Forecasting and
monitoring of credit risk

The Group’s exposure to credit risk

Amounts due from banks Exposure
31.12.2011 31.12.2010
Amounts due from banks impaired, of which: 32 499 28 559
valued with an individual method 32 385 28 089
Amounts due from banks not impaired, of which: 2 396 540 2 307 398
neither past due nor impaired 2 396 540 2 307 047
ast due but not impaired - 351
past due up to 4 days - 351
Gross total 2 429 039 2 335 957
Impairment allowances (32 812) (28 925)
Net total by carrying amount 2 396 227 2 307 032


Loans and advances to customers Exposure
31.12.2011 31.12.2010
Loans and advances impaired, of which: 11 797 232 10 887 174
valued with an individual method 5 701 547 5 899 231
Loans and advances not impaired, of which: 135 495 505 124 637 615
neither past due nor impaired 131 488 230 120 260 937
past due but not impaired 4 007 275 4 376 678
past due up to 4 days 855 403 2 027 160
past due over 4 days 3 151 872 2 349 518
Gross total 147 292 737 135 524 789
Impairment allowances (5 658 243) (4 856 670)
Net total by carrying amount 141 634 494 130 668 119


Investment securities available for sale
– debt securities
Exposure
31.12.2011 31.12.2010
Debt securities impaired, of which: 17 944 21 259
Valued with an individual method 17 944 21 259
Debt securities not impaired, of which: 14 307 525 10 123 419
neither past due nor impaired 14 307 525 10 123 419
with external rating 8 729 898 5 864 172
with internal rating 5 577 627 4 259 247
Gross total 14 325 469 10 144 678
Impairment allowances (17 944) (21 259)
Net total by carrying amount 14 307 525 10 123 419


Other assets – other financial assets Exposure
31.12.2011 31.12.2010
Other assets impaired 110 826 137 213
Other assets not impaired 421 244 367 098
neither past due nor impaired 420 251 366 806
past due but not impaired 993 292
Gross total 532 070 504 311
Impairment allowances (100 926) (130 223)
Net total by carrying amount 431 144 374 088

Level of exposure to credit risk

The table below presents maximum exposure to credit risk of the Group as at 31 December 2011 and as at 31 December 2010.

Items of the statement of financial position 31.12.2011 31.12.2010
Current account in the central bank 6 845 759 3 782 717
Amounts due from banks 2 396 227 2 307 032
Trading assets – debt securities 1 300 164 1 491 053
issued by the State Treasury 1 268 471 1 483 144
issued by local government bodies 14 783 7 390
issued by banks 1 724 -
issued by financial institutions 239 10
issued by non-financial institutions 14 947 509
Derivative financial instruments 3 064 733 1 719 085
Financial instruments designated upon initial recognition at fair value through profit and loss - debt securities 12 467 201 10 758 331
issued by the State Treasury 3 620 515 6 631 702
issued by central banks 8 593 791 3 997 780
issued by local government bodies 252 895 128 849
Loans and advances to customers 141 634 494 130 668 119
financial entities (other than banks) 1 215 310 2 972 158
corporate loans 1 215 310 2 972 158
non-financial entities 135 368 534 123 858 597
consumer loans 22 872 908 24 129 437
mortgage loans 69 832 423 61 695 223
corporate loans 42 663 203 38 033 937
state budget entities 5 050 650 3 837 364
corporate loans 5 050 650 3 836 720
mortgage loans - 644
Investment securities - debt securities 14 307 525 10 123 419
issued by banks 50 870 50 858
issued by non-financial institutions 2 119 271 1 435 074
issued by the State Treasury 8 679 028 5 813 314
issued by local government bodies 3 458 356 2 824 173
Other assets - other financial assets 431 144 374 088
Total 182 447 247 161 223 844


Off-balance sheet items 31.12.2011 31.12.2010
Irrevocable liabilities granted 5 946 055 7 001 338
Guarantees granted 4 939 669 4 554 377
Letters of credit granted 420 376 229 946
Guarantees of issue (underwriting) 1 074 685 2 496 031
Total 12 380 785 14 281 692

Credit quality of financial assets which are neither past due nor impaired

Taking the type of Group’s business activity and the amount of credit and leasing debts into consideration, the most important portfolios are managed by the Bank and Bankowy Fundusz Leasingowy SA. Information about credit quality of loans granted by the Bank and BFL SA Group is presented below.

