The objective of credit risk management is to reduce 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.
Credit risk is defined as a risk of occurrence of losses due to client’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 client’s ability to repay amounts due to the Bank.
The objective of credit risk management is to reduce 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 assessment relating to potential and concluded loan transactions is measured at the stage of a loan request review and during the monitoring process 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 or its value 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 level generated by the contract,
- loan granting decisions are made only by authorised persons within their authority,
- 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, margins on the credit risk collected from clients and allowances (provisions) for credit losses.
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 measurements are developed to ensure compliance with the internal rating-based method (IRB) requirements, 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 Bank assesses the credit risk of retail clients on two levels: 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 corporate 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 cumulative rating.
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.
In the case of corporate customers from the small and medium enterprises segment 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, 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. It enables tracking the reaction of the loan portfolio in a more homogeneous groups, and more precise information on the realised recoveries.
The structure of loan portfolio and impairment allowances
| 31.12.2013 | 31.12.2012 restated | Change 2013/2012 | |
|---|---|---|---|
| Loans and advances to customers | |||
| Assessed on an individual basis | 7,337.0 | 8,086.2 | (9.3%) |
| Impaired, of which: | 5,532.4 | 6,505.1 | (15.0%) |
| Finance lease receivables | 134.0 | 134.4 | (0.3%) |
| Not impaired, of which: | 1,804.6 | 1,581.1 | 14.1% |
| Finance lease receivables | 193.6 | 128.1 | 51.1% |
| Assessed on a portfolio basis, of which: | 7,328.9 | 6,911.9 | 6.0% |
| Impaired, of which: | 7,328.9 | 6,911.9 | 6.0% |
| Finance lease receivables | 115.9 | 132.2 | (12.3%) |
| Assessed on a group basis (IBNR), of which: | 141,608.1 | 135,261.3 | 4.7% |
| Finance lease receivables | 3,793.7 | 3,177.6 | 19.4% |
| Loans and advances to customers - gross | 156,274.0 | 150,259.3 | 4.0% |
| Allowances on exposures assessed on an individual basis | (2,292.2) | (2,708) | (15.4%) |
| Impaired, of which: | (2,276.1) | (2,647) | (14.0%) |
| Impairment allowances on lease receivables | (46.4) | (35) | 32.0% |
| Allowances on exposures assessed on a portfolio basis, of which: | (3,772.7) | (3,517) | 7.3% |
| Impairment allowances on lease receivables | (75.4) | (74) | 2.5% |
| Allowances on exposures assessed on a group basis (IBNR), of which: | (585.8) | (552) | 6.2% |
| Impairment allowances on lease receivables | (10.9) | (13) | (19.0%) |
| Allowances – total | (6,650.8) | (6,776) | (1.9%) |
| Loans and advances to customers – net | 149,623.3 | 143,483.1 | 4.3% |
In 2013, the value of gross loans granted by the Group and assessed on the individual basis decreased by PLN 749.2 million, assessed on the group basis increased by PLN 6 346.8 million and those assessed on the portfolio basis increased by PLN 417.0 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 and advances in the PKO Bank Polski SA Group’s gross loan portfolio as at 31 December 2013 amounted to 8.2% and decreased by 0.7 pp. as compared to 31 December 2012 (see chapter 3.2).
The coverage ratio of impaired loans for the PKO Bank Polski SA Group as at 31 December 2013 amounted to 51.7%, compared with 50.5% as at 31 December 2012 (see chapter 3.2).
The Group entities, which have significant credit risk levels (the KREDOBANK SA Group, the PKO Leasing SA Group, the BTK SA Group, 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, the KREDOBANK SA Group 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 BTK SA Group is supported by credit committees, which are activated 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 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.