Loans and advances to customers

Accounting policies

Loans and advances to customers include financial assets which are not derivatives, with determined or possible to be determined payments, which are not quoted on an active market. The group includes loans and advances granted, finance lease receivables, corporate and municipal debt securities which based on the entity’s decision are classified to this category and receivables due from repurchase agreements, where the bank is not a counterparty to the transaction.

At initial recognition they are measured at fair value plus transaction costs, which can be directly attributed to the purchase or issuance of a financial asset.

After initial recognition, these assets are measured at amortized cost using the effective interest rate method, less impairment allowances. In the case of loans and advances for which it is not possible to reliably estimate the schedule of future cash flows and the effective interest rate, they are measured at the amount due.

Finance lease agreements are recognized as receivables in the amount equal to the current contractual value of the lease payments plus the potential unguaranteed residual value attributed to the lessor, determined as at the date of inception of the lease. Lease payments on finance leases are divided between interest income and a reduction in the balance of receivables in a manner enabling achieving a fixed interest rate on the remaining receivables.

Buy-sell-back securities are recognized under amounts due from customers if the counterparty to the transaction is other than a bank. Receivables due from repurchase agreements are measured at amortized cost. The difference between the purchase price and the repurchase (sale) price is recognized as interest expense and is settled over the term of the contract using the effective interest rate.

Loans and advances to customers also include an adjustment for hedging accounting of fair value for loans disclosed in the hedged item in Strategy 8 “Hedging the fair value volatility of fixed-rate loans in convertible currencies resulting from the risk of changes in interest rates using IRS transactions” (Note “Derivative hedging instruments”).

Estimates and judgements – impairment allowances

An impairment loss is incurred when there is objective evidence of impairment due to one or more events that occurred after the initial recognition of the asset (“a loss event”), and the event has a reliably measurable impact on the expected future cash flows from the financial asset or a group of financial assets. Future cash flows are assessed by the Group on the basis of estimates based on historical parameters.

The Group performs a monthly review of loan exposures in order to identify loan exposures exposed to potential impairment, measure the impairment of loan exposures and recognize impairment allowances on loans and advances or provisions for off-balance sheet exposures.

The process of determining impairment allowances on loans and advances and provisions includes the following stages:

  • identifying impairment triggers and events significant from the perspective of identifying those triggers;
  • registering in the Group’s IT systems the events that are significant from the perspective of identifying impairment triggers on loan exposures;
  • determining the method of measuring impairment;
  • measuring impairment and determining an impairment allowance or provision;
  • verifying and aggregating the results of the impairment measurement;
  • recording the results of impairment measurement.

The method of determining the amount of impairment allowances depends on the type of impairment triggers identified and the individual significance of a given loan exposure. The loss events considered as impairment triggers are, in particular, as follows:

  • breach of the contract by the debtor, i.e. for example, delay in the payment of principal or interest longer than 90 days (when determining the loan overdue period, the Bank takes into account the amounts of overdue interest or principal instalments exceeding the fixed threshold values);
  • a decline in the debtor’s rating to a level indicating a significant threat to the repayment of debt (with respect to non-financial clients ‘H1’ rating, with respect to financial institutions – G, H rating) resulting from significant financial difficulties of the debtor;
  • entering into a restructuring agreement or granting a concession concerning debt repayment (the impairment trigger is recognized if the concessions are granted to the client for economic or legal reasons resulting from financial difficulties);
  • high probability of bankruptcy or reorganization of the debtor;
  • the debt being declared as due and payable;
  • enforcement proceedings against the debtor;
  • declaration of the debtor’s bankruptcy or filling a motion to declare bankruptcy;
  • the amount of the debt being challenged by the debtor;
  • commencement of corporate recovery proceedings against the debtor;
  • establishing imposed administration over the debtor or suspending the debtor’s activities;
  • additional impairment triggers identified for exposures to housing cooperatives arising from housing loans of the so-called ‘old portfolio’, covered by State Treasury guarantees.

