49. Credit risk management

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 apply 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 relating to potential and concluded loan transactions is measured on a cyclical basis, taking into consideration changes in external conditions and in the financial standing of the borrowers,
• credit risk assessment of exposures which are significant due to their risk levels is subject to additional verification by credit risk assessment teams, which are independent of the business teams,
• terms of loan contracts that are offered to a client depend on the credit risk 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 collateral received by the Bank, margins from clients and allowances (provisions) for credit losses.

The above mentioned policies are executed by the Bank through the use of 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 verified and developed to ensure compliance with the internal ratings based requirements (IRB) i.e. advanced credit risk management method, which can be used while calculating capital requirements for credit risk after being approved by the Polish Financial Supervision Authority.

The Group entities, which have significant credit risk levels (the KREDOBANK SA Group, the PKO Leasing SA Group, the BTK SA Group, subsidiary: 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 the activities of these companies.

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 BTK SA Group and the KREDOBANK SA Group and subsidiary: Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. measure credit risk regularly and the results of such measurements are submitted to the Bank.

The KREDOBANK SA Group, the PKO Leasing SA Group and the BTK Group have units responsible for risk in their organisational structures, which are in particular responsible for:

• developing methods of credit risk assessment, recognising provisions and allowances,
• controlling and monitoring credit risk during the lending process,
• the quality and efficiency of restructuring and enforcement of the amounts due from clients.

In these companies, the credit decision limits depend primarily on: the amount of the exposure to a given client, the amount of an individual credit transaction and the period of credit transaction.

The process of credit decision-making at the KREDOBANK SA Group, the PKO Leasing SA Group and the BTK SA Group is supported by credit committees, which are involved in the case of transactions which generate increased credit risk.

Appropriate organisational units of the Banking Risk Division participate in managing the credit risk in the Group companies 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.

49.1. Measurement and assessment of credit risk

Credit risk measurement and assessment methods

In order to assess the level of credit risk and profitability of loan portfolios, the Bank uses different credit risk measurement and valuation methods, including:

• Probability of Default (PD),
• Expected Loss (EL),
• Credit Value at Risk (CVaR),
• effectiveness measures used in scoring methodologies (Accuracy Ratio),
• share and structure of impaired loans (according to IAS),
• coverage ratio of impaired loans with impairment (according to IAS) allowances (coverage ratio),
• cost of risk.

Bank extends regularly the scope of credit risk measures used, taking into account the internal rating-based method (IRB) requirements, and extends the use of risk measures to cover the whole Bank’s loan portfolio with these methods.

The portfolio credit risk measurement methods allow i.a. to reflect the credit risk in the price of products, determine the optimum conditions of financing availability and determine impairment allowances.

The Bank performs analysis and stress-tests regarding the influence of potential changes in macroeconomic environment on the quality of the Bank’s loan portfolio. The test results are reported to the Bank’s authorities. The above mentioned information enables the Bank to identify and take measures to limit the negative influence of unfavourable market changes on the Bank’s performance.

The Bank assesses the risk of individual credit transactions with the use of scoring and rating methods, which are created, developed and supervised by the Banking Risk Division. The assessment methods are supported by specialist application software. The scoring method is defined by Bank’s internal regulations whose main aim is to ensure uniform and objective assessment of credit risk during the credit process.

Rating models for corporate clients

In 2013 the Bank implemented new rating models for corporate clients, including entrepreneurs keeping books of account in accordance with the Accounting Act or in accordance with IAS and keeping tax book of revenues and expenses, and entrepreneurs credited in the formula of specialist financing. The implementation of the evaluation model of entrepreneurs credited in the formula of specialist financing will particularly allow adequate assessment of the credit risk of large projects involving the financing of real estate held for rental or sale (e.g. office space, retail areas, industrial areas) and infrastructure projects (e.g. telecommunications; industrial; public utility infrastructure).

These 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. In addition, the client's risk assessment depends on the size of the enterprise for which risk analysis is made.

The above mentioned models were implemented in a new IT tool that supports the Bank's credit risk assessment related to financing corporate clients.

The evaluation of retail clients credit risk

The assessment of the credit risk of retail clients on two levels: the client’s borrowing capacity and his 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 sources.