Exposures to corporate clients who are not individually impaired are classified according to customer rating as part of the individual rating classes, from A to G (in respect of financial institutions from A to F).

The following loan portfolios are covered by the rating system:

  • corporate clients,
  • housing market corporate clients,
  • small and medium enterprises (excluding certain product groups which are assessed in a simplified manner).
Financial assets neither past due nor impaired 31.12.2011 31.12.2010
Amounts due from banks 2 396 540 2 307 047
of which:
with rating 2 072 322 2 215 818
without rating 324 218 91 229
Loans and advances to customers 131 488 230 120 260 937
with rating 123 173 721 115 489 715
without rating 8 314 509 4 771 222
PKO Bank Polski SA 128 593 307 118 036 993
with rating – financial, non-financial and budget sector (corporate loans) 38 595 846 36 648 989
A (first rate) 1 269 043 1 053 966
B (very good) 2 377 152 2 683 977
C (good) 4 248 073 6 165 665
D (satisfactory) 8 937 711 10 691 018
E (average) 9 791 398 7 460 009
F (acceptable) 9 244 208 8 594 354
G (poor)* 2 728 261 -
with rating – non-financial sector (consumer and mortgage loans) 83 438 089 77 811 902
A (first rate) 39 006 051 43 929 181
B (very good) 28 255 664 13 666 144
C (good) 6 770 389 12 303 034
D (average) 3 224 042 3 536 471
E (acceptable) 6 181 943 4 377 072
without rating – financial, non-financial and budget sector (consumer, mortgage and other loans) 6 559 372 3 576 102
The BFL SA Group 2 307 463 1 858 253
with rating 1 139 786 1 028 824
A2 (first rate) 4 574 2 858
A3 (very good) 71 872 109 326
A4 (good) 147 577 132 142
A5 (satisfactory) 354 505 284 998
A6 (average) 477 485 391 914
B1 (acceptable) 61 132 94 634
B2 (poor) 19 117 12 065
C (bad) 3 524 887
without rating 1 167 677 829 429
without rating – customers of non-financial and financial sector of other entities of the PKO Bank Polski SA Group 587 460 365 691
Other assets – other financial assets 420 251 366 806
Total 134 305 021 122 934 790

*recognise the premise of ‘deterioration in the customer’s financial position during the crediting period’ in respect of customers who until then were in this group and are characterised by a relatively low probability of default.

Loans and advances which are not individually impaired and are not rated, are characterised with a satisfactory level of the credit risk. It concerns, in particular, retail loans (including mortgage loans) which are not individually significant and thus do not create significant credit risk.

Structure of debt securities and inter-bank deposits, neither past due nor impaired by external rating class is presented below:

Trading debt securities

Rating/portfolio 31.12.2011 31.12.2010
issued by the State Treasury issued by local government bodies issued by other financial institutions issued by non-financial institutions issued by the State Treasury issued by local government bodies issued by other financial institutions issued by non-financial institutions
A- to A+ 1 268 471 - - - 1 483 144 - - -
without rating - 14 783 1 963 14 947 - 7 390 10 509
Total 1 268 471 14 783 1 963 14 947 1 483 144 7 390 10 509

Debt securities designated upon initial recognition at fair value through profit and loss

 
Rating/portfolio 31.12.2011 31.12.2010
ssued by the State Treasury issued by local government bodies issued by central banks issued by the State Treasury issued by local government bodies issued by central banks
A- to A+ 3 620 515 - 8 593 791 6 631 702 - 3 997 780
without rating - 143 973 - - 128 849 -
Total 3 620 515 143 973 8 593 791 6 631 702 128 849 3 997 780

Debt securities available for sale

Rating/portfolio 31.12.2011 31.12.2010
issued by State Treasury issued by banks issued by State Treasury issued by banks
A- to A+ 8 427 574 - 5 659 991 -
BBB- to BBB+ - 50 870 - 50 858
rated differently in entities of the Group 251 454 - 153 323 -
Total 8 679 028 50 870 5 813 314 50 858

