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mBank S.A. Group
Consolidated
IFRS Financial Statements
2022
This document is a translation from the original Polish version. In case of any discrepancies between the Polish and English versions, the Polish version shall prevail.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
2
SELECTED FINANCIAL DATA
The selected financial data presented below are supplementary information to these Consolidated Financial Statements of mBank S.A. Group for 2022.
PLN thousand
EUR thousand
Year ended 31 December
Year ended 31 December
SELECTED CONSOLIDATED FINANCIAL DATA
2022
2021
- restated
2022
2021
- restated
I.
Interest income
9 265 806
4 454 007
1 976 368
973 022
II.
Fee and commission income
3 026 096
2 692 626
645 457
588 231
III.
Net trading income
97 198
96 890
20 732
21 167
IV.
Operating profit
576 156
17 596
122 892
3 844
V.
Profit / (loss) before income tax
(108 019)
(591 031)
(23 040)
(129 117)
VI.
Net profit / (loss) attributable to Owners of mBank S.A.
(702 691)
(1 178 753)
(149 882)
(257 510)
VII.
Net profit / (loss) attributable to non-controlling interests
164
(60)
35
(13)
VIII.
Net cash flows from operating activities
8 027 061
10 803 934
1 712 147
2 360 226
IX.
Net cash flows from investing activities
(495 740)
(508 006)
(105 740)
(110 979)
X.
Net cash flows from financing activities
(3 783 916)
(1 994 726)
(807 098)
(435 768)
XI.
Net increase / decrease in cash and cash equivalents
3 747 405
8 301 202
799 310
1 813 479
XII.
Basic earnings / (loss) per share (in PLN/EUR)
(16.57)
(27.82)
(3.53)
(6.08)
XIII.
Diluted earnings / (loss) per share (in PLN/EUR)
(16.55)
(27.77)
(3.53)
(6.07)
XIV.
Declared or paid dividend per share (in PLN/EUR)
-
-
-
-
PLN thousand
EUR thousand
As at
As at
SELECTED CONSOLIDATED FINANCIAL DATA
31.12.2022
31.12.2021
- restated
31.12.2022
31.12.2021
- restated
I.
Total assets
209 892 113
198 373 374
44 754 070
43 130 272
II.
Amounts due to other banks
3 270 223
5 266 179
697 291
1 144 971
III.
Amounts due to customers
174 130 914
157 071 670
37 128 918
34 150 470
IV.
Equity attributable to Owners of mBank S.A.
12 713 001
13 716 050
2 710 719
2 982 139
V.
Non-controlling interests
2 030
1 866
433
406
VI.
Registered share capital
169 734
169 540
36 191
36 861
VII.
Number of shares
42 433 495
42 384 884
42 433 495
42 384 884
VIII.
Book value per share (in PLN/EUR)
299.60
323.61
63.88
70.36
IX.
Total capital ratio (%)
16.4
16.6
16.4
16.6
X.
Common Equity Tier I capital ratio (%)
13.8
14.2
13.8
14.2
The following exchange rates were used in translating selected financial data into EUR:
■ for items of the consolidated statement of financial position – exchange rate announced by the National
Bank of Poland as at 31 December 2022: EUR 1 = 4.6899 PLN, 31 December 2021: EUR 1 = 4.5994 PLN;
■ for items of the consolidated income statement and the consolidated statement of cash flows –
exchange rate calculated as the arithmetic mean of exchange rates announced by the National Bank of Poland as at the end of each month of 2022 and 2021: EUR 1 = 4.6883 PLN and EUR 1 = 4.5775 PLN, respectively.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
3
CONTENTS
CONSOLIDATED INCOME STATEMENT ........................................................................................ 5
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ...................................................... 6
CONSOLIDATED STATEMENT OF FINANCIAL POSITION ............................................................. 7
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............................................................... 8
CONSOLIDATED STATEMENT OF CASH FLOWS ........................................................................... 9
EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ............................... 10
1. Information regarding the Group of mBank S.A. ............................................................... 10
2. Description of relevant accounting policies ....................................................................... 13
2.1. Accounting basis ................................................................................................. 13
2.2. Consolidation ...................................................................................................... 14
2.3. Interest income and expenses ............................................................................... 15
2.4. Fee and commission income ................................................................................. 15
2.5. Revenue and expenses from sale of insurance products bundled with loans ................. 17
2.6. Segment reporting .............................................................................................. 17
2.7. Financial assets ................................................................................................... 17
2.8. Offsetting of financial instruments ......................................................................... 20
2.9. Impairment of financial assets .............................................................................. 20
2.10. Financial guarantee contracts ................................................................................ 22
2.11. Cash and cash equivalents .................................................................................... 22
2.12. Sell and repurchase agreements ............................................................................ 22
2.13. Derivative financial instruments and hedge accounting ............................................. 23
2.14. Gains and losses on initial recognition .................................................................... 25
2.15. Financial liabilities measured at amortised cost ........................................................ 25
2.16. Intangible assets ................................................................................................. 25
2.17. Tangible fixed assets ........................................................................................... 26
2.18. Investment properties .......................................................................................... 27
2.19. Inventories ......................................................................................................... 27
2.20. Non-current assets held for sale and discontinued operations .................................... 27
2.21. Deferred income tax ............................................................................................ 28
2.22. Assets repossessed for debt .................................................................................. 29
2.23. Prepayments, accruals and deferred income ........................................................... 29
2.24. Leasing .............................................................................................................. 29
2.25. Provisions .......................................................................................................... 31
2.26. Post-employment benefits and other employee benefits ........................................... 31
2.27. Equity ................................................................................................................ 32
2.28. Valuation of items denominated in foreign currencies ............................................... 33
2.29. Trust and fiduciary activities ................................................................................. 34
2.30. New standards, interpretations and amendments to published standards .................... 34
2.31. Comparative data ................................................................................................ 37
3. Risk management ........................................................................................................ 41
3.1. Risk management in mBank Group in 2022 – regulatory environment ........................ 41
3.2. Principles of risk management ............................................................................... 43
3.3. Credit risk .......................................................................................................... 46
3.4. Concentration of assets, liabilities and off-balance sheet items .................................. 61
3.5. Market risk ......................................................................................................... 63
3.6. Currency risk ...................................................................................................... 66
3.7. Interest rate risk ................................................................................................. 67
