Credit risk is defined as a risk of occurrence of losses due to counterparty’s default of payments to the Bank or as a risk of decrease in economic value of amounts due to the Bank as a result of deterioration of counterparty’s ability to repay amounts due to the Bank.
The objective of credit risk management is to minimise losses on the credit portfolio as well as to minimise the risk of occurrence of loans threatened with impairment exposure, while keeping expected level of profitability and value of credit portfolio at the same time
The Bank and subsidiaries of the Group applies mainly the following principles of credit risk management:
- each loan transaction is a subject to comprehensive credit risk assessment, which is reflected in an internal rating or credit scoring,
- credit risk assessment related to loan transactions is measured on the stage of loan request review and on a cyclical basis during the monitoring process, taking into consideration changes in external conditions and in the financial standing of the borrowers,
- credit risk assessment of exposures is separated from the sales function by ensuring proper organizational structure, independent development and validation of tools supporting the assessment of credit risk and the independence of the decision accepting derogations from the indication of these tools,
- terms of loan contracts that are offered to a client depend on the credit risk level generated by the contract,
- loan granting decisions are made only by authorised persons,
- credit risk is diversified particularly by geographical location, by industry, by product and by clients,
- expected credit risk level is mitigated by collaterals received by the Bank, credit margins collected from clients and impairment allowances on loan exposures.
The above mentioned policies are executed by the Bank through the use of more advanced credit risk management methods, both on the level of individual exposures and on the level of the whole credit portfolio of the Bank.
These methods are developed to ensure compliance with the internal rating based method (IRB) requirements, i.e. advanced credit risk measurement method, which can be used while calculating own funds requirements for credit risk after being approved by the Polish Financial Supervision Authority.
The Bank assesses the credit risk of retail clients on two dimensions: the client’s borrowing capacity and 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 internal records of the Bank and external databases.
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 primarily, ratings of clients and transactions.
The models were prepared using internal data of the Bank which ensures that they are tailored to the risk profile of the Bank’s clients.
Models are based on a statistical dependence analysis between the default and a customer’s risk scoring. Scoring includes an assessment of the financial indicators, qualitative factors and evaluation of behavioural factors. The client’s risk assessment depends on the size of the enterprise for which analysis is made. In addition, the Bank has implemented a model for assessment of credited entrepreneurs in the formula of specialist financing, which allows adequate credit risk assessment of large projects involving real estate financing (e.g. office space, retail areas, industrial areas) and infrastructure projects (e.g. telecommunications, industrial, public utility infrastructure).
The rating and scoring models are implemented in an IT tool that supports the Bank’s credit risk assessment related to financing corporate clients.
In order to assess the correctness of functioning of methods used in the Bank, methodologies of assessment of credit risk related to individual credit exposures, are reviewed on a periodical basis.
In the case of the small and medium enterprises that meet certain criteria, the Bank assesses credit risk using the scoring method. This assessment is dedicated to low-value, uncomplicated loan transactions and it is performed in two dimensions: clients’ borrowing capacity and creditworthiness. The borrowing capacity assessment involves examination of the client’s economic and financial situation, whereas the creditworthiness assessment involves scoring and evaluation of the client’s credit history obtained from internal records of the Bank and external databases.
The information about ratings and scoring is widely used in the Bank for the purposes of credit risk management, in particular in the system of credit decision-making powers and in the credit risk assessment and reporting system.
The Bank implements improvements for ongoing monitoring of the loan portfolio of small and medium enterprises and customers of corporate and investment Banking segment, it allows a faster response to changes in the existing portfolio and comprehensive information about its quality.
In 2015, the Bank changed the loan process of the customers of corporate and investment Banking segment. According to this model, the risk assessment is performed only by credit risk assessment cells. At the same time making credit decisions for these clients is performed with a double decision by the representatives of the business cells and cells of credit risk assessment.
Process of assessing non-resident (German entities) was also introduced, including those that are running account reporting according to HGB (Handelsgesetzbuch).
The exchange within the Group (with PKO Leasing SA) was initiated in the range of warning signals and customer limits.