Amounts due from banks

Rating/portfolio 31.12.2011 31.12.2010
AAA 8 308 -
AA- to AA+ 342 293 521 466
A- to A+ 1 544 092 1 292 018
BBB- to BBB+ 135 914 350 470
BB- to BB+ 108 2 066
B- to B+ 35 898 43 685
bez ratingu 324 218 91 229
rated differently in entities of the Group 5 709 6 113
Total 2 396 540 2 307 047

Structure of other debt securities issued by other financial entities, non-financial entities and local government bodies by internal rating class:

Debt securities available for sale

Entities with rating 31.12.2011 31.12.2010
carrying amount carrying amount
A (first rate) 25 293 10 233
B (very good) 341 104 304 834
C (good) 758 732 987 295
D (satisfactory) 2 320 579 1 216 372
E (average) 1 241 433 951 813
F (acceptable) 602 792 573 439
G (poor) 84 180 215 261
H (bad) 203 514 -
Total 5 577 627 4 259 247

Debt securities designated upon initial recognition at fair value through profit and loss account

 
Entities with rating 31.12.2011 31.12.2010
carrying amount carrying amount
C (good) 108 922 -
Total 108 922 -

Concentration of credit risk within the Group

The Group defines credit concentration risk as one of arising from a considerable exposure to single entities or to group of entities whose repayment capacity depends on a common risk factor. The Group analyses the risk of credit risk concentration in respect of:

  • the largest business entities,
  • the largest capital groups,
  • ndustries,
  • geographical regions,
  • currencies,
  • exposures with established mortgage collateral.

Concentration by the largest business entities

The Banking Law specifies maximum concentration limits for the Bank, which has an influence upon the Group. According to Article 71.1 of the Banking Law, the total value of the Bank's exposures, off-balance sheet liabilities and commitments granted or shares held by the Bank directly or indirectly in another entity, additional payments into a limited liability company as well as contributions or limited partnership sums - whichever higher - in a limited partnership or limited joint-stock partnership with a risk of one entity or a group of entities related by capital or management, cannot exceed concentration limit, which is 25% of the Bank's own consolidated funds.

As at 31 December 2011 and 31 December 2010, those concentration limits had not been exceeded.

As at 31 December 2011, the level of concentration risk in Group with respect to individual exposures was low – the largest exposure to a single entity was equal to 9.2% and 7.7% of the Bank’s own consolidated funds.

Among 20 largest borrowers of the Group there are exclusively clients of PKO Bank Polski SA.

Total exposure of the Group towards the 20 largest non-banking sector clients:

31.12.2011
31.12.2010
No.
Exposure* Share in the loan portfolio**
No.
Exposure* Share in the loan portfolio**
1.
1 258 272 0.85%
1.
736 873 0.54%
2.
541 970 0.37%
2.
464 247 0.34%
3.
484 761 0.33%
3.
350 441 0,26%
4.
399 939 0.27%
4.
334 671 0.25%
5.
342 022 0.23%
5.
326 815 0.24%
6.
325 542 0.22%
6.
297 702 0,22%
7.
323 299 0.22%
7.
287 418 0.21%
8.
313 271 0.21%
8.
281 790 0.21%
9.
294 361 0.20%
9.
256 297 0.19%
10.
293 060 0.20%
10.
250 000 0.18%
11.
262 785 0.18%
11.
243 947 0.18%
12.
244 256 0.17%
12.
230 999 0.17%
13.
237 574 0.16%
13.
229 921 0.17%
14.
236 898 0.16%
14.
223 904 0.17%
15.
235 466 0.16%
15.
218 157 0.16%
16.
220 566 0.15%
16.
214 447 0.16%
17.
213 811 0.15%
17.
212 636 0.16%
18.
212 868 0.14%
18.
209 785 0.15%
19.
206 108 0.14%
19.
199 078 0.15%
20.
203 980 0.14%
20.
195 894 0.14%
Total
6 850 809 4.65%
Total
5 765 022 4.25%

* Total exposure includes loans, advances, purchased debts, discounts on bills of exchange, realised guarantees and interest receivable.

** Loan portfolio does not include off-balance sheet and capital exposures.

Concentration by the largest capital groups

The greatest exposure of the PKO Bank Polski SA Group towards a group of borrowers amounted to 1.31%. The 5 largest capital groups include only clients of PKO Bank Polski SA.