3.8. Liquidity risk ....................................................................................................... 71
3.9. Operational risk .................................................................................................. 78
3.10. Compliance risk .................................................................................................. 79
3.11. Business risk ...................................................................................................... 80
3.12. Model risk .......................................................................................................... 81
3.13. Reputational risk ................................................................................................. 81
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
4
3.14. Capital risk ......................................................................................................... 81
3.15. FX loans portfolio risk .......................................................................................... 82
3.16. Tax risk ............................................................................................................. 82
3.17. Fair value of assets and liabilities .......................................................................... 82
4. Major estimates and judgments made in connection with the application of accounting policy principles .................................................................................................................... 90
5. Business segments ....................................................................................................... 93
6. Net interest income ...................................................................................................... 97
7. Net fee and commission income ..................................................................................... 98
8. Dividend income .......................................................................................................... 99
9. Net trading income ...................................................................................................... 99
10. Gains or losses on non-trading financial assets mandatorily at fair value through profit or loss ............................................................................................................................... 100
11. Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss .................................................................................................. 100
12. Other operating income .............................................................................................. 101
13. Overhead costs .......................................................................................................... 102
14. Other operating expenses ........................................................................................... 103
15. Impairment or reversal of impairment on financial assets not measured at fair value through profit or los ............................................................................................................... 103
16. Income tax expense ................................................................................................... 104
17. Earnings / (loss) per share .......................................................................................... 105
18. Other comprehensive income ....................................................................................... 105
19. Cash and balances with central bank ............................................................................ 106
20. Financial assets and liabilities held for trading and derivatives held for hedges ................... 107
21. Non-trading financial assets mandatorily at fair value through profit or loss ....................... 118
22. Financial assets at fair value through other comprehensive income ................................... 119
23. Financial assets at amortised cost ................................................................................ 121
24. Non-current assets and disposal groups classified as held for sale and liabilities held for sale 128
25. Intangible assets ........................................................................................................ 128
26. Tangible assets .......................................................................................................... 130
27. Investment properties ................................................................................................ 133
28. Other assets .............................................................................................................. 133
29. Financial liabilities measured at amortised cost .............................................................. 134
30. Other liabilities .......................................................................................................... 139
31. Provisions ................................................................................................................. 139
32. Assets and liabilities for deferred income tax .................................................................. 141
33. Proceedings before a court, arbitration body or public administration authority ................... 143
34. Legal risk related to mortgage and housing loans granted to individual customers in CHF ..... 146
35. Off-balance sheet liabilities .......................................................................................... 153
36. Pledged assets ........................................................................................................... 155
37. Registered share capital .............................................................................................. 156
38. Share premium .......................................................................................................... 157
39. Retained earnings ...................................................................................................... 157
40. Other components of equity ......................................................................................... 158
41. Dividend per share ..................................................................................................... 158
42. Explanatory notes to the statement of cash flow ............................................................. 158
43. Share-based incentive programmes .............................................................................. 161
44. Transactions with related entities ................................................................................. 163
45. Acquisitions and disposals ........................................................................................... 166
46. Prudential consolidation .............................................................................................. 166
47. Capital adequacy ........................................................................................................ 169
48. Events after the balance sheet date .............................................................................. 173
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
5
CONSOLIDATED INCOME STATEMENT
Year ended 31 December
Note
2022
2021
- restated
Interest income, including:
6
9 265 806
4 454 007
Interest income accounted for using the effective interest method
9 093 789
3 970 220
Income similar to interest on financial assets at fair value through profit or loss
172 017
483 787
Interest expenses
6
( 3 356 567 )
( 327 694 )
Net interest income
5 909 239
4 126 313
Fee and commission income
7
3 026 096
2 692 626
Fee and commission expenses
7
( 906 019 )
( 824 875 )
Net fee and commission income
2 120 077
1 867 751
Dividend income
8
5 236
5 046
Net trading income
9
97 198
96 890
Gains or losses on non-trading financial assets mandatorily at fair value through profit or loss
10
( 50 924 )
4 608
Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss
11
( 91 548 )
93 690
Other operating income
12
265 162
232 384
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss
15
( 803 217 )
( 873 226 )
Costs of legal risk related to foreign currency loans
34
( 3 112 265 )
( 2 758 079 )
Overhead costs
13
( 2 851 881 )
( 2 020 629 )
Depreciation
( 467 308 )
( 436 254 )
Other operating expenses
14
( 443 613 )
( 320 898 )
Operating profit
576 156
17 596
Tax on the Bank's balance sheet items
( 684 175 )
( 608 627 )
Profit / (loss) before income tax
( 108 019 )
( 591 031 )
Income tax expense
16
( 594 508 )
( 587 782 )
Net profit / (loss)
( 702 527 )
( 1 178 813 )
Net profit / (loss) attributable to:
- Owners of mBank S.A.
