and deposit liabilities).
|Change in portfolio value caused by a +/-100 bp shift in the yield curve, by currency of the instrument||31 December 2019||31 December 2018|
The above sensitivity tests do not include the effects of changes in interest rates for technical provisions and liabilities under investment contracts. An analysis of effect of a change in technical rate on measurement of insurance contracts is presented in sections 188.8.131.52 and 184.108.40.206.
The table below presents the contractual level of sensitivity of net interest income (NII) to a 100 bp change in interest rates and sensitivity of the economic value of equity (EVE) of PZU Group’s banks to a 200 bps change in interest rates. The measure (NII) is used for managing interest rate risk in order to reduce variations in net interest income. EVE is defined as the present value of future cash flows that will be generated by the entity’s assets, less the present value of the future cash flows necessary to pay the entity’s liabilities. Both analyses assume an immediate change in market rates. The interest rate on bank products changes according to the contractual provisions, whereas in the case of contractual NII sensitivity, for deposits from retail customers, the declines in interest rates are limited to the zero interest rate level, but not down to negative figures, while for EVE sensitivity the zero-based limitation of interest rate decreases applies to all liabilities. Also, in the case of EVE sensitivity for PLN-denominated current deposits, a model that ensures realistic revaluation is used.
|Entity||Measure||31 December 2019||31 December 2018 1)|
|Alior Bank Group||NII||-6.86%||3.14%||-5.97%||2.45%|
1) December 2018 data based on the methodology in effect before the EBA IRRBB requirements were implemented in June 2019
|Assets by currency||31 December 2019||31 December 2018|
|Loan receivables from clients||163,827||25,914||1,423||3,704 1)||194,868||153,035||23,458||1,903||3,658 2)||182,054|
|Investment financial assets||97,050||7,427||5,748||1,191||111,416||88,455||7,796||5,174||240||101,665|
|Measured at amortized cost||43,587||1,643||278||430||45,938||42,162||2,580||333||159||45,234|
|Term deposits with credit institutions||885||175||87||307||1,454||1,286||1,250||150||83||2,769|
|Measured at fair value through other comprehensive income||44,523||5,006||4,965||717||55,211||30,788||3,674||4,272||3||38,737|
|Measured at fair value through profit or loss||8,940||778||505||44||10,267||15,505||1,542||569||78||17,694|
|Participation units and investment certificates||3,954||604||243||19||4,820||3,556||550||178||14||4,298|
|Cash and cash equivalents||4,973||1,542||482||791 3)||7,788||11,741||3,815||778||721 4)||17,055|
1) of which PLN 2,695 million in Swiss francs and PLN 533 million in British pounds.
2) of which PLN 2,999 million in Swiss francs and PLN 409 million in British pounds.
3) of which PLN 310 million in British pounds, PLN 144 million in Swiss francs, PLN 70 million in Norwegian kroner, PLN 56 million in Swedish kronor and PLN 39 million in Danish kroner.
4) of which PLN 261 million in British pounds, PLN 157 million in Swiss francs, PLN 69 million in Swedish kronor, PLN 67 million in Norwegian kroner and PLN 52 million in Danish kroner.
|Liabilities by currency||31 December 2019||31 December 2018|
|Financial liabilities measured at fair value||3,170||379||106||5||3,660||3,445||374||157||41||4,017|
|Liabilities on borrowed securities (short sale)||293||-||-||-||293||120||-||-||-||120|
|Investment contracts for the client’s account and risk (unit-linked)||258||1||-||-||259||266||-||-||-||266|
|Liabilities to members of consolidated mutual funds||90||-||-||-||90||266||-||-||-||266|
|Financial liabilities measured at amortized cost||202,387||25,994||11,196||3,253||242,830||188,918||28,534||11,528||3,319||232,299|
|Liabilities to banks||3,120||3,242||19||223 1)||6,604||2,234||3,474||60||276 2)||6,044|
|Liabilities to clients under deposits||182,288||22,150||11,123||3,027 3)||218,588||172,162||20,962||11,468||3,043 4)||207,635|
|Liabilities on the issue of own debt securities||9,006||229||38||-||9,273||7,998||4,011||-||-||12,009|
|Liabilities on account of repurchase transactions||503||96||-||-||599||540||-||-||-||540|
|Investment contracts with guaranteed and fixed terms and conditions||-||-||-||-||-||-||-||-||-||-|
|Finance lease liabilities||814||233||16||3||1,066||10||-||-||-||10|
|Total liabilities by currency||212,290||27,284||11,633||3,352||254,559||199,017||29,419||11,792||3,495||243,723|
1) of which PLN 187 million in Swiss francs.