In the first half of 2013 in respect of credit risk, the Bank endeavoured to adapt to the requirements of Recommendation T of the Polish Financial Supervision Authority amended in February 2013, relating to best practice in respect of management of risk arising from retail loan exposures. All recommendations have been implemented in the Bank in accordance with the expected date, i.e. to 31 July 2013. In the second half of 2013, the Bank endeavoured to adapt to the requirements of Recommendation S of the PFSA amended in June 2013, relating to best practice in respect of management of mortgage-secured loan exposures. A part of recommendations have been implemented in the end of 2013, in accordance with the PFSA’s expectations, the work on the full adaptation of the Bank to the provisions of this Recommendation will also be continued in the first half of 2014 (a part of recommendations should be implemented no later than to 1 July 2014).

Assessment of credit risk relating to the financing of corporate clients

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 ratings of clients and transactions. The comprehensive measure of credit risk which reflects both risk factors is the aggregate rating.

In the case of corporate customers from the small and medium enterprise segment that meet certain criteria, the Bank assesses credit risk using the scoring method. Such assessment refers to low-value, uncomplicated loan transactions and it is performed in two dimentions: clients’ borrowing capacity and his 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 sources.

The information about ratings and scoring is widely used at the Bank for the purposes of credit risk management, the system of credit decision-making powers, determining the amounts above which independent credit assessment services are activated and in the credit risk assessment and reporting system.

With regard to institutional clients and the small and medium enterprises segment, the Bank implemented a number of improvements in respect of the ongoing portfolio monitoring, which allows for faster response to changes in the existing portfolio of the Bank and the use of an adequate policy and tools for new customers.

In June 2013, the Bank implemented a new methodology for the estimation of portfolio parameters used in the calculation of impairment allowances on credit exposure and provisions for off-balance sheet credit exposures. This methodology uses elements of the modelling portfolio parameters for determining capital requirements with the IRB method. Provides tracking the reaction of the loan portfolio in a more homogeneous groups, and more precise information on the ongoing recoveries.

49.2. Forecasting and monitoring of credit risk

The Group’s exposure to credit risk divided into impaired and not impaired, and into not past due and past due

Maximum exposure to credit risk

Credit quality of financial assets - neither past due nor impaired

Internal rating classes

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 PKO Leasing SA. Information about credit quality of loans granted by the Bank and PKO Leasing SA Group is presented below.

Exposures to corporate clients which are not individually impaired are classified according to customer rating as part of the internal 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). 

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 housing loans) which are not individually significant and thus do not create significant credit risk.

External rating classes

Structure of debt securities, amounts due from banks, neither past due nor impaired by external rating class is presented in the table below: 

31 December 2013

31 December 2012

49.3. 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,
• industries,
• 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 2013 and as at 31 December 2012, those concentration limits had not been exceeded. As at 31 December 2013, the level of concentration risk in Group with respect to individual exposures was low – the largest exposure to a single entity was equal to 5.1% 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: 

Concentration by the largest groups

The greatest exposure of the PKO Bank Polski SA Group towards a group of borrowers amounted to 1.72%. The 5 largest capital groups include only clients of PKO Bank Polski SA.

As at 31 December 2013 and 31 December 2012, the concentration of credit risk by the largest capital groups was low. The greatest exposure of the Group towards a group amounted to 16.6% and 19.9% of the Group’s own consolidated funds. 

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

Concentration by industry

As compared with 31 December 2012 the exposure of the Group in industry sectors has increased by nearly PLN 977 million. The total exposure in the four largest industry sectors: ‘Industrial processing’, ‘Maintenance of real estate’, ‘Wholesale and retail trade (...)’and ‘Construction’ amounted to approx. 60% of the total loan portfolio covered by an analysis of the sector.

Analysis of exposure by industry segments as at 31 December 2013 and as at 31 December 2012 is presented in the table below:

The above mentioned structure does not include a exposure arising from debt securities reclassified from the category ‘available for sale’ to ‘loans and advances’.

Concentration by geographical regions

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

The structure of the loan portfolio by geographic regions is identified in the Group due to the Bank’s client area – a separate area for the retail client (ORD) a separate area for the corporate client (ORK).

Within ORD 11 geographical regions are distinguished. As at 31 December 2013, the largest concentration of the ORD loan portfolio occurs in region of Katowice and Warsaw (ca. 23% of the ORD portfolio).