( 702 691 )
( 1 178 753 )
- Non-controlling interests
164
( 60 )
Earnings / (loss) per share (in PLN)
17
( 16,57 )
( 27,82 )
Diluted earnings / (loss) per share (in PLN)
17
( 16,55 )
( 27,77 )
Notes presented on pages 10–173 constitute an integral part of these Consolidated Financial Statements.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
6
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December
Note
2022
2021
Net profit / (loss)
( 702 527 )
( 1 178 813 )
Other comprehensive income net of tax, including:
18
( 313 225 )
( 1 788 889 )
Items that may be reclassified subsequently to the income statement
( 316 696 )
( 1 807 384 )
Exchange differences on translation of foreign operations (net)
6 194
4 898
Cash flows hedges (net)
18
( 296 666 )
( 919 332 )
Cost of hedge (net)
27 105
-
Change in valuation of debt instruments at fair value through other comprehensive income (net)
18
( 53 329 )
( 892 950 )
Items that will not be reclassified to the income statement
3 471
18 495
Actuarial gains and losses relating to post-employment benefits (net)
18
3 471
7 059
Reclassification to investment properties (net)
18
-
11 436
Total comprehensive income (net)
( 1 015 752 )
( 2 967 702 )
Total comprehensive income (net), attributable to:
- Owners of mBank S.A.
( 1 015 916 )
( 2 967 642 )
- Non-controlling interests
164
( 60 )
Notes presented on pages 10–173 constitute an integral part of these Consolidated Financial Statements.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
7
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ASSETS
Note
31.12.2022
31.12.2021
- restated
01.01.2021
- restated
Cash and balances with the Central Bank
19
16 014 318
12 202 266
3 968 691
Financial assets held for trading and hedging derivatives
20
2 524 652
2 589 076
2 586 721
Non-trading financial assets mandatorily at fair value through profit or loss, including:
21
1 044 189
1 417 191
1 784 691
Equity instruments
185 788
224 389
202 304
Debt securities
45 009
81 128
76 068
Loans and advances to customers
813 392
1 111 674
1 506 319
Financial assets at fair value through other comprehensive income – Debt securities
22
35 117 450
36 206 059
35 498 061
Financial assets at amortised cost, including:
23
148 138 819
139 919 159
129 883 521
Debt securities
19 002 527
16 164 103
15 952 501
Loans and advances to banks
9 806 262
7 229 681
7 354 268
Loans and advances to customers
119 330 030
116 525 375
106 576 752
Fair value changes of the hedged items in portfolio hedge of interest rate risk
20
3 064
( 110 033 )
( 10 986 )
Non-current assets and disposal groups classified as held for sale
24
26 747
31 247
-
Intangible assets
25
1 391 707
1 283 953
1 178 698
Tangible assets
26
1 484 933
1 542 250
1 514 577
Investment properties
27
136 909
127 510
-
Current income tax assets
28 302
28 147
23 957
Deferred income tax assets
32
1 875 728
1 392 350
853 880
Other assets
28
2 105 295
1 744 199
1 578 820
TOTAL ASSETS
209 892 113
198 373 374
178 860 631
LIABILITIES AND EQUITY
LIABILITIES
Financial liabilities held for trading and hedging derivatives
20
2 086 111
2 011 182
1 338 564
Financial liabilities measured at amortised cost, including:
29
190 567 661
179 348 925
156 673 052
Amounts due to banks
3 270 223
5 266 179
5 654 331
Amounts due to customers
174 130 914
157 071 670
133 672 142
Lease liabilities
960 324
956 838
771 935
Debt securities issued
9 465 479
13 429 782
13 996 317
Subordinated liabilities
2 740 721
2 624 456
2 578 327
Fair value changes of the hedged items in portfolio hedge of interest rate risk
20
( 1 528 582 )
( 1 055 478 )
48 638
Liabilities classified as held for sale
24
7 375
7 425
-
Provisions
31
1 362 259
836 900
535 179
Current income tax liabilities
571 456
61 910
225 796
Deferred income tax liabilities
32
-
89
690
Other liabilities
30
4 110 802
3 444 505
3 363 645
TOTAL LIABILITIES
197 177 082
184 655 458
162 185 564
EQUITY
Equity attributable to Owners of mBank S.A.
12 713 001
13 716 050
16 673 133
Share capital:
3 604 778
3 593 944
3 587 035
Registered share capital
37
169 734
169 540
169 468
Share premium
38
3 435 044
3 424 404
3 417 567
Retained earnings:
39
10 625 836
11 326 494
12 501 597
- Profit from the previous years
11 328 527
12 505 247
12 397 766
- Profit (loss) for the current year
( 702 691 )
( 1 178 753 )
103 831
Other components of equity
40
( 1 517 613 )
( 1 204 388 )
584 501
Non-controlling interests
2 030
1 866
1 934
TOTAL EQUITY
12 715 031
13 717 916
16 675 067
TOTAL LIABILITIES AND EQUITY
209 892 113
198 373 374
178 860 631
Notes presented on pages 10–173 constitute an integral part of these Consolidated Financial Statements.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
8
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Changes in equity from 1 January to 31 December 2022
Share capital
Retained earnings
Registered share capital
Share premium
Profit from the previous years
Profit/loss for the current year
Other components of equity
Equity attributable to Owners of mBank S.A.
Non-controlling interests
Total equity
Equity as at 1 January 2022
169 540
3 424 404
12 505 247
( 1 178 753 )
( 1 204 388 )
13 716 050
1 866
13 717 916
Transfer of profit/loss from previous year
-
-
( 1 178 753 )
1 178 753
-
-
-
-
Total comprehensive income
-
-
-
( 702 691 )
( 313 225 )
( 1 015 916 )
164
( 1 015 752 )
Issuance of ordinary shares
194
-
-
-
-
194
-
194
Stock option program for employees
-
10 640
2 033
-
-
12 673
-
12 673
value of services provided by the employees
-
-
12 673
-
-
12 673
-
12 673
settlement of exercised options
-
10 640
( 10 640 )
-
-
-
-
-
Equity as at 31 December 2022
169 734
3 435 044
11 328 527
( 702 691 )
( 1 517 613 )
12 713 001
2 030
12 715 031
Changes in equity from 1 January to 31 December 2021
Share capital
Retained earnings
Registered share capital
Share premium
Profit from the previous years
Profit/loss for the current year
Other components of equity
Equity attributable to Owners of mBank S.A.