2) of which PLN 226 million in Swiss francs.
3) of which PLN 1,532 million in British pounds, PLN 648 million in Swiss francs, PLN 234 million in Norwegian kroner, PLN 147 million in Swedish kronor, PLN 86 million in Canadian dollars, PLN 48 million in Czech korunas and PLN 121 million in Japanese yen.
4) of which PLN 1,627 million in British pounds, PLN 584 million in Swiss francs, PLN 174 million in Norwegian kroner, PLN 112 million in Swedish kronor, PLN 89 million in Canadian dollars, PLN 81 million in Czech korunas and PLN 30 million in Japanese yen.
To manage its FX risk, the PZU Group uses also derivatives which allows it to take a selected market exposure in a more efficient manner than by using cash instruments.
The following table presents the sensitivity test of the portfolio of PZU Group’s financial instruments (except for loan receivables from clients and deposit liabilities) in respect to financial instruments for which the PZU Group bears the risk.
Financial assets exposed to exchange risk include investment (deposit) financial assets of the PZU Group and derivative financial assets denominated in foreign currencies.
|Change in portfolio value caused by a +/-20% change of the exchange rate||31 December 2019||31 December 2018|
The value of the portfolio of equity financial instruments is presented in item 35.2.
The table below presents the sensitivity test of PZU Group’s portfolio of quoted equity instruments for which the PZU Group bears the risk.
|Impact of a change in the measurement of quoted equity instruments on equity||31 December 2019||31 December 2018|
|increase in measurement of quoted equity instruments by 20%||112||190|
|decrease in measurement of quoted equity instruments by 20%||(112)||(190)|
Financial liquidity risk means the possibility of losing the capacity to settle, on an ongoing basis, the PZU Group’s liabilities to its clients or business partners. The aim of the liquidity risk management system is to maintain the capacity of fulfilling the entity’s liabilities on an ongoing basis. Liquidity risk is managed separately for the insurance part and the bancassurance part.
The risk identification involves analysis of the possibility of occurrence of unfavorable events, in particular:
Risk assessment and measurement are carried out by estimating the shortage of cash to pay for liabilities. The risk estimate and measurement is carried out from the following perspectives:
The banks in the PZU Group employ the liquidity risk management metrics stemming from sector regulations, including Recommendation P issued by the KNF.
To manage the liquidity of the banks in the PZU Group, liquidity ratios are used for different periods ranging from 7 days, to a month, to 12 months and to above 12 months.
Within management of liquidity risk, banks in the PZU Group also perform analyses of the maturity profile over a longer term, depending to a large extent on the adopted assumptions about development of future cash flows connected with items of assets and equity and liabilities. The assumptions take into consideration:
Monitoring and controlling financial liquidity risk involves analyzing the utilization of the defined limits.
Reporting involves communicating the level of financial liquidity to various decision-making levels. The frequency of each report and the scope of information provided therein are tailored to the information needs at each decision-making level.
The following measures aim to reduce financial liquidity risk:
|Carrying amount of debt instruments, by maturity||31 December 2019||31 December 2018|
|up to 1 year||1 – 2years||2 – 3years||3 – 4years||4 – 5years||Over5 years||Total||up to 1 year||1 – 2years||2 – 3years||3 – 4years||4 – 5years||Over5 years||Total|
|Loan receivables from clients||53,167||19,432||18,451||14,267||14,130||75,421||194,868||53,823||18,022||13,302||14,537||12,512||69,858||182,054|
|Investment (deposit) debt instruments||16,298||15,935||13,048||9,315||15,156||35,481||105,233||16,429||8,028||11,300||15,091||9,231||35,546||95,625|
|Measured at amortized cost||7,884||3,526||4,908||5,170||6,675||17,775||45,938||9,485||2,497||2,717||5,005||5,540||19,990||45,234|
|Term deposits with credit institutions||1,398||56||-||-||-||-||1,454||2,532||170||54||-||-||13||2,769|
|Measured at fair value through other comprehensive income||8,221||10,847||7,504||3,568||7,851||16,702||54,693||5,923||4,600||5,952||7,791||2,471||11,478||38,215|
|Measured at fair value through profit or loss||193||1,562||636||577||630||1,004||4,602||1,021||931||2,631||2,295||1,220||4,078||12,176|
The following table presents future undiscounted cash flow from assets and liabilities.