Within ORK, the Bank distinguish 7 macro-regions and the headquarter. As at 31 December 2013, the largest concentration of the ORK loan portfolio occurs in the Bank’s headquarter and in the central macro region (20% and 17% of the ORK loan portfolio, respectively).

Concentration of credit risk by currency

As at 31 December 2013, the share of exposure in convertible currencies, other than PLN, in the total loan portfolio of the Group amounted to 20.4%.

A decrease in share of loans denominated in foreign currencies in 2013 is a result of a decrease in USD and CHF exchange rates in comparison to 2012. Moreover, a steady growth in new sales of loans offered to corporate clients granted in foreign currencies was observed, offset by a decrease in the involvement of currency portfolio of individual clients, as a result of lack of currency loans for these clients in the Bank’s offer.

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 PKO Leasing SA Group and BTK SA, the greatest currency exposures are those in EUR (96% and 91% of currency loan portfolio of these Groups, respectively). Whereas, for the KREDOBANK SA Group and in the company Finansowa Kompania ‘Prywatne Inwestycje’ (i.e. entities operating in Ukraine) - USD denominated loans constitute the largest part (54% and 80% of the currency loan portfolio of these entities, respectively). 

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 2013, these limits have not been exceeded.

49.4. Forbearance practices

Bank takes as forbearance actions aiming at making changes in the contract terms agreed with a debtor or an issuer, forced by his difficult financial situation (restructuring activities). The aim of the forbearance is to restore a debtor or an issuer the ability to correct execution of the agreement and to maximise the efficiency of non-performing loans management, i.e. obtaining the highest recoveries while minimising the incurred costs, related to these recoveries, which are very high in case of executive proceedings.

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

1. restoration of original terms,
2. repayment schedule,
3. spreading of payments into instalments,
4. interest rate,
5. loans reduction,
6. payment formulas (annuity instalments, diminishing instalment)

As a result of signing and a timely service of forbearance agreement, the loan being restructured is reset from overdue to current. Evaluation of the ability of a debtor to fulfil the forbearance agreement conditions (debt repayment according to the agreed schedule) constitutes an element of the forbearance process. Concluded forbearance agreements are monitored on an on-going basis. Signing of the forbearance agreement, amending the contractual terms due to the financial difficulties of a debtor or an issuer, is one of indications of individual impairment and results in the necessity of analysing the situation in terms of recording impairment charges or provisions revaluating the exposure value (provisions) resulting from this fact.

Loans and advances cease to be subject of forbearance if the following conditions are met simultaneously:

• 3 consecutive payments under the forbearance agreement schedule were settled,
• at least 60 days from the date of the first instalment determined in accordance with the forbearance agreement schedule have elapsed,
• other contractual arrangements are realised on a regular basis and not raising concerns,
• a loan is not covered by the outsourcing of debt collection activities.

Change in carrying amount of loans and advances to customers subjected to forbearance at the beginning and at the end of the period

For a given loan exposure subject to forbearance more than one change in terms of repayment may be applied.

The amount of recognised interest income related to loans and advances to customers, which are subject to forbearance amounted to PLN 391 983 thousand as at 31 December 2013 (as at 31 December 2012 amounted to PLN 398 125 thousand).

49.5. Past due of financial assets

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

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

The conducted assessment proved that for the above mentioned financial assets the expected cash flows fully cover the carrying amount of these exposures.

49.6. Financial assets assessed on an individual basis for which individual impairment allowance has been recognised by carrying amount gross

Financial assets 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 2013 amounted to PLN 4 022 319 thousand (as at 31 December 2012 the amount was PLN 4 203 045 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 housing 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.

49.7. 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 method of determining the amount of impairment charges is dependent on the type of indications of impairment identified and the individual significance of a credit exposure. The events considered as indications of individual impairment are, in particular, as follows:

• a loan being overdue for at least 3 months,
• a significant deterioration in a customer’s internal rating,
• entering into restructuring agreement or granting a discount concerning debt repayment (the indication of impairment is recognised, if the convenience granted to the consumer are forced by economic or legal considerations arising from its financial situation).

When determining the overdue period of a loan, the amounts of interest not paid according to the schedule or instalment payments exceeding accepted thresholds are taken into account.

49.8. Impairment estimating methods

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.