Non-controlling interests
Total equity
Equity as at 1 January 2021
169 468
3 417 567
12 397 766
103 831
584 501
16 673 133
1 934
16 675 067
Transfer of profit/loss from previous year
-
-
103 831
( 103 831 )
-
-
-
-
Total comprehensive income
-
-
-
( 1 178 753 )
( 1 788 889 )
( 2 967 642 )
( 60 )
( 2 967 702 )
Issuance of ordinary shares
72
-
-
-
-
72
-
72
Other increase or decrease in equity
-
-
-
-
-
-
( 8 )
( 8 )
Stock option program for employees
-
6 837
3 650
-
-
10 487
-
10 487
value of services provided by the employees
-
-
10 487
-
-
10 487
-
10 487
settlement of exercised options
-
6 837
( 6 837 )
-
-
-
-
-
Equity as at 31 December 2021
169 540
3 424 404
12 505 247
( 1 178 753 )
( 1 204 388 )
13 716 050
1 866
13 717 916
Notes presented on pages 10–173 constitute an integral part of these Consolidated Financial Statements.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
9
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December
Note
2022
2021
- restated
Profit / (loss) before income tax
( 108 019 )
( 591 031 )
Adjustments:
8 135 080
11 394 965
Income taxes paid
( 454 867 )
( 837 687 )
Depreciation, including depreciation of fixed assets provided under operating lease
25,26
498 701
468 584
Foreign exchange (gains) losses related to financing activities
473 497
205 130
(Gains) losses on investing activities
2 490
14 965
Dividends received
8
( 5 236 )
( 5 046 )
Interest income (income statement)
6
( 9 265 806 )
( 4 454 007 )
Interest expense (income statement)
6
3 356 567
327 694
Interest received
9 227 748
4 698 299
Interest paid
( 2 657 442 )
( 234 411 )
Changes in loans and advances to banks
( 2 486 657 )
96 423
Changes in financial assets and liabilities held for trading and hedging derivatives
( 954 096 )
( 1 452 131 )
Changes in loans and advances to customers
( 2 890 289 )
( 9 448 118 )
Changes in financial assets at fair value through other comprehensive income
1 261 938
( 2 054 013 )
Changes in securities at amortised cost
( 2 806 315 )
( 284 047 )
Changes of non-trading securities mandatorily at fair value through profit or loss
57 934
( 17 617 )
Changes in other assets
( 382 611 )
( 142 056 )
Changes in amounts due to banks
( 2 123 045 )
949 944
Changes in amounts due to customers
16 669 811
23 405 905
Changes in lease liabilities
6 436
( 42 226 )
Changes in issued debt securities
( 662 074 )
( 246 519 )
Changes in provisions
528 816
301 721
Changes in other liabilities
739 580
144 178
A. Cash flows from operating activities
8 027 061
10 803 934
Disposal of shares in subsidiaries, net of cash disposed
122
5 147
Disposal of intangible assets and tangible fixed assets
61 723
85 802
Dividends received
8
5 236
5 046
Other investing outflows
289
-
Acquisition of shares in subsidiaries
-
( 14 597 )
Purchase of intangible assets and tangible fixed assets
( 563 110 )
( 589 404 )
B. Cash flows from investing activities
( 495 740 )
( 508 006 )
Issue of debt securities
29
1 792 187
3 497 354
Issue of ordinary shares
194
72
Repayments of loans and advances from banks
-
( 1 358 250 )
Redemption of debt securities
( 5 366 177 )
( 3 980 595 )
Payments of lease liabilities
( 115 629 )
( 93 616 )
Interest paid from loans and advances received from banks and from subordinated liabilities
( 94 491 )
( 59 691 )
C. Cash flows from financing activities
( 3 783 916 )
( 1 994 726 )
Net increase / decrease in cash and cash equivalents (A+B+C)
3 747 405
8 301 202
Effects of exchange rate changes on cash and cash equivalents
4 020
( 9 649 )
Cash and cash equivalents at the beginning of the reporting period
12 540 599
4 249 046
Cash and cash equivalents at the end of the reporting period
42
16 292 024
12 540 599
Notes presented on pages 10–173 constitute an integral part of these Consolidated Financial Statements.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
10
EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Information regarding the Group of mBank S.A.
Name of reporting entity or other means of identification
mBank S.A.
Explanation of change in name of reporting entity or other means of identification from end of preceding reporting period
not applicable
Domicile of entity
Poland
Legal form of entity
joint stock company
Country of incorporation
Poland
Address of registered office of entity
Poland, 00-850 Warszawa, ul. Prosta 18
Principal place of business
Poland, 00-850 Warszawa, ul. Prosta 18
Description of nature of entity’s operations and principal activities
providing banking services and consulting and advisory services in financial matters, as well as of conducting business activities within the scope described in its by-laws
Name of parent entity
Commerzbank AG
Name of ultimate parent of group
Commerzbank AG
The Group of mBank S.A. (“Group”, “mBank Group”) consists of entities under the control of mBank S.A. (“Bank”, “mBank”) of the following nature:
■ strategic - shares and equity interests in companies supporting particular business segments of mBank S.A. (corporate and investment banking segment, retail banking segment as well as treasury and other segment) with an investment horizon not shorter than 3 years. The formation or acquisition of these companies was intended to expand the range of services offered to the clients of the Bank;
■ other - shares and equity interests in companies acquired in exchange for receivables, in transactions resulting from composition and work out agreements with debtors, with the intention to recover a part or all claims to loan receivables and insolvent companies under liquidation or receivership.