As at 31 December 2011, the concentration of credit risk by the largest capital groups was low. The greatest exposure of the Group towards a capital group amounted to 10.5% and 9.4% of the Group’s own consolidated funds.

Total exposure of the Group towards the 5 largest capital groups:

31.12.2011 31.12.2010
No. Exposure* Share in the loan portfolio** No. Exposure* Share in the loan portfolio**
1 1 928 808 1.31% 1*** 1 183 394 0.87%
2 1 725 766 1.17% 2 898 546 0.66%
3 1 226 346 0.83% 3 892 191 0.66%
4 950 453 0.65% 4 871 694 0.64%
5 949 050 0.64% 5 848 561 0.63%
Total 6 780 423 4.60% Total 4 694 386 3.46%

* Total exposure includes loans, advances, purchased debts, discounts on bills of exchange, realised guarantees, interest receivable and off-balance sheet and capital exposures.

** Loan portfolio does not include off-balance sheet and capital exposures.

*** Concentration in respect of the entities exempted from concentration limits under the Article 71.3 of the Banking Law.

Concentration by industry

As compared with 31 December 2010 the exposure of the Group in industry sectors has increased by over PLN 7.5 billion. The total exposure in the four largest industry sectors: ‘Industrial processing’, ‘Wholesale and retail trade (...)’, ‘Maintenance of real estate’ and ‘Construction’ amounted to approx. 63% of the total loan portfolio covered by an analysis of the sector.

The analysis of exposure by industry segments is presented in the table below.

Section Description 31.12.2011 31.12.2010
Exposure Number of entities Exposure Number of entities
C Industrial processing 19.19% 11.67% 21.94% 11.51%
G Wholesale and retail trade, repair of motor vehicles, including motorcycles 16.64% 24.52% 17.08% 23.63%
L Maintenance of real estate 15.18% 10.00% 13.29% 11.08%
F Construction 12.17% 13.20% 14.09% 11.35%
O Public administration and national defence, obligatory social security 8.03% 0.47% 6.77% 0.46%
D Electricity, gas, water vapour, hot water and air conditioning production and supply 1.49% 0.20% 1.49% 0.14%
Other exposure 27.30% 39.94% 25.34% 41.83%
Total 100.00% 100.00% 100.00% 100.00%

Concentration by geographical regions

The Group’s loan portfolio is diversified in terms of geographical location.

As at 31 December 2011, the largest concentration of the Group’s loan portfolio was in the mazowiecki region. Half of the Group's loan portfolio is concentrated in four regions: mazowiecki, śląsko-opolski, wielkopolski and małopolsko-świętokrzyski, which is consistent with the regions’ domination both in terms of population and economy of Poland.

Region 31.12.2011 31.12.2010
Polska
mazowiecki 18.12% 17.27%
śląsko-opolski 11.69% 13.04%
wielkopolski 10.44% 10.29%
małopolsko-świętokrzyski 9.47% 9.43%
dolnośląski 7.65% 7.71%
lubelsko-podkarpacki 7.04% 6.87%
zachodnio-pomorski 6.68% 6.96%
łódzki 6.43% 6.49%
pomorski 6.32% 6.41%
kujawsko-pomorski 5.02% 4.94%
warmińsko-mazurski 3.61% 3.57%
podlaski 3.21% 3.14%
other 3.26% 2.74%
Ukraine 1.06% 1,14%
Total 100.00% 100.00%

 

Concentration of credit risk by currency

As at 31 December 2011, the share of exposure in convertible currencies, other than PLN, in the total loan portfolio of the Group amounted to 24.2%. Increase of loans denominated in foreign currencies in 2011 is mainly the consequence of increase of foreign exchange rates in 2011.

The greatest part of the Group’s currency exposures are those in CHF and they relate mainly to the currency loan portfolio of the Bank. In case of particular Group entities, the situation is different, i.e. for the BFL SA Group, the greatest currency exposures are those in EUR (88.2% of currency loan portfolio), similarly for the BTK SA Group – EUR denominated loans (80.9% of currency loan portfolio) and for KREDOBANK SA – USD denominated loans (76.5% of the currency loan portfolio and 30.4% of the company’s total loan portfolio).

Significant concentration risk was identified in KREDOBANK SA, and resulted from the character of the Ukrainian market, where due to weak local currency the majority of loans are granted in a foreign currency.