Impairment allowances in respect of a loan exposure correspond to the difference between the carrying amount of the exposure and the present value of the expected future cash flows from a given exposure:

• while calculating impairment allowances under the individualised method, the expected future cash flows are estimated for each loan exposure individually, taking into account the possible scenarios relating to contract execution, weighted by the probability of their realisation,
• an impairment charge in respect of loan exposures under the portfolio method or the group method corresponds to the difference between the carrying amount of the exposures and the present value of the expected future cash flows estimated using statistical methods, based on historic observations of exposures from homogenous portfolios. 

49.9. Off-balance sheet provisions

With regard to off-balance sheet 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 liability.

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.

In the second half of 2013, PKO Bank Polski SA implemented the results of work on more consistent methodology for estimating portfolio parameters used in the process of estimation of impairment allowances and write-downs with the methodology used for the purposes of determining capital requirements using internal rating based method (IRB). Standardised definition of default, including all indications of individual impairment, was included in the new methodology. Methods for portfolio parameters estimation depend on the characteristics of the distinguished portfolios and the possibility of using elements of modelling parameters in accordance with IRB.

Separate sub-portfolios of exposures without default history (FirstDefault) and with default history (ReDefault) were distinguished in PD model, making their further granulation as a result of overdue and client’s rating class or score level. The methodology for estimating recovery rates ensures distinguishing their components, resulting from the recovery, restructuring and debt collection.

Introduced changes improved the impairment measurement accuracy and adequacy of impairment allowances recognised on distinguished loan sub-portfolios. At the level of the entire portfolio they did not cause significant changes in the amount of impairment allowances.

The structure of the loan portfolio and loan impairment allowances of the PKO Bank Polski SA Group are presented in Note 21 ‘Loans and advances to customers’.

49.10. Credit risk of financial institutions

As at 31 December 2013, the largest exposures of the PKO Bank Polski SA Group presents the table below:

For comparison, the largest exposures of the PKO Bank Polski SA Group on the interbank market as at 31 December 2012 presents the table below:

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 2013 the Bank had signed master agreements (in accordance with ISDA/Polish Banks Association standards) with 26 local banks and 56 foreign banks and credit institutions. Additionally the Bank was a party of 63 CSA agreements (CreditSupportAnnex)/Polish Banks Association Agreements with established collateral and 7 ISMA agreements (International Securities Market Association).

Geographical localisation of counterparties

The counterparties generating the 20 largest exposures as at 31 December 2013 come from the following countries (classified by location of registered office):

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 20 was accepted as at 31 December 2013. 

49.11. Credit risk of financial institutions on retail markets

In addition to the interbank market exposure discussed above, as at 31 December 2013 the Group had an exposure to financial institutions on the retail market. The structure of this exposure (over PLN 10 million) is presented in the table below:

49.12.  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 or sale 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 2013 and 31 December 2012, 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 2013 amounted to
PLN 118 131 thousand and as at 31 December 2012 amounted to PLN 76 818 thousand. The above mentioned amounts are presented in
Note 29 ‘Other assets’, in line item ‘Other’ (PLN 12 346 thousand and PLN 12 779 thousand respectively), in Note 26 ‘Inventories’, in line item ‘Supplies’ (PLN 105 785 thousand and PLN 64 039 thousand respectively).

49.13. Credit risk reporting

The Bank prepares monthly and quarterly credit risk reports. The reporting of credit risk covers specifically cyclic information on 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’s subsidiaries (i.a. KREDOBANK SA and the PKO Leasing SA Group), which have significant credit risk levels.

49.14. Management actions concerning credit risk

Basic credit risk management tools used by the Bank include:

• minimum transaction requirements (risk parameters) determined for a given type of transaction (e.g. minimum LTV amount, 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 Group entities 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, in which the disposal is possible without a substantial reduction in their prices at a time, which does not expose the Bank to change the value of the collateral because of the appropriate prices fluctuation of a particular collateral are preferred,
• 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,
• collateral is assessed in terms of the actual possibility of their use as a potential source of the Bank's claim. The basis of the value assessment of the collateral established on tangible assets is the market value,
• 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, a cession of a development contract and an open/closed fiduciary account/guarantee, bill of exchange or warranty.

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, 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, the PKO Leasing SA Group, as a proprietor of leased objects, treats them as collateral.