The parent entity of the Group is mBank S.A., which is a joint stock company registered in Poland and a part of Commerzbank AG Group.
The head office of the Bank is located at 18 Prosta St., Warsaw.
The shares of the Bank are listed on the Warsaw Stock Exchange.
As at 31 December 2022, mBank S.A. Group covered by the Consolidated Financial Statements comprised the following companies:
mBank S.A. – the parent entity
Bank functions under the name of mBank S.A. with the head office located in Poland in Warsaw, Prosta 18 Street, KRS 0000025237, REGON 001254524, NIP 526-021-50-88.
According to the by-laws of the Bank, the scope of its business consists of providing banking services and consulting and advisory services in financial matters, as well as of conducting business activities within the scope described in its by-laws. The Bank operates within the scope of corporate, institutional and retail banking (including private banking) throughout the whole country and operates trade and investment activities as well as brokerage activities.
The Bank provides services to Polish and international corporations and individuals, both in the local currency (Polish Zloty, PLN) and in foreign currencies.
The Bank may open and maintain accounts in Polish and foreign banks and can possess foreign exchange assets and trade in them.
The Bank conducts retail banking business in the Czech Republic and Slovakia through its foreign mBank branches in these countries.
As at 31 December 2022 the headcount of mBank S.A. amounted to 6 382 FTEs (Full Time Equivalents) and of the Group to 7 014 FTEs (31 December 2021: Bank 6 075 FTEs, Group 6 738 FTEs).
As at 31 December 2022 the employment in mBank S.A. was at 7 387 persons and in the Group at 8 364 persons (31 December 2021: Bank 7 088 persons, Group 9 464 persons).
The business activities of the Group are conducted in the following business segments presented in detail in Note 5.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
11
Corporate and Investment Banking Segment
■ mBank Hipoteczny S.A., subsidiary (the corporate segment of the company’s activity)
The core business of mBank Hipoteczny S.A. is to ensure stable and long-term financing of the Group by issuing mortgage bonds. The company does not conduct independent credit operations but uses the pooling model in cooperation with mBank. The company performs market analysis and provides consultancy services addressed to investors and commercial real estate sector entities.
■ mFaktoring S.A., subsidiary
The company operates in Poland and provides factoring services for domestic, export and import transactions.
■ mLeasing Sp. z o.o., subsidiary (the corporate segment of the company’s activity)
The company’s core business is to lease machinery, equipment, technology lines, passenger cars, vans and trucks, tractors, trailers and semi-trailers, buses, vehicles, special equipment, ships, aircraft, rolling stock, office equipment, computer hardware. mLeasing’s offer for corporate clients includes leasing of real estate, mainly offices, hotels, warehouses and logistics centres, petrol stations, public buildings and municipal infrastructure. The company has a network of offices in the largest cities of Poland.
■ Asekum Sp. z o.o., subsidiary (the corporate segment of the company’s activity)
The company operates as an insurance agent, mainly in the field of insurance of leasing objects. The Bank holds indirectly through mLeasing Sp. z o.o. 100% shares in the company.
Retail Banking Segment
■ mFinanse S.A., subsidiary
mFinanse S.A. offers mBank S.A. and third-party banks’ products. Its offer includes mortgage loans, business products, cash loans, insurance products and leasing. Distribution is carried out throughout the whole country in 40 offices of mFinanse and 149 mKiosks placed in shopping centres.
■ mFinanse CZ s.r.o., subsidiary
■ mFinanse SK s.r.o., subsidiary
The mFinanse companies in the Czech Republic and Slovakia operate in the area of financial intermediation in the sale of banking products distributed by mBank's branches in the Czech Republic and Slovakia. The mFinanse companies in the Czech Republic and Slovakia took over the tasks that were previously carried out by mBank Branches in these countries. The Bank holds indirectly through mFinanse S.A. 100% shares in the companies.
■ mBank Hipoteczny S.A., subsidiary (the retail segment of the company’s activity)
■ mLeasing Sp. z o.o., subsidiary (the retail segment of the company’s activity)
■ Asekum Sp. z o.o., subsidiary (the retail segment of the company’s activity)
■ LeaseLink Sp. z o.o., subsidiary
LeaseLink Sp. z o.o. is a company operating in the fintech area in the leasing of low-value items, specialises in providing leasing as a payment method for e-commerce. The Bank holds indirectly through mLeasing Sp. z o.o. 100% shares in the company.
■ mElements S.A., subsidiary
mElements S.A. operates in the construction of dedicated solutions for e-commerce trade and new technologies. The company designs and develops IT solutions including API solutions (Application Programming Interface), online and mobile payments as well as services dedicated to online sellers, including the Paynow payment integrator. In October 2019, mElements S.A. received from the Polish Financial Supervision Authority permission to operate as a National Payment Institution.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
12
Treasury and Other Segment
■ mBank Hipoteczny S.A., subsidiary (with regard to activities concerning funding)
■ mLeasing Sp. z o.o., subsidiary (with regard to activities concerning funding)
■ Future Tech Fundusz Inwestycyjny Zamknięty, subsidiary
The Fund was established as an investment vehicle within the mAccelerator project, which focuses on developing and commercialising high-potential projects in the field of new technologies for the financial services sector (fintech). The Bank held 98.04% of the Fund's investment certificates, while the remaining 1.96% was owned by minority shareholders. The entity managing the Fund is Quercus Towarzystwo Funduszy Inwestycyjnych S.A.
Other information concerning companies of the Group
In the first quarter of 2022, the Group ceased to consolidate the subsidiary G-Invest Sp. z o.o. due to its immaterial impact on financial result and on financial statements of mBank S.A. Group.