Currency 31.12.2011 31.12.2010
PLN 75.76% 76.43%
Foreign currencies, of which: 24.24% 23.57%
CHF 16.46% 16.85%
EUR 5.71% 4.73%
USD 1.41% 1.44%
UAH 0.64% 0.54%
GBP 0.02% 0.01%
Razem 100.00% 100.00%

Other types of concentration

In accordance with the Recommendation S and T of the Polish Financial Supervision Authority, the Bank uses internal limits on credit exposures related to the Bank’s customers defining the appetite for the credit risk.

As at 31 December 2011, these limits have not been exceeded.

Renegotiated receivables

The purpose of the restructuring activity of the Group is to maximise the effectiveness of non-performing loan management. The aim is to receive the highest possible recoveries and, at the same time, incur the minimal costs relating to these recoveries in the case of enforcement proceedings.

The restructuring activities include a change in payment terms which is individually agreed on an each contract basis. Such changes may concern:

  1. repayment deadline,
  2. repayment schedule,
  3. interest rate,
  4. payment recognition order,
  5. collateral,
  6. amount to be repaid (reduction of the amount).

As a result of signing and a timely service of a restructuring agreement the loan being restructured is reset from overdue to current. Evaluation of the ability of a debtor to fulfil the restructuring agreement conditions (debt repayment according to the agreed schedule) constitutes an element of the restructuring process. Active restructuring agreements are monitored on an on-going basis.

Past due financial assets

Financial assets which are past due but not impaired at the reporting date include the following financial assets:

Financial assets which are past due but not impaired at the reporting date include the following financial assets:


Click to enlarge

Collateral for the above receivables includes: mortgages, registered pledges, transfers of property rights, account lock-ups, loan exposure insurances, warranties and guarantees.

The Bank made an assessment which proved that for the above-mentioned loan exposures the expected cash flows exceed the carrying amount of these exposures.

Financial assets individually determined to be impaired for which individual impairment allowance has been recognised by carrying amount gross

31.12.2011 31.12.2010
Amounts due from banks 32 385 28 089
Loans and advances to customers 5 701 547 5 899 231
Financial sector 44 757 41 188
corporate loans 44 757 41 188
Non-financial sector 5 649 239 5 850 521
consumer loans 84 444 91 982
mortgage loans 1 262 477 903 038
corporate loans 4 302 318 4 855 501
State budget sector 7 551 7 522
corporate loans 7 551 7 522
Financial assets available for sale 18 058 21 376
issued by financial entities 9 8
issued by non-financial entities 18 049 21 368
Total 5 751 990 5 948 696

Financial assets available for sale for which individual objective evidence of impairment was identified were secured by the following collaterals established for the Group:

  • for loans and advances to customers: ceiling mortgages and ordinary mortgages, registered pledges, promissory notes and transfers of receivables and property right for cash. The financial effect of the collateral held in respect of the amount that best represents the maximum exposure to credit risk as at 31 December 2011 amounted to PLN 3 436 427 thousand (as at 31 December 2010 the amount was PLN 3 751 558 thousand).
  • for investment securities available for sale: blank promissory notes, guarantee, registered pledges on the bank account and on debtor’s shares.

In determining impairment allowances for the above assets, the Group considered the following factors:

  • delay in payment of the amounts due by the debtor,
  • the debt being declared as due and payable,
  • enforcement proceedings against the debtor,
  • declaration of the debtor’s bankruptcy or filling a petition 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,
  • a decline in debtor’s rating to a level indicating a significant threat to the repayment of debt,
  • restructuring actions taken and payment reliefs applied,
  • additional impairment indicators identified for exposures to housing cooperatives arising from mortgage loans of the so called ‘old portfolio’, covered by State Treasury guarantees,
  • expected future cash flows from the exposure and the related collateral,
  • expected future economic and financial position of the client,
  • the extent of execution of forecasts by the client.

Allowances for credit losses

The PKO Bank Polski SA Group performs a monthly review of loan exposures in order to identify loan exposures threatened with impairment, measure the impairment of loan exposures and record impairment charges or provisions. The process of determining the impairment charges and provisions consists of the following stages:

  • identifying the indications of impairment and events significant from the point of view of identifying those indications,
  • registering in the Group’s IT systems the events that are material from the point of view of identifying indications of impairment of credit exposures,
  • determining the method of measuring impairment,
  • measuring impairment and determining an impairment charge or provision,
  • verifying and aggregating the results of the impairment measurement,
  • recording the results of impairment measurement.