|Liquidity risk||31 December 2019||31 December 2018|
|Up to 1 year||1 – 2 years||2 – 3 years||3 – 4 years||4 – 5 years||5 – 10 years||Over 10 years||Total||Up to 1 year||1 – 2 years||2 – 3 years||3 – 4 years||4 – 5 years||5 – 10 years||Over 10 years||Total|
|Cash and cash equivalents||3,410||151||109||90||78||290||3,694||7,822||13,195||142||103||85||74||274||3,258||17,131|
|Loan receivables from clients||49,666||25,154||23,366||16,679||16,973||39,462||42,200||213,500||47,576||23,979||19,287||16,650||13,761||36,998||42,209||200,460|
|Term deposits with credit institutions||1,455||141||60||104||118||22||-||1,900||2,632||166||141||60||104||49||-||3,152|
|Other financial liabilities||(102,215)||(11,572)||(4,994)||(3,555)||(3,319)||(13,816)||(106,516)||(245,987)||(95,013)||(11,138)||(6,378)||(3,732)||(2,740)||(14,476)||(95,724)||(229,201)|
The following table presents future undiscounted cash flows from banks’ off-balance sheet liabilities (by contractual terms)
|Off-balance sheet liabilities granted||31 December 2019||31 December 2018|
|up to 1 month||1 – 3 months||3 months to 1 year||1 – 5 years||over 5 years||Total||up to 1 month||1 – 3 months||3 months to 1 year||1 – 5 years||over 5 years||Total|
Operational risk is the possibility of suffering loss resulting from improper or erroneous internal processes, human activities, system failures or external events.
Operational risk management has the purpose of optimizing the level of operational risk and operating efficiency in the PZU Group’s operations, leading to a reduction of losses and costs arising from such risks and ensuring adequate and effective control mechanisms. Information on operational risk levels is regularly reported to relevant internal authorities.
Operational risk is identified in particular by:
Operational risk is assessed and measured by:
Monitoring and control of operational risk is performed mainly through an established system of operational risk indicators and limits enabling assessment of changes in the level of operational risk over time and assessment of factors that affect the level of this risk in the business.
Reporting involves communicating the level of operational risk, the effects of monitoring and control to various decision-making levels. The frequency of each report and the scope of information provided therein are tailored to the information needs at each decision-making level.
Management actions involving reactions to any identified and assessed operational risks involve, in particular:
Compliance risk is the risk of legal sanctions, financial losses or loss of reputation or credibility arising from a failure of PZU Group companies, their employees or entities acting on their behalf to comply with the law, internal regulations or standards of conduct, including ethical standards.
The demarcation of responsibilities with respect to systemic and ongoing compliance risk management is based on internal regulations.
Systemic management entails in particular: developing solutions for implementing compliance risk management principles, monitoring the compliance risk management process and promoting and monitoring compliance with internal regulations and standards of conduct in respect to compliance.
Ongoing compliance risk management entails: identifying, assessing and measuring and adaptation to regulatory requirements.
Model risk is the risk of incurring financial losses, incorrectly estimating data reported to the regulatory authority, taking incorrect decision or losing reputation as a result of errors in the development, implementation or application of models. Taking into account the growing importance of the scope of use of models and the fact that model risk was classified as material risk for the PZU Group; the formal process of identifying and evaluating this risk was continued in 2019. The process aims to ensure high quality of risk management practices applied to this risk and is currently being developed by PZU and PZU Życie. Within the framework of this process, the models were monitored and independently validated in 2019.
Model risk is very important for banking sector entities and therefore management of this risk has already been implemented in the course of adaptation to the requirements of Recommendation W issued by the KNF. Both banks have defined standards for the model risk management process, including the rules for developing models and evaluating the quality of their operation and have ensured appropriate corporate governance solutions.