The Group categorizes its loans and advances based on the exposure amounts. The Group applies three methods of estimating impairment:

  • individual basis applied in respect of individually significant loans, for which the objective evidence of impairment was identified or requiring individual assessment due to the specifics of the transactions and resulting from events determining the repayment of exposure. In the portfolio of individually significant loan exposures, each individual loan exposure is subject to individual assessment of impairment triggers and the level of recognized loss.
  • portfolio basis applied in respect of individually insignificant loans, for which objective evidence of individual impairment was identified. For individually insignificant exposures recognition and measurement of loss are made using portfolio risk parameters estimated with statistical methods. If loss is recognized for an individual loan exposure, the adequate impairment allowance is recognized.
  • group basis (IBNR) applied in respect of the loans, for which objective evidence of impairment was not identified, but there is a possibility of losses being incurred but not recognized. If for individual loan exposure a loss is not recognized, the exposure is classified to a portfolio of assets with similar risk characteristics which is assessed on a group basis and is subject to impairment allowance set up for the given group due to incurred but not reported losses (IBNR allowance).

Loan exposures, in respect of which no objective evidence of individual impairment was identified, or in spite of their occurrence no impairment loss was recognized, are assessed for impairment on a basis of exposures with the same characteristics.

Impairment allowance in respect of a loan exposure corresponds to the difference between the carrying amount of the exposure and the present value of the expected future cash flows from a given exposure:

  • while assessing impairment allowances on an individual basis, the expected future cash flows are estimated for each loan exposure individually, taking into account the possible scenarios relating to contract execution, weighted by the probability of their realization;
  • an impairment allowance in respect of loan exposures assessed on a portfolio basis or a group basis corresponds to the difference between the carrying amount of the exposures and the present value of the expected future cash flows (excluding future credit losses that have not been incurred).

Future cash flows of a group of financial assets assessed for impairment on a collective basis are estimated on the basis of cash flows generated from loan agreements and historical recovery parameters generated from assets with similar risk characteristics.

Historical recovery parameters are adjusted on the basis of data from current observations to take into account the impact of current conditions and exclude factors that were relevant in the past but which currently do not occur. In subsequent periods if the amount of impairment loss is reduced because of an event subsequent to the impairment loss being recognized (e.g. improvement in the debtor’s credit rating), the impairment loss that was previously recognized is reversed by making an appropriate adjustment to the impairment allowances balance. The amount of the reversal is recognized in the income statement.

IBNR allowance is estimated using the portfolio parameters. These parameters are estimated for the group of exposures with the same risk characteristics.

The calculation of the present value of estimated cash flows relating to financial assets for which collateral is held takes into account cash flows arising from the foreclosure of the collateral, less costs to foreclose and sell.

According to the Group’s plans the adopted methodology used for estimating impairment allowances will be developed in line with the further possibilities of gathering information on impairment from the existing and implemented applications and information systems. As a consequence, new data obtained could influence the level of impairment allowances in the future. The methodology and assumptions used in the estimates are reviewed on a regular basis to minimize the differences between the estimated and actual loss amount.

Financial information

LOANS AND ADVANCES TO CUSTOMERS31.12.201731.12.2016
 Net amountNet amount
Loans and advances to customers (excluding adjustments relating to fair value hedge accounting)205 629200 606
Adjustment relating to fair value hedge accounting(1)-
Total loans and advances to customers 205 628200 606
LOANS AND ADVANCES TO CUSTOMERS BY PRODUCT
TYPE (excluding adjustments relating
to fair value hedge accounting)
31.12.201731.12.2016
 GrossImpairment allowancesNetGrossImpairment allowancesNet
       
Loans 194 936 (7 363) 187 573 189 736 (7 478) 182 258
housing108 163(1 972)106 191108 321(2 200)106 121
corporate60 497(3 705)56 79256 722(3 807)52 915
consumer26 276(1 686)24 59024 693(1 471)23 222
       
Debt securities 4 378 (10) 4 368 4 948 (78) 4 870
debt securities (corporate)1 859(4)1 8552 352(69)2 283
debt securities (municipal)2 519(6)2 5132 596(9)2 587
Receivables in respect of repurchase agreements 902 - 902 1 339 - 1 339
Finance lease receivables13 236(450)12 78612 586(447)12 139
       