The PKO Bank Polski SA Group applies three methods of estimating impairment:

  • the individualised method applied in respect of individually significant loans, for which the objective evidence of impairment was identified or requiring individual assessment due to the transactions specifics and resulting from events determining the repayment of exposure,
  • the portfolio method applied in respect of individually insignificant loans, for which the objective evidence of impairment was identified,
  • the group method (IBNR) applied in respect of the loans for which no objective evidence of impairment was identified, but there is a possibility of losses incurred but not recognised occurring.

The structure of the loan portfolio and loan impairment allowances of the PKO Bank Polski SA Group are presented in Note 23 ‘Loans and advances to customers’.

With regard to other credit exposures, the provision is determined as the difference between the expected amount of exposure in the statement of financial position, which will arise as a result of an off-balance sheet liabilities (from the date at which the assessment is performed till the date of overdue amounts due arising considered as constituting an indication of individual impairment) and the present value of the expected future cash flows obtained from the exposure in the statement of financial position arising out of the off-balance sheet liabilities.

When determining a provision under the individualised method, the expected future cash flows are estimated for each loan exposure separately.

When determining a provision under the portfolio method or the group method, the portfolio parameters are used, estimated using statistical methods, based on the historic observation of exposures with the same features.

The structure of the loan portfolio and loan impairment allowances of the PKO Bank Polski SA Group are presented in Note 23 ‘Loans and advances to customers’.

Credit risk of financial institutions

As at 31 December 2011, the largest exposures of the PKO Bank Polski SA Group were as follows:

Interbank exposure
Counterparty Type of instrument Total
Deposits Derivatives
Counterparty 1 485 944 1 918 487 863
Counterparty 2 366 725 7 854 374 579
Counterparty 3 338 336 (26 002) 338 336
Counterparty 4 130 420 5 636 136 056
Counterparty 5 - 112 015 112 015
Counterparty 6 - 104 000 104 000
Counterparty 7 - 93 667 93 667
Counterparty 8 - 91 009 91 009
Counterparty 9 77 000 (44 328) 77 000
Counterparty 10 - 68 449 68 449
Counterparty 11 62 702 18 62 720
Counterparty 12 - 57 548 57 548
Counterparty 13 - 54 471 54 471
Counterparty 14 - 47 737 47 737
Counterparty 15 - 41 021 41 021
Counterparty 16 - 33 652 33 652
Counterparty 17 - 32 208 32 208
Counterparty 18 - 22 147 22 147
Counterparty 19 - 21 203 21 203
Counterparty 20 - 17 601 17 601

The table below presents the greatest exposures of PKO Bank Polski SA on the interbank market as at 31 December 2010:

Interbank exposure*
Counterparty Type of instrument Total
Deposits Deposits
Counterparty 21 396 030 - 396 030
Counterparty 22 229 437 5 285 234 722
Counterparty 14 - 61 291 61 291
Counterparty 23 - 55 803 55 803
Counterparty 11 16 308 (157) 16 308
Counterparty 24 - 12 895 12 895
Counterparty 25 - 12 347 12 347
Counterparty 17 - 11 393 11 393
Counterparty 10 213 8 377 8 590
Counterparty 26 6 711 - 6 711
Counterparty 27 - 6 500 6 500
Counterparty 1 5 527 5 5 532
Counterparty 28 - 4 641 4 641
Counterparty 29 - 2 496 2 496
Counterparty 12 - 2 220 2 220
Counterparty 15 - 2 165 2 165
Counterparty 30 - 1 419 1 419
Counterparty 31 - 1 331 1 331
Counterparty 32 - 993 993
Counterparty 13 - 862 862

* Excluding exposure to the State Treasury and the National Bank of Poland.

For the purpose of determining exposures: placements and securities issued by the counterparties are stated at nominal values, while derivative instruments are stated at market values, excluding the collateral established by the counterparty.