On 19 July 2021, the Bank sold 100% of shares in Tele-Tech Investment Sp. z o.o. and all bonds held by the Bank issued by that subsidiary. Hence, starting from July 2021, the Group ceased to consolidate the subsidiary Tele-Tech Investment Sp. z o.o.
Information concerning the business conducted by the Group’s entities is presented under Note 5 Business Segments of these consolidated financial statements.
The consolidated financial statements of the Bank cover the following companies:
31.12.2022
31.12.2021
Company
Share in voting rights (directly and indirectly)
Consolidation method
Share in voting rights (directly and indirectly)
Consolidation method
mBank Hipoteczny S.A.
100%
full
100%
full
mLeasing Sp. z o.o.
100%
full
100%
full
mFinanse S.A.
100%
full
100%
full
mFaktoring S.A.
100%
full
100%
full
Future Tech Fundusz Inwestycyjny Zamknięty
98.04%
full
98.04%
full
mElements S.A.
100%
full
100%
full
Asekum Sp. z o.o.
100%
full
100%
full
LeaseLink Sp. z o.o.
100%
full
100%
full
mFinanse CZ s.r.o.
100%
full
100%
-
mFinanse SK s.r.o.
100%
full
100%
-
G-Invest Sp. z o.o.
100%
-
100%
full
As of 31 December 2022, the Bank did not include the following subsidiaries in its consolidated financial statements due to their immateriality:
§ Direct subsidiaries of mBank S.A.: BRE Property Partner Sp. z o.o., G-Invest Sp. z o.o., Herut Sp. z o.o., mBox Sp. z o.o., mInvestment Banking S.A., mServices Sp. z o.o., mTowarzystwo Funduszy Inwestycyjnych S.A., Octopus Sp. z o.o.
§ Indirectly owned subsidiaries, through:
□ Future Tech Fundusz Inwestycyjny Zamknięty: Digital Operations S.A., Digital Teammates S.A., Bot4Business Sp. z o.o., Samito S.A., CyberRescue Sp. z o.o., HCM Deck Sp. z o.o., Mercury Financial S.A.;
□ mLeasing Sp. z o.o.: Ravenna Kraków Sp. z o.o.;
□ BRE Property Partner Sp. z o.o.: Property Partner Sp. z o.o., Projekt CH Łódź Sp. z o.o.
The Management Board of mBank S.A. approved these consolidated financial statements for issue on 28 February 2023.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
13
2. Description of relevant accounting policies
The principal accounting policies used in the preparation of these consolidated financial statements are set forth below. These accounting policies have been applied consistently in all periods presented, except for accounting policy for hedge accounting. For accounting policy for hedge accounting until 30 June 2022 the Group applied the hedge accounting requirements in accordance with IAS 39, instead of the requirements set forth in IFRS 9. Starting 1 July 2022 the Group applies IFRS 9 requirements in the area of hedge accounting to all hedge relations except for fair value portfolio hedges of interest rate risk where the hedged item is designated as portion that is a currency amount. The above change in accounting policy, as required by IFRS 9, was implemented prospectively from 1 July 2022 and did not have a material impact on the Group's financial statements. In particular, no hedge relationships were discontinued as a result of this change. New accounting policies are presented in Note 2.13. In addition, the Group changed the presentation of certain items in the statement of financial position. These changes are described in Note 2.31.
2.1. Accounting basis
These Consolidated Financial Statements of mBank S.A. Group have been prepared for the 12-month period ended 31 December 2022. Comparative data presented in these consolidated financial statements relate to the period of 12 months ended on 31 December 2021.
The Consolidated Financial Statements of mBank S.A. Group have been prepared on a historical cost basis in compliance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union, except for derivative financial instruments, other financial assets and liabilities held for trading, financial assets failing SPPI test and financial assets and liabilities designated at fair value through profit or loss, debt and equity instruments at fair value through other comprehensive income, investment properties and liabilities related to cash-settled share-based payment transactions, all of which have been measured at fair value. Non-current assets held for sale or group of these assets classified as held for sale are stated at the lower of the carrying value and fair value less costs to sell.
The data for the year 2021 presented in these mBank S.A. Group consolidated financial statements was audited by the auditor, except for the restated data presented in Note 2.31.
The preparation of the financial statements in compliance with IFRS requires the application of specific accounting estimates. It also requires the Management Board to use its own judgment when applying the accounting policies adopted by the Group. The issues in relation to which a significant professional judgement is required, more complex issues, or such issues where estimates or judgments are material to the consolidated financial statements are disclosed in Note 4.
Financial statements are prepared in compliance with materiality principle. Omissions or misstatements of positions of financial statements are material if they could, individually or collectively, influence the economic decisions that users make on the basis of Group’s financial statements. Materiality depends on the size and nature of the omission or misstatement of the position of financial statements or a combination of both. The Group presents separately each material class of similar positions. The Group presents separately positions of dissimilar nature or function unless they are immaterial.
These consolidated financial statements were prepared under the assumption that all the entities of the Group continue as a going concern in the foreseeable future, i.e. in the period of at least 12 months following the reporting date.
The Management Board, in its assessment of the appropriateness of the going concern assumption for the Bank and the Group companies, considered, inter alia, net loss incurred by the Bank and the Group in 2022 in the amount of PLN 696.7 million and PLN 702.5 million, respectively. This loss results mainly from the legal risk costs related to FX loans in the amount of PLN 3 112.3 million (as described in detail in the Note 34), impact of credit holidays in the amount of PLN 1 334.4 million (Note 4), contributions to Institutional Protection Scheme in the amount of PLN 428.1 million and to the Borrowers Support Fund in the amount of PLN 170.9 million (Note 13).