Total213 452(7 823)205 629208 609(8 003)200 606
LOANS AND ADVANCES TO CUSTOMERS
BY METHOD OF CALCULATING
IMPAIRMENT ALLOWANCES
(excluding adjustments relating
to fair value hedge accounting)
31.12.201731.12.2016
 GrossImpairment
allowances
NetGrossImpairment
allowances
Net
       
individual basis, of which:5 420(2 103)3 3176 551(2 608)3 943
impaired4 346(2 097)2 2495 049(2 594)2 455
not impaired1 074(6)1 0681 502(14)1 488
portfolio basis, of which:7 354(5 000)2 3547 183(4 766)2 417
impaired7 332(5 000)2 3327 171(4 766)2 405
not impaired22-2212-12
group basis (IBNR)200 678(720)199 958194 875(629)194 246
       
Total213 452(7 823)205 629208 609(8 003)200 606

LOANS AND ADVANCES TO CUSTOMERS –
THE GROUP'S EXPOSURE TO CREDIT RISK
(excluding adjustments relating to fair value hedge accounting)
31.12.201731.12.2016
 GrossImpairmentNetGrossImpairmentNet
       
impaired, of which:11 678(7 097)4 58112 220(7 360)4 860
assessed on an individual basis4 346(2 097)2 2495 049(2 594)2 455
not impaired, of which:201 774(726)201 048196 389(643)195 746
with a recognized individual impairment trigger1 074(6)1 0681 452(14)1 438
not past due763(4)7591 199(13)1 186
past due311(2)309253(1)252
without a recognized individual impairment trigger/IBNR200 700(720)199 980194 937(629)194 308
not past due195 643(544)195 099190 628(436)190 192
past due5 057(176)4 8814 309(193)4 116
       
Total213 452(7 823)205 629208 609(8 003)200 606
LOANS AND ADVANCES TO CUSTOMERS BY CUSTOMER SEGMENT
(excluding adjustments relating to fair value hedge accounting)
31.12.201731.12.2016
   
Loans and advances to customers, gross, of which: 213 452 208 609
mortgage banking101 544101 389
corporate (including receivables due from repurchase agreements)56 05654 522
retail and private banking26 28824 701
small and medium enterprises29 56427 997
Impairment allowances on loans and advances(7 823)(8 003)
   
Loans and advances to customers, net 205 629 200 606
LOAN QUALITY RATIOS
(excluding adjustments relating to fair value hedge accounting)
31.12.201731.12.2016
   
Share of impaired loans5,5%5,9%
Coverage ratio of impaired loans167,0%65,5%
Share of loans overdue for more than 90 days in gross loans and advances to customers4,2%4,4%

1 The coverage ratio of loans and advances to customers is calculated as the ratio of total impairment allowance (both on impaired loans and advances to customers and IBNR) to the total gross exposure of impaired loans and advances to customers.

IMPAIRMENT ALLOWANCES ON LOANS AND ADVANCES TO CUSTOMERS - RECONCILIATION OF MOVEMENTS IN 2017As at the beginning of the periodRecognized during the periodReversed during the periodDerecognition of assets and settlementsOther, of which arising from business combinationsAs at the end of the periodRecoveries of exposures written off*Net - impact on the income statement
         
housing loans2 200708(526)(268)(142)1 97216(166)
business loans3 8072 217(1 374)(770)(175)3 70571(772)
consumer loans1 4711 251(744)(226)(66)1 6868(499)
debt securities (corporate)694(9)(60)-4-5
debt securities (municipal)9-(2)-(1)6-2
finance lease receivables447245(171)(68)(3)450-(74)
         
Total8 0034 425(2 826)(1 392)(387)7 82395(1 504)