Total exposure to each counterparty (column ‘Total’) is the sum of exposures arising from placements and securities, increased by the exposure arising from derivative instruments, if it is positive (otherwise the exposure arising from derivatives is not included in total exposure). Exposure arising from all instruments is calculated from the moment of entering into transaction.

As at 31 December 2011 the Bank had signed master agreements (in accordance with ISDA/ Polish Banks Association standards) with 27 local banks and 51 foreign banks and credit institutions. Additionally the Bank was a party of 55 CSA agreements (Credit Support Annex)/Polish Banks Association Agreements with established collateral and 4 ISMA agreements (International Securities Market Association).

Geographical localisation of counterparties

The counterparties generating the 20 largest exposures as at 31 December 2011 and as at 31 December 2010 come from the following countries (classified by location of registered office):

No. Country Counterparty
1. Austria Counterparty 2
2. Belgium Counterparty 28
3. Denmark Counterparty 10
4. France Counterparty 9, Counterparty 13, Counterparty 15
5. Netherlands Counterparty 27
6. Canada Counterparty 32
7. Germany Counterparty 6, Counterparty 20
8. Norway Counterparty 1
9. Poland Counterparty 3, Counterparty 4, Counterparty 12, Counterparty 14, Counterparty 18, Counterparty 19, Counterparty 22, Counterparty 23, Counterparty 24
10. Switzerland Counterparty 17
11. Sweden Counterparty 26
12. USA Counterparty 31
13. United Kingdom Counterparty 5, Counterparty 7, Counterparty 8, Counterparty 11, Counterparty 16, Counterparty 25, Counterparty 29, Counterparty 30
14. Italy Counterparty 21

Counterparty structure by rating

Exposure structure by rating is presented in the table below. The ratings were determined based on external ratings granted by Moody’s, Standard&Poor’s and Fitch (when a rating was granted by two agencies, the lower rating was applied, whereas when a rating was granted by three agencies, the middle rating was applied). Rating for counterparties 1 to 32 was accepted as at 31 December 2011.

Rating Counterparty
AA Counterparty 15, Counterparty 30, Counterparty 32, Counterparty 8
A Counterparty 1, Counterparty 10, Counterparty 11, Counterparty 13, Counterparty 16, Counterparty 17, Counterparty 2, Counterparty 25, Counterparty 26, Counterparty 27, Counterparty 28, Counterparty 3, Counterparty 31, Counterparty 5, Counterparty 6, Counterparty 7, Counterparty 9
BBB Counterparty 12, Counterparty 18, Counterparty 20, Counterparty 21, Counterparty 23, Counterparty 24, Counterparty 4
BB Counterparty 14, Counterparty 22
Without rating Counterparty 19, Counterparty 29

Credit risk of financial institutions on retail markets

In addition to the interbank market exposure discussed above, as at 31 December 2011 the Group had an exposure to financial institutions on the retail market (over PLN 5 million). The structure of this exposure is presented in the table below:

  Nominal value of exposure (in thousand PLN) Country of the counterparty
Statement of financial position item Off-balance
Counterparty 33 50 000 200 000 Poland
Counterparty 34 - 170 870 Ukraine

Management of foreclosed collateral

Foreclosed collaterals as a result of restructuring or debt collection activities are either used by the Group for internal purposes or designated for sale. Details of the foreclosed assets are analysed in order to determine whether they can be used by the Group for internal purposes. All of the assets taken over as a result of restructuring and debt collection activities in the years ended 31 December 2011 and 31 December 2010, respectively, were designated for sale.

Activities undertaken by the Group are aimed at selling assets as soon as possible. In individual and justified cases, assets may be withheld from sale. This occurs only if circumstances indicate that the sale of the assets at a later date is likely to generate greater financial benefits. The primary procedure for a sale of assets is open auction. Other procedures are acceptable in cases where they provide a better chance of finding a buyer and generate higher proceeds for the Group.

The Group takes steps to disseminate broadly to the public the information about assets being sold by publishing it on the Group’s website, placing announcements in the national press, using internet portals i.a. carried out internet auctions and sending offers. In addition, the Group cooperates with external firms operating all over Poland in respect of collection, transportation, storage and intermediation in the sale of assets taken over by the Group as a result of restructuring and debt collection activities. The Group has also entered into cooperation agreements with external companies, which perform valuations of the movable and immovable properties that the Group has foreclosed or would like to foreclose in the course of realisation of collateral.

