Definition

Interest rate risk is a risk of losses being incurred on the Group’s balance sheet and off-balance sheet items sensitive to interest rate fluctuations, as a result of changes in the market interest rates.

Risk management objective

To reduce the potential losses resulting from market interest rate fluctuations to an acceptable level by properly shaping the structure of balance sheet and off-balance sheet items.

Risk identification and measurement

The Group uses the following measures of interest rate risk: interest income sensitivity, economic value sensitivity, value at risk (VaR), stress tests and repricing gaps.

Risk control

Control over interest rate risk consists in determining the interest rate risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to interest rate risk.

Risk forecasting and monitoring

The following measures are monitored by the Group on a regular basis:

- the levels of interest rate risk measures;
- utilization of the strategic limit of tolerance to interest rate risk;
- utilization of internal limits and thresholds of interest rate risk.

Reporting

Reports on interest rate risk are prepared on a daily, weekly, monthly and quarterly basis.

Management actions

The main tools for interest rate risk management used by the Group are: interest rate risk management procedures, interest rate risk limits and thresholds.

The Group established limits and thresholds for interest rate risk comprising, among other things, of the following: interest income sensitivity, sensitivity of the economic value and losses.

Financial information

Repricing gap

The repricing gap shows the difference between the present value of assets and liabilities exposed to interest rate risk which are repriced in a given time range, with the items recognized on the transaction date.

Repricing gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |
---|---|---|---|---|---|---|---|---|

PLN (in PLN million) | | 31.12.2017 | ||||||

The Group - Periodic gap | 53 418 | 37 380 | (12 316) | (14 757) | (14 560) | (27 570) | 4 247 | 25 842 |

The Group - Cumulative gap | 53 418 | 90 798 | 78 482 | 63 725 | 49 165 | 21 595 | 25 842 | - |

PLN (in PLN million) | | 31.12.2016 | ||||||

The Group - Periodic gap | 57 495 | 15 015 | (16 037) | (7 719) | (12 247) | (25 600) | 5 938 | 16 845 |

The Group - Cumulative gap | 57 495 | 72 510 | 56 473 | 48 754 | 36 507 | 10 907 | 16 845 | - |

Repricing gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |
---|---|---|---|---|---|---|---|---|

USD (in USD million) | | 31.12.2017 | ||||||

The Group - Periodic gap | 841 | (347) | (445) | (84) | 12 | (109) | 1 | (131) |

The Group - Cumulative gap | 841 | 494 | 49 | (35) | (23) | (132) | (131) | - |

USD (in USD million) | | 31.12.2016 | ||||||

The Group - Periodic gap | 731 | (829) | (159) | 104 | 175 | 8 | (123) | (93) |

The Group - Cumulative gap | 731 | (98) | (257) | (153) | 22 | 30 | (93) | - |

Repricing gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |
---|---|---|---|---|---|---|---|---|

EUR (in EUR million) | | 31.12.2017 | ||||||

The Group - Periodic gap | 3 866 | (1 794) | (803) | (548) | (888) | 141 | 18 | (8) |

The Group - Cumulative gap | 3 866 | 2 072 | 1 269 | 721 | (167) | (26) | (8) | - |

EUR (in EUR million) | | 31.12.2016 | ||||||

The Group - Periodic gap | 2 641 | (960) | (611) | (117) | (132) | (834) | 70 | 57 |

The Group - Cumulative gap | 2 641 | 1 681 | 1 070 | 953 | 821 | (13) | 57 | - |

Repricing gap | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-2 years | 2-5 years | >5 years | Total |
---|---|---|---|---|---|---|---|---|

CHF (in CHF million) | | 31.12.2017 | ||||||

The Group - Periodic gap | 289 | 866 | 75 | (83) | (216) | (2) | (590) | 339 |

The Group - Cumulative gap | 289 | 1 155 | 1 230 | 1 147 | 931 | 929 | 339 | - |

CHF (in CHF million) | | 31.12.2016 | ||||||

The Group - Periodic gap | 119 | 2 962 | 159 | (1 839) | 2 | (325) | (677) | 401 |

The Group - Cumulative gap | 119 | 3 081 | 3 240 | 1 401 | 1 403 | 1 078 | 401 | - |

As at the end of 2017 and 2016, the Group had a positive cumulative gap in PLN in all the time horizons.

Sensitivity measures

The PKO Bank Polski SA Group’s exposure to interest rate risk remained within the adopted limits as at 31 December 2017 and 31 December 2016. The Group was mainly exposed to PLN interest rate risk. Among all the stress tests performed by the Group involving a parallel shift of interest rate curves, the most unfavourable for the Group was the scenario of a parallel shift of interest rate curves in PLN.

Interest rate risk generated by the Group companies did not materially affect the interest rate risk of the entire Group and therefore did not change its risk profile significantly.

The Bank's VaR and a stress-test analysis of the Group’s exposure to interest rate risk are presented in the table below:

SENSITIVITY MEASURE | 31.12.2017 | 31.12.2016 |
---|---|---|

VaR for a 10-day time horizon at the confidence level of 99% (in PLN million)^{1} | 301 | 269 |

Parallel movement of interest rate curves by 200 b.p. (in PLN million) (stress-test)^{2} | 2 150 | 2 059 |

1 Taking into account the nature of the operation of the other Group companies which generate material interest rate risk and the specific characteristics of the market in which they operate, the Group does not determine the consolidated VaR sensitivity measure. Such companies use their own risk measures to manage their interest rate risk. KREDOBANK SA applies the 10-day VaR for interest rates in the main currencies; as at 31 December 2017 it amounted to approx PLN 10 million and as at 31 December 2016, to PLN 9 million.

2 The table presents the value of the most adverse stress-test scenario: a movement of interest rate curves in particular currencies by 200 b.p. upwards and by 200 b.p. downwards.

As at 31 December 2017, the Bank’s interest rate VaR for a 10-day time horizon (10-day VaR) amounted to PLN 302 million, and as at 31 December 2016, the Bank’s VaR amounted to PLN 269 million.