The results for 2022 were influenced by extraordinary events listed above. The profitability of core business model of the Bank and the Group remained high and stable in 2022.
It should be emphasized that despite the net loss in 2022, in accordance with the applicable provisions regarding recovery plans, in particular Article 142(2) of the Banking Law, the prerequisite related to significant deterioration of the financial situation of the Bank and the Group has not been met. Recovery plan indicators in the areas of liquidity, capital and assets quality demonstrate the safe situation of the Bank and the Group.
Therefore, as of the date of approving these consolidated financial statements, the Bank Management Board has not identified any events that could indicate that the continuation of the operations by the Group is endangered in the period of at least 12 months from the reporting date.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
14
2.2. Consolidation
Subsidiaries
Subsidiaries are entities, regardless of the nature of the involvement with an entity (including special purpose vehicles) over which the Group exercises control. The control is achieved when the Group has power over the investee, is exposed or has rights, to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting rights of an investee, it considers all relevant facts and circumstances in assessing whether it has power over the investee, including a contractual arrangements between the Group and other vote holders, rights arising from other contractual arrangements, the Group’s voting rights and potential voting rights. If facts and circumstances indicate that there are changes in at least one of the three elements of control listed above, the Group reassess whether it controls an investee. The consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. The consolidated financial statements combine items of assets, liabilities, equity, income and expenses of the parent with those of its subsidiaries eliminating the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary. Thus arises goodwill. If goodwill has negative value, it is recognised directly in the income statement. The profit or loss and each component of other comprehensive income is attributed to the Group’s owners and to the non-controlling interests even if this results in the non-controlling interests having a negative balance. If the Group loses control of a subsidiary, it accounts for all amounts previously recognised in other comprehensive income in relation to that subsidiary on the same basis as would be required if the Group had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income is reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses control of the subsidiary. If a revaluation surplus previously recognised in other comprehensive income is transferred directly to retained earnings on the disposal of the assets, the Group transfers the revaluation surplus directly to retained earnings when it loses control of the subsidiary.
Non-controlling interest is equity in a subsidiary not attributable, directly or indirectly, to a parent. The Group presents non-controlling interest in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transaction (i.e. transactions with owners in their capacity as owners). In such cases, the Group adjusts the carrying amount of the controlling and non-controlling interests to reflect the changes in their relative interests in the subsidiary. The Group recognises directly in the equity any difference between the amount by which the non-controlling interests are adjusted, and the fair value of the consideration paid or received and attributes it to the owners of the parent.
In case when an acquirer made a bargain purchase, which is a business combination, and a result of that is a gain, the acquirer recognises the resulting gain in profit or loss on the acquisition date. Before recognising a gain on a bargain purchase, the acquirer reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and recognises any additional assets and liabilities that are identified in that review. The acquirer then reviews the procedures used to measure the amounts required to be recognised at the acquisition date to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date.
Intra-group transactions, balances and unrealised gains on transactions between companies of the Group are eliminated in full. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
The Group applies predecessor accounting method for combinations of businesses under common control. The method stipulates that assets and liabilities of the acquired businesses are not measured at fair value, but the acquirer includes them in its financial statements based on the value of the acquired businesses derived from the consolidated financial statements of the consolidating entity that prepares the consolidated financial statements at the higher level and exercises the common control under which the transaction takes place.
Consolidation does not cover those companies whose scale of business operations is immaterial in relation to the volume of business of the Group.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
15
2.3. Interest income and expenses
All interest income on financial instruments carried at amortised cost using the effective interest rate method as well as interest income from financial assets measured at fair value through profit or loss and measured at fair value through other comprehensive income are recognised in the income statement.
The effective interest rate method is a method of calculation of the amortised initial value of financial assets or financial liabilities and allocation of interest income or interest expense to the proper periods. The effective interest rate is the interest rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial assets or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. When calculating the effective interest rate, the Group estimates the expected cash flows taking into account all the contractual terms of the financial instrument, but without taking into account the expected credit losses. This calculation takes into account all the fees paid or received between the parties to the contract, which constitute an integral component of the effective interest rate, as well as transaction expenses and any other premiums or discounts.
The Group calculates interest income using the effective interest rate to the gross carrying amount of the financial asset except for the financial assets which subsequently have become credit impaired. In case of reclassification of a financial asset or a group of similar financial assets to Stage 3, the interest income is calculated on the amortized cost (i.e. the gross carrying amount adjusted for the loss allowance) and recognised using the interest rate at which the future cash flows were discounted for the purpose of valuation of impairment.
Interest income includes interest and commissions received or due on account of loans, inter-bank deposits or investment securities recognised in the calculation of the effective interest rate.
Interest income, including interest on loans, is recognised in the income statement and on the other side in the statement of financial position as part of receivables from banks or from other customers.
Amounts calculated with the use of negative interest rates are qualified accordingly to interest income in case when they relate to financial liabilities, and to interest expenses when they relate to financial assets.
Income and expenses related to the interest component of the result on interest rate derivatives and resulting from current calculation of swap points on currency derivatives classified into banking book are presented in the interest results in the position Interest income/expense on derivatives classified into banking book. The banking book includes transactions, which are not concluded for trading purposes i.e. not aimed at generating a profit in a short-term period (up to 6 months) and those that do not constitute hedging a risk arising from the operations assigned into trading book.
Interest income and interest expenses related to the interest measurement component of derivatives concluded as hedging instruments under fair value hedge are presented in the interest result in the position interest income/expense on derivatives under the fair value hedge accounting.
Interest income related to the interest measurement component of derivatives concluded as hedging instruments under cash flow hedge are presented in the interest result in the position interest income on derivatives under the cash flow hedge accounting.
