The objective of credit risk management is to reduce losses on the credit portfolio as well as to minimise the risk of occurrence of loan exposures threatened with impairment.
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 loan exposures threatened with impairment, 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 which are significant due to their risk levels or their 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,
- 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 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 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 ratings of clients and transactions. The cumulative credit rating is a synthetic measure of credit risk.
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 corporate customers and 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.
In 2014, the Bank has implemented the housing cooperatives’ evaluation model with the use of the scoring method.
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.
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.
The structure of loan portfolio and impairment allowances of the PKO Bank Polski SA Group (in PLN million)
|Loans and advances to customers|
|Assessed on an individual basis||7,378.0||7,337.0||0.6%|
|Impaired, of which:||5,615.9||5,532.4||1.50%|
|Finance lease receivables||345.0||134||2.6x|
|Not impaired, of which:||1,762.1||1,804.6||-2.4%|
|Finance lease receivables||300.0||193.6||55.0%|
|Assessed on a portfolio basis, of which:||7,361.4||7,328.9||0.4%|
|Impaired, of which:||7,361.4||7,328.9||0.4%|
|Finance lease receivables||106.4||115.9||-8.2%|
|Assessed on a group basis (IBNR), of which:||172,780.5||141,608.1||22.0%|
|Finance lease receivables||4,477.9||3,793.7||18.0%|
|Loans and advances to customers - gross||187,519.9||156,274.0||20.0%|
|Allowances on exposures assessed on an individual basis||(2,963.7)||(2,292.2)||29.3%|
|Impaired, of which:||(2,948,0)||(2,276.1)||29.5%|
|Impairment allowances on lease receivables||(95.1)||(46.4)||2x|
|Allowances on exposures assessed on a portfolio basis, of which:||(4,426.9)||(3,772.7)||17.3%|
|Impairment allowances on lease receivables||(75.3)||(75.4)||-0.1%|
|Allowances on exposures assessed on a group basis (IBNR), of which:||(631.9)||(585.8)||7.9%|
|Impairment allowances on lease receivables||(14.5)||(10.9)||32.9%|
|Allowances – total||(8,022.5)||(6,650.8)||20.6%|
|Loans and advances to customers – net||179,497.4||149,623.3||20.0%|
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 2014 amounted to 6.9% and dropped by 1.3% y/y compared with 31 December 2013.
The coverage ratio of impaired loans for the PKO Bank Polski SA Group as at 31 December 2014 amounted to 61.8%, compared with 51.7 % as at 31 December 2014.
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 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 BTK SA Group and 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 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.