Measurement of credit risk
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),
- Credit Value at Risk (CVaR),
- effectiveness measures used in scoring methodologies (Accuracy Ratio),
- share and structure of non-performing loans (according to IAS),
- coverage ratio of non-performing loans with impairment allowances (according to IAS),
- cost of risk.
PKO Bank Polski SA extends regularly the scope of credit risk measures used, taking account of the internal rating-based method (IRB) requirements, and extends the use of risk measures to cover the whole Bank’s loan portfolio with these methods.
The portfolio credit risk measurement methods make it possible, i.e. to reflect the credit risk in the price of products, determine the optimum cut-off levels and determine 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 Executives. The above-mentioned information enables the Bank to identify and take measures to limit the negative influence of unfavourable market changes on the Bank’s performance.
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. The assessment methods are supported by specialist 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 credit process.
The Bank assesses the credit risk of retail clients on two levels: the client’s borrowing capacity and his creditworthiness. The assessment of borrowing capacity involves an examination of the client’s financial situation, whereas the creditworthiness assessment involves scoring and evaluating the client’s credit history obtained from external sources and internal records of the Bank.
In 2011, the parameters for assessing the creditability of individual customers were adapted to the amended provisions of the Recommendation S, in particular as regards the following:
- changing the method of determining disposable income for foreign currency loan transactions drawn to finance real property and foreign currency loan transactions secured by mortgage,
- changing (shortening) the maximum lending period adopted in the assessment of creditability,
- taking into account the probability that the level of the borrower’s income will change after acquisition the pension entitlement in the assessment of creditability.
The evaluation of credit risk related to financing institutional clients is performed in two dimensions: in respect of the client and of the transaction. The assessment measures comprise ratings of clients and transactions. The comprehensive measure of credit risk which reflects both risk factors is the aggregate rating. Since 1 September 2010, Bank uses a scoring method for credit risk evaluation of clients in the SME segment, and a dedicated software application. This method is available apart from the rating method. Its implementation resulted in shortening the assessment process of loan applications as well as improvement of credit risk management effectiveness. As a result of the positive scoring of the institutional clients’ portfolio in November 2011 the scoring procedure was extended.
The information about ratings and scoring is widely used at the Bank for the purposes of credit risk management, the system of credit decision-making powers, determining the amounts above which independent credit assessment services are activated and in the credit risk assessment and reporting system.
In order to reduce the period of response as regards warning signals suggesting an increase in credit risk level, the Bank implemented a dedicated application the Early Warning System (EWS) in August 2010. In 2011 this tool was being developed, in result of which in June 2011 the automatic identification of adverse events was implemented.
In 2011 in its rating system the Bank took into consideration the identification of default events, achieving consistency between the rating system and the system for identifying individual premises for impairment of credit exposures. The scale of rating non-financial customers was also expanded: in place of 8 rating classes, 10 rating classes were introduced and at the same time it was decided that credit exposures which had been classified into the rating class ‘G’ (due to the low likeliness of default) were not to be automatically considered to be individually impaired. Moreover, as a rule the terms and conditions for determining availability of financing were maintained.
In the second half of 2011, in determining the write-downs against the portfolio of mortgage loans for individuals, the Bank used the portfolio parameters estimated on the basis of the methodology for estimating parameters for the purpose of calculating the capital requirements using the IRB method. The new methodology takes into account intense restructuring processes conducted in respect of the above-mentioned portfolio and allows more precise assessment of the related credit risk.