In 2015, the Bank implemented application solutions and procedure improvement of the process of measuring the impairment, loan exposures and interest income. Developed methods used in the calculation of write-offs and provisions, including the methodology for estimating the parameters of portfolio, with due regard to the portfolio acquired in 2014 and portfolio of SKOK acquired in 2015.
The structure of loan portfolio and impairment allowances of the PKO Bank Polski SA Group (in PLN million)
| 31.12.2015 | 31.12.2014 | Change 2015/2014 | |
| Loans and advances to customers | |||
| Valued according to the individualized method | 7 549,6 | 7 378,0 | 2,3% |
| Impaired, including: | 5 412,8 | 5 615,9 | -3,6% |
| Receivables from financial leases | 407,1 | 345,0 | 18,0% |
| No identified impairment , including: | 2 136,9 | 1 762,1 | 21,3% |
| Receivables from financial leasing | 332,9 | 300,0 | 11,0% |
| Valued according to the portfolio method | 7 688,1 | 7 361,4 | 4,4% |
| Impaired, including: | 7 688,1 | 7 361,4 | 4,4% |
| Receivables from financial leases | 96,7 | 106,4 | -9,1% |
| Valued according to the group method (IBNR), including: | 183 463,1 | 172 780,5 | 6,2% |
| Receivables from financial leases | 4 899,2 | 4 477,9 | 9,4% |
| Loans and advances to customers - gross | 198 700,9 | 187 519,9 | 6,0% |
| Write-offs on exposures valued according to the individualized method | (2 895,9) | (2 963,7) | -2,3% |
| Impaired, including: | (2 882,4) | (2 948,0) | -2,2% |
| Write-offs on leasing receivables impairement losses | (109,5) | (95,1) | 15,2% |
| Write-offs on exposures valued according to the individualized method | (4 822,2) | (4 426,9) | 8,9% |
| Write-offs on leasing receivables impairement losses | (77,8) | (75,3) | 3,4% |
| Write-offs on exposures valued according to the group method (IBNR), including: | (569,2) | (631,9) | -9,9% |
| Write-offs on leasing receivables impairement losses | (13,1) | (14,5) | -9,5% |
| Write-offs total | (8 287,2) | (8 022,5) | 3,3% |
| Loans and advances to customers - net | 190 413,7 | 179 497,4 | 6,1% |
In 2015 the gross value of granted loans by the Group evaluated with individual method increased by PLN 172 million, with the portfolio method increased by PLN 327 million and evaluated using the portfolio method by PLN 10 683 million.
The chart below presents the share of impaired loans and their coverage ratio.
The share of impaired loans and advances in the PKO Bank Polski SA Group and the coverage ratio to total allowances.
The share of impaired loans of the PKO Bank Polski SA Group in gross loan portfolio as at 31 December 2015 amounted to 6.6% and dropped by 0.3 p.p. y/y compared with 31 December 2014. The coverage ratio of impaired loans for the PKO Bank Polski SA Group as at 31 December 2015 amounted to 61.8%, compared with 63.3 % as at 31 December 2014.
The Group entities, which have significant credit risk levels (the KREDOBANK SA Group, the PKO Leasing SA Group, PKO Bank Hiposteczny SA, Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o.) manage their credit risk individually, but the methods used by them for credit risk assessment and measurement are adjusted to the methods used by PKO Bank Polski SA, taking into account the specific nature of their activities.
Any changes to the solutions used by the Group’s subsidiaries are agreed every time with the Bank's units responsible for risk management.
The PKO Leasing SA Group, the KREDOBANK SA Group and PKO Bank Hipoteczny SA and Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. measure credit risk regularly and the results of such measurements are submitted to the Bank.
The process of credit decision-making at the KREDOBANK SA Group, the PKO Leasing Group and the PKO Bank Hipoteczny SA is supported by credit committees, which are activated in the case of credit transactions which generate increased credit risk.
Appropriate organisational units of the Banking Risk Division and organisational unit of the Risk Management Area dedicated to integration of risk management in the Group participate in managing the credit risk in the Group entities by giving their opinions on projects and periodically reviewing internal regulations of these companies relating to the assessment of credit risk and preparation of recommendations relating to amendments in the drafts of regulations. The Bank supports implementation of the recommended changes in principles for assessing credit risk in the Group entities.