1 The item is related to amounts recovered from repayments from customers and sales of loans.

IMPAIRMENT ALLOWANCES ON LOANS AND ADVANCES TO CUSTOMERS - RECONCILIATION OF MOVEMENTS IN 2016As at the beginning of the periodRecognized during the periodReversed during the periodDerecognition of assets and settlementsOther, of which arising from business combinationsAs at the end of the periodRecoveries of exposures written off*Net - impact on the income statement
         
housing loans2 3371 240(883)(488)(6)2 20011(346)
business loans4 1072 271(1 428)(967)(176)3 80756(787)
consumer loans1 5691 143(793)(397)(51)1 4715(345)
debt securities (corporate)69----69--
debt securities (municipal)36---9-(6)
finance lease receivables202121(101)(15)240447-(20)
         
Total8 2874 781(3 205)(1 867)78 00372(1 504)

1 The item is related to amounts recovered from repayments from customers and sales of loans.

Reclassification of securities

In 2012 due to the change of intention as regards holding a selected portfolio of non-Treasury securities classified as available for sale upon initial recognition, the Group reclassified them to the category of loans and advances to customers. As a result of the reclassification of the portfolio, the valuation methods for the portfolio have changed, i.e. from measured at fair value to measured at amortized cost.

PORTFOLIO RECLASSIFIED IN 201231.12.201731.12.2016
 fair valuecarrying amountfair valuecarrying amount
     
Municipal bonds506511623628
Corporate bonds--88
     
Total506511631636
PORTFOLIO RECLASSIFIED IN 2012
AS AT THE RECLASSIFICATION DATE
nominal valuefair valuecarrying amount
    
Municipal bonds1 2191 2371 237
Corporate bonds1 2891 2941 294
    
Total2 5082 5312 531

The change in fair value which would have been recognized in the income statement and/or in other comprehensive income if there was no reclassification, would have amounted to PLN (13) million for the period from the date of reclassification until 31 December 2017 (31 December 2016 PLN (39) million). As at 31 December 2017, the average effective interest rate for the debt securities portfolio was 3.20% (3.30% as at 31 December 2016).

Calculation of estimates – impairment allowances

The impact of an increase/decrease in cash flows for the Group’s loans and advances portfolio assessed for impairment on the basis of an individual analysis of future cash flows arising both from own payments and foreclosure of collaterals, i.e. the exposures for which an individual method is applied and the impact of an increase/decrease in the portfolio parameters for the Group’s loans and advances portfolio assessed on a portfolio and group basis is presented in the table below:

ESTIMATED CHANGE IN IMPAIRMENT ALLOWANCES ON LOANS AND ADVANCES IN THE SCENARIOS OF IMPROVING OR DETERIORATING RISK PARAMETERS, OF WHICH:*31.12.2017 31.12.2016 
 scenario +10%scenario -10%scenario +10%scenario -10%
     
Changes in the present value of estimated future cash flows for the Group's portfolio of individually
impaired loans and advances assessed on an individual basis
(191)290(196)320
changes in the probability of default47(48)49(49)
changes in recovery rates(314)314(353)353

1(in plus – increase in allowances, in minus – decrease in allowances)

Finance lease agreements

The Group conducts lease activities through entities in the PKO Leasing SA Group.

GROSS INVESTMENT IN THE LEASE AND MINIMUM
LEASE PAYMENTS RECEIVABLE AS AT 31 DECEMBER 2017
Gross investment in the leasePresent value of minimum lease paymentsUnrealized income
    
Lease receivables, gross   
up to 1 year5 5185 054464
from 1 to 5 years8 1367 580556
over 5 years65260250
Total, gross14 30613 2361 070
Impairment allowances(450)(450)-
    
Total, net13 85612 7861 070
 
GROSS INVESTMENT IN THE LEASE AND MINIMUM
LEASE PAYMENTS RECEIVABLE AS AT 31 DECEMBER 2016
Gross investment in the leasePresent value of minimum lease paymentsUnrealized income
    
Lease receivables, gross   
up to 1 year5 1204 651469
from 1 to 5 years7 8597 287572
over 5 years71064862
Total, gross13 68912 5861 103
Impairment(447)(447)-
    
Total carrying amount, net13 24212 1391 103
 

As at 31 December 2017 and 31 December 2016, there were no unguaranteed residual values attributable to the lessor.