The carrying amounts of non-financial assets held by the Group, taken over in exchange for debts as at 31 December 2011 amounted to PLN 59 086 thousand and as at 31 December 2010 amounted to PLN 56 585 thousand. The above mentioned amounts are presented in Note 29 ‘Other assets’, in line item ‘Other’ (PLN 11 319 thousand and PLN 11 188 thousand respectively), in Note 26 ‘Inventories’, in line item ‘Supplies’ (PLN 47 767 thousand and PLN 45 397 thousand respectively).

Credit risk reporting

The Bank prepares monthly and quarterly credit risk reports for i.a. ALCO, BCC, the Bank’s Management Board and the Bank’s Supervisory Board. The reporting of credit risk covers specifically cyclic information on the results of risk measurement and the scale of risk exposure of the credit portfolio. In addition to the information concerning the Bank, the reports also contain information about the credit risk level for Group entities (i.a. KREDOBANK SA and the BFL SA Group), which have significant credit risk levels.

Management decisions concerning credit risk

Basic credit risk management tools used by the Bank include:

  • minimum transaction requirements determined for a given type of transaction (e.g. minimum LTV, maximum loan amount, required collateral),
  • the principles of defining credit availability, including cut-offs – the minimum number of points awarded in the process of creditworthiness assessment with the use of a scoring system (for retail clients) or the client’s rating class or cumulative rating class (for corporate clients), which a client must obtain to receive a loan,
  • concentration limits – the limits defined in the Article 71, clause 1 of the Banking Law,
  • industry-related limits – limits which reduce the risk level related to financing institutional clients that conduct business activities in industries characterised by high level of credit risk,
  • limits on credit exposures related to the Bank's customers – the limits defining the appetite for credit risk as result of i.a. the recommendations S and T,
  • credit limits defining the Bank’s maximum exposure to a given client or country in respect of wholesale operations and settlement limits and limits for the period of exposure,
  • competence limits – they define the maximum level of credit decision-making powers with regard to the Bank’s clients, the limits depend primarily on the amount of the Bank’s exposure to a given client (or a group of related clients) and the loan transaction period; the competence limit depends on the credit decision-making level (in the Bank’s organisational structure),
  • minimum credit margins – credit risk margins relating to a given credit transaction concluded by the Bank with a given corporate client but the interest rate offered to a client cannot be lower than the reference rate plus credit risk margin.

Collateral management policy plays a significant role in establishing minimum transaction terms as regards credit risk. The Bank’s and the entities’ of the Group collateral management is meant to secure properly the credit risk to which the Group is exposed, including first of all the fact of establishing collateral that will ensure the highest possible level of recovery in the event of realisation of collateral.

The Bank applies the following rules with respect to accepting legal collateral for loans:

  • in the case of substantial loans (in terms of value), several types of collateral are established, if possible, personal guarantees are combined with collateral established on assets,
  • liquid types of collateral i.e. collateral established on tangible assets, which the Bank is likely to dispose of quickly for a price approximating the value of the assets put up as collateral are preferred,
  • types of collateral which are exposed to a risk of significant adverse fluctuations of value are treated as auxiliary collateral,
  • when an asset is accepted as collateral, an assignment of rights from the insurance policy relating to this asset or the insurance policy issued to the Bank are accepted as additional collateral,
  • effective establishment of collateral in compliance with the loan agreement is necessary to make the funds available.

The policy regarding legal collateral is defined by internal regulations of Group’s subsidiaries.

The type of collateral depends on the product and the type of the client. With regard to real estate financing products, collateral is required to be established as mortgage on the property. Until an effective mortgage is established, the following types of collateral are used (depending on type and amount of loan): an increased credit margin or/and a collateral in the form of a cession of receivables related to the construction agreement, bill of exchange, guarantee or an insurance of receivables.

With regard to retail banking loans for individuals, usually personal guarantees are used (a civil law surety/guarantee, a bill of exchange) or collateral is established on the client’s bank account, his car or securities.

With regard to loans for the financing of small and medium enterprises and corporate clients, collateral can be established on i.a.: trade receivables, bank accounts, movable property, real estate or securities.

When signing a leasing agreement, BFL SA Group, as a proprietor of leased objects, treats them as collateral.