Derivative
hedging instruments

As at 31 December 2011, the Group applies the following hedging strategies:

  1. hedges against fluctuations in cash flows from mortgage loans in CHF and negotiated term deposits in PLN, resulting from the risk of fluctuations in interest rates and foreign exchange rates, using CIRS transactions,
  2. hedges against fluctuations in cash flows from floating interest rate loans in PLN, resulting from the risk of fluctuations in interest rates, using IRS transactions,
  3. hedges against fluctuations in cash flows from floating interest rate loans in EUR, resulting from the risk of fluctuations in interest rates, using IRS transactions,
  4. hedges against fluctuations in cash flows from floating interest rate loans in CHF, resulting from the risk of fluctuations in interest rates, using IRS transactions.

As at 31 December 2010, the Group used the fair value hedge described in points 1-3 above.

As at 31 December 2011 and 31 December 2010, the Group did not use the fair value hedge.

The characteristics of the cash flow hedges applied by the Group are presented in the table below:

Hedging strategy:

Hedges against fluctuations in cash flows from mortgage loans in CHF and negotiated term deposits in PLN, resulting from the risk of fluctuations in interest rates and in foreign exchange rates, using CIRS transactions

Type of hedge relationship

Hedge accounting of cash flow (macro cash flow hedge)

Description of hedge relationship

Elimination of the risk of cash flow fluctuations generated by mortgage loans denominated in CHF and negotiated term deposits in PLN resulting from fluctuations in reference interest rates in CHF and PLN, and changes in foreign exchange rates CHF/PLN during the hedged period.

Hedged risk

Currency risk and interest rate risk.

Hedging instrument

CIRS transactions where the Bank pays coupons based on 3M CHF LIBOR, and receives coupons based on 3M WIBOR on the nominal amount defined in CHF and PLN respectively.

Hedged position

1) The portfolio of floating rate mortgage loans denominated in CHF.
2) portfolio of short-term negotiable term deposits, including renewals in the future (high probability of occurrence).
The Bank designated the hedged position according to the regulations of IAS 39.AG.99C as adopted by the EU.

Hedge efficiency

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed monthly.

Periods in which cash flows are expected and in which they should have an impact on the financial result

January 2012 to October 2026

Hedging strategy:
Hedges against fluctuations from loans in PLN at float rate, resulting from the risk of fluctuations in interest rates, using IRS transactions
Type of hedge relationship
Hedge accounting of cash flow (macro cash flow hedge)
Description of hedge relationship
Elimination of the risk of cash flow fluctuations generated by floating rate PLN loans resulting from the interest rate risk in the period covered by the hedge.
Hedged risk
Interest rate risk.
Hedging instrument
IRS transactions where the Bank pays coupons based on variable 3M WIBOR, and receives coupons based on a fixed rate on the nominal amount for which they were concluded.
Hedged position
The portfolio of loans in PLN indexed to the variable 3M WIBOR rate.
Hedge efficiency
Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed monthly.
Periods in which cash flows are expected and in which they should have an impact on the financial result
January 2012 to December 2013
Hedging strategy:
Hedges against fluctuations from loans in EUR at float rate, resulting from the risk of fluctuations in interest rates, using IRS transactions
Type of hedge relationship
Hedge accounting of cash flow (macro cash flow hedge)
Description of hedge relationship
Elimination of the risk of cash flow fluctuations generated by floating rate EUR loans resulting from the interest rate risk in the period covered by the hedge.
Hedged risk
Interest rate risk.
Hedging instrument
IRS transactions where the Bank pays coupons based on variable 3M EURIBOR, and receives coupons based on a fixed rate on the nominal amount for which they were concluded.
Hedged position
The portfolio of loans in EUR indexed to the variable 3M EURIBOR rate.
Hedge efficiency
Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed monthly.
Periods in which cash flows are expected and in which they should have an impact on the financial result
January 2012 to June 2016
Hedging strategy:
Hedges against fluctuations from loans in CHF at float rate, resulting from the risk of fluctuations in interest rates, using IRS transactions
Type of hedge relationship
Hedge accounting of cash flow (macro cash flow hedge)
Description of hedge relationship
Elimination of the risk of cash flow fluctuations generated by floating rate CHF loans resulting from the interest rate risk in the period covered by the hedge.
Hedged risk
Interest rate risk.
Hedging instrument
IRS transactions where the Bank pays coupons based on variable 3M LIBOR CHF, and receives coupons based on a fixed rate on the nominal amount for which they were concluded.
Hedged position
The portfolio of loans in CHF indexed to the variable 3M LIBOR CHF rate.
Hedge efficiency
Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed monthly.
Periods in which cash flows are expected and in which they should have an impact on the financial result
January 2012 to July 2016

Cash flow hedges

The fair value of derivative instruments constituting cash flow hedges related to the interest rate and / or foreign exchange rate as at 31 December 2011 and 31 December 2010 respectively:

Type of instrument: Carrying amount/fair value

31.12.2011

31.12.2010

Assets  Liabilities  Total Assets  Liabilities  Total
IRS 175 566 1 643 173 923 103 219 18 755 84 464
CIRS 341 359 340 955 404 50 702 537 228 (486 526)
Total 516 925 342 598 174 327 153 921 555 983 (402 062)

The nominal value of hedging instruments by maturity.

Type of instrument: Nominal value as at 31 December 2011
1 - 3 months 3 months
- 1 year roku
1 - 5 years Over 5 years Total
IRS   in PLN thousand 500 000 5 330 000 526 000 - 6 356 000
IRS
in PLN thousand - - 2 084 730 - 2 084 730
in EUR thousand - - 472 000 - 472 000
IRS
in PLN thousand - - 908 325 - 908 325
in CHF thousand - - 250 000 - 250 000
CIRS
in PLN thousand - 1 998 315 15 714 023 1 362 488 19 074 826
in CHF thousand - 550 000 4 325 000 375 000 5 250 000
Type of instrument: Nominal value as at 31 December 2011
1 - 3 months 3 months
- 1 year roku
1 - 5 years Over 5 years Total
IRS w tys. PLN - 5 075 000 905 000 - 5 980 000
IRS
in PLN thousand - - 1 128 686 - 1 128 686
in EUR thousand - - 285 000 - 285 000
CIRS
in PLN thousand 158 195 1 740 145 14 158 453 1 423 755 17 480 548
in CHF thousand 50 000 550 000 4 475 000 450 000 5 525 000

The nominal values were translated using the average NBP rate as at 31 December 2011 and as at 31 December 2010 respectively.

Other comprehensive income as regards cash flow hedges 31.12.2011 31.12.2010
Other comprehensive income at the beginning of the period 269 042 147 254
Gains/ losses transferred to other comprehensive income in the period 1 290 334 (145 504)
Amount transferred from other comprehensive income to profit and loss, of which transferred to: (1 112 234) 267 292
- interest income (814 275) (649 116)
- net foreign exchange gains (297 959) 916 408
Other comprehensive income at the end of the period (gross) 447 142 269 042
Tax effect (84 957) (51 118)
Other comprehensive income at the end of the period (net) 362 185 217 924
Ineffective part of hedging cash flows recognised through profit and loss (64 342) (82 879)
Effect on other comprehensive income in the period (gross) 178 100 121 788
Deferred tax on cash flow hedges (33 839) (23 140)