Liquidity risk management

Definition

Liquidity risk is the risk of the inability to settle liabilities as they become due because of an absence of liquid assets. The lack of liquidity may be due to the inappropriate structure of the statement of financial position, a mismatch of cash flows, customers’ failing to settle their liabilities, a sudden withdrawal of funds by the customers or other market developments.

The Group also manages the financing risk which takes into account the risk of losing the existing sources of financing and the inability of renewing the required means of financing or loss of access to new sources of financing.

Risk management objective

To ensure the necessary level of funds needed to settle current and future liabilities (also potential ones) as they become due, taking into account the nature of the activities conducted and the needs which may arise due to changes in the market environment, by appropriately shaping the structure of the statement of financial position and off-balance sheet liabilities.

Risk identification and measurement

The Group uses the following measures of the liquidity risk:

• contractual and adjusted liquidity gap;
• liquidity reserve;
• liquidity surplus;
• the ratio of stable funds to illiquid assets;
• liquidity coverage ratio (LCR);
• domestic supervisory liquidity measures (M1-M4);
• measures of stability of the deposit and loan portfolios;
• liquidity stress tests.

Risk control

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

Risk forecasting and monitoring

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

• utilization of the strategic limit of tolerance to liquidity risk;
• utilization of regulatory liquidity standards;
• utilization of internal limits and thresholds of liquidity risk;
• concentration of the sources of financing;
• early warning indicators – monitored for the early detection of unfavourable developments which may have a negative impact on the Group’s or the financial sector’s liquidity position (when exceeded, early warning indicators trigger liquidity contingency plans).

The Group also makes regular liquidity forecasts which take into account the current developments in the Group operations. Liquidity forecasts include primarily the levels of selected liquidity risk measures envisaged in the forecasts of the Group’s statement of financial position and in selected stress test scenarios.

Reporting

Liquidity reports are developed on a daily, weekly, monthly and quarterly basis and once a year, an in-depth long-term liquidity analysis is performed.

Management actions / Risk management tools

The main tools for liquidity risk management used by the Group are:

• procedures for liquidity risk management, in particular contingency plans;
• limits and thresholds to mitigate short-term, medium-term and long-term liquidity risk;
• national and European supervisory liquidity standards;
• deposit, investment and purchase and sale securities transactions and well as derivatives, including structural currency transactions and transactions for the sale or purchase of securities;
• transactions ensuring long-term financing of the lending activities.

The Group’s policy concerning liquidity is based on keeping a portfolio of an appropriate level of liquidity surplus through an increase in the portfolio of liquid securities, and stable sources of financing (a stable deposit base, in particular). In liquidity risk management, money market instruments, including NBP open market operations, are also used.

Financial information

Liquidity gap

The liquidity gaps presented below represent the sum of adjusted liquidity gaps of the Bank (adjustments relate to, among other things, the Bank’s core deposits from non-financial entities and their maturities, core overdrafts of non-financial entities and their maturities, and liquid securities and their maturities), PKO Bank Hipoteczny and KREDOBANK and the contractual liquidity gaps of the other Group companies.

In all time horizons, the adjusted cumulative liquidity gap of the Group, determined as the sum of the adjusted liquidity gaps of the Bank, PKO Bank Hipoteczny and KREDOBANK and the contractual liquidity gaps of the other Group companies, was positive. As at 31 December 2017 and as at 31 December 2016 this means that the Group has a surplus of the assets receivable over the liabilities payable.

Liquidity reserve and liquidity surplus

Supervisory liquidity measures

In the periods from 31 December 2016 to 31 December 2017, liquidity measures remained above their respective supervisory limits.

Core deposit base

As at 31 December 2017, the core deposit base constituted approx. 93.6% of all deposits placed with the Bank (excluding the interbank market), which represents a decrease of approx. 0.2 p.p. compared with the end of 2016.

Structure of the sources of financing

Contractual cash flows from the Group’s liabilities, excluding derivative financial instruments

The tables below show the contractual maturity analysis presenting the outstanding contractual maturity dates by individual categories of the statement of financial position and off-balance sheet liabilities, excluding derivative financial instruments.

The amounts denominated in foreign currencies have been translated using the average NBP exchange rate as at 31 December 2017 and as at 31 December 2016. The amounts disclosed comprise non-discounted future cash flows, both in respect of principal and interest (if applicable), in accordance with the contract, for the entire period to the date of the liability’s maturity. Where the party to whom the Group has a liability is able to select the settlement deadline, it has been assumed that the earliest date on which the Group is obliged to settle the liability will be taken into account. Where the Group is obliged to settle the liabilities in instalments, each instalment is allocated to the earliest period in which the Group might be obligated to settle. In the case of liabilities where instalment amounts are not fixed, the terms binding as at the reporting date have been adopted.

Contractual flows of the Group’s liabilities as at 31 December 2017 and as at 31 December 2016 by maturity

Contractual cash flows from liabilities in respect of derivative financial instruments

Derivative financial instruments settled on a net basis

Derivative financial instruments settled by the Group on a net basis include:

• interest rate swaps (IRS);
• Forward Rate Agreements (FRA);
• Non Deliverable Forwards (NDF);
• options.

The tables below show the contractual maturity analysis presenting the outstanding contractual maturity dates by individual categories of derivative financial instruments in respect of which the valuation as at the balance sheet date was negative (a liability).

The amounts denominated in foreign currencies have been translated using the average NBP exchange rate as at 31 December 2017 and as at 31 December 2016. In the case of IRS transactions, non-discounted future net cash flows in respect of interest have been presented and in the case of the remaining derivative instruments settled on a net basis, the amount of the valuation as at 31 December 2017 and as at 31 December 2016 respectively was adopted as the cash flow amount.

Derivative financial instruments settled on a gross basis

Derivative financial instruments settled by the Bank on a gross basis include:

• foreign currency swaps;
• foreign currency forwards;
• Cross Currency IRS (CIRS).

The tables below show the contractual maturity analysis, presenting the outstanding contractual maturity dates by individual categories of derivative financial instruments (inflows and outflows) in respect of which valuation the balance sheet date was negative (a liability).

The amounts denominated in foreign currencies have been translated using the average NBP exchange rate as at 31 December 2017 and as at 31 December 2016. The amounts disclosed comprise non-discounted future cash flows, both in respect of principal and interest (if applicable).

Current and non-current assets and liabilities

The Group classifies an asset as current when:

• it expects to realize the asset or intends to sell or consume it in the course of the normal operating cycle;
• it holds the asset primarily for the purpose of trading;
• it expects that the asset will be realized within twelve months after the reporting period, or
• the asset is cash or a cash equivalent, unless it is restricted from being exchanged or used to settle a liability for at least twelve months from the end of the reporting period.

All other assets are classified as non-current.

The Group classifies a liability as current when:

• it expect that the liability will be settled in the normal operating cycle;
• it holds the liability primarily for the purpose of trading;
• the liability matures within twelve months from the end of the reporting period, or
• the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

All other liabilities are classified as non-current.