2.4. Fee and commission income
Fee and commission income is recognised in accordance with IFRS 15 using a 5-step model for revenue recognition, which consists of:
Step 1: Identifying the contracts with a customer
The Group accounts for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:
1. the parties to the contract have approved the contract (in writing, orally or in accordance with business practices) and are committed to perform their respective obligations,
2. the Group can identify each party’s rights regarding the goods or services to be transferred,
3. the Group can identify the payment terms for the goods or services to be transferred,
4. the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract), and
5. it is probable that the Group will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, the Group considers only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the Group may offer the customer a price discount.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
16
Step 2: Identifying performance obligations in the contract
The performance obligation is a promise (presumed or specified) to provide the client with goods or services that are identified at the time of entering into the contract on the basis of contractual terms as well as the Group’s business practice. At contract inception, the Group assesses the goods or services promised in a contract with a customer and identifies as a performance obligation each promise to transfer to the customer either:
1. a good or service (or a bundle of goods or services) that is distinct; or
2. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
A good or service that is promised to a customer is distinct if both of the following criteria are met:
1. the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e. the good or service is capable of being distinct); and
2. the Group’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the good or service is distinct within the context of the contract).
The Group identifies options for purchasing additional goods or services for the customer (loyalty points) as separate obligations to provide benefits, if they give the customer relevant rights (material law, which the client would not have obtained if he did not conclude the contract).
If a third party is involved in the process of providing selected services for the client, the Group assesses whether it acts as an agent or principal, taking into account in particular the possibility of controlling the given service before it is passed on to the client (control principle).
Step 3: Determining the transaction price
The transaction price reflects the amount of consideration that the Group expects to be entitled to in exchange for distinct good or service transferred as provided by the terms of the contract and the Group’s business practice.
The transaction price is the amount of remuneration which, in line with the Group's expectations, will be due in exchange for transfer of promised goods or services to the client, excluding amounts collected on behalf of third parties.
Determining the transaction price can become complex where a contract includes any of the following: variable consideration, a significant financing component, non-cash consideration, consideration payable to a customer. In terms of variable remuneration (e.g. rebates from payment organisations), the Group estimates the amount of remuneration to which it will be entitled in exchange for the transfer of promised services.
Step 4: Allocating the transaction price to the performance obligations
The transaction price is allocated to each separate performance obligation, or distinct good or service, so that revenue is recorded at an amount that depicts the amount of consideration that the Group expects to be entitled to in exchange for transferring the promised goods or services. The transaction price is allocated to each performance obligation based on a relative stand-alone selling price.
Step 5: Recognition of revenue when (or as) the Group satisfies a performance obligation
The Group recognises revenue when (or as) it satisfies a performing obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The Group recognises immediately the fees not related directly to origination of loans and advances. Fees for services delivered over the period longer than 3 months are recognised by the Group over time. As the fee and commission income, the Group treats also fees and commissions recognised over time on a straight-line basis, related to loans and advances with not established timing of cash flows, for which effective interest rate is not possible to be determined. Straight line method for those services presents fairly the timing of transfer of services because they are delivered evenly over time.
Accounting principles related to recognition of fee income from sale of assurance products bundled with loans and advances are described in a separate Note 2.5.
Fees charged for the granting of loans which are likely to be drawn down are deferred (together with the related direct costs) and included in the calculation of the effective interest rate charge on the loan at the time of granting. Fees on account of syndicated loans are recognised as income at the time of closing of the process of organisation of the respective syndicate, if the Group has not retained any part of the credit risk on its own account or has retained a part of the risk of a similar level as other participants. Commissions and fees on account of negotiation or participation in the negotiation of a transaction on behalf of a third party, such as the acquisition of shares or other securities, or the acquisition or disposal of an enterprise, are recognised at the time of realisation of the transaction. Portfolio management fees and other fees for
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
17
management, advisory and other services are recognised on the basis of service contracts, usually in proportion to the passage of time. The same principle is applied in the case of management of client assets, financial planning and custody services, which are continuously provided over an extended period of time.
Fees and commissions collected by the Group on account of issuance, renewal and change in the limit of credit and payment cards, guarantees granted as well as opening, extension and increase of letters of credit are accounted for on a straight-line basis.
Fees and commissions collected by the Group on account of cash management operations, money transfers and brokerage business activities are recognised directly in the income statement as one-off. Fees and commissions for keeping customer accounts are charged monthly and recognised at the time of collection.
In addition, revenue from fees and commissions include income from fees on instalment payment for premium on insurance products sold through the Internet platform. The fees on instalment payment are settled in time in accordance with the duration of the policy.
The Group's fee and commission income comprises also income from offering insurance products of third parties. In case of selling insurance products that are not bundled with loans, the revenues are recognised as upfront income or in majority of cases settled on a monthly basis.
2.5. Revenue and expenses from sale of insurance products bundled with loans
The Group treats insurance products as bundled with loans, in particular when insurance product is offered to the customer only with the loan, i.e. it is not possible to purchase from the Group the insurance product which is identical in a legal form, content and economic conditions without purchasing the loan.
Revenue and expenses from sale of insurance products bundled with loans are split into interest income and fee and commission income based on the relative fair value analysis of each of these products.
The remuneration included in interest income is recognised over time as part of effective interest rate calculation for the bundled loan. The remuneration included in fee and commission income is recognised partly as upfront income and partly including deferring over time based on the analysis of the stage of completion of the service in accordance with 5-step model described above.
Expenses directly linked to the sale of insurance products are recognised using the same pattern as in case of income observing the matching concept. A part of expenses is treated as an element adjusting the calculation of effective interest rate for interest income and the remaining part of expenses is recognised in fee and commission expenses as upfront cost or as cost accrued over time.
The Group estimates also the part of remuneration which in the future will be returned due to early termination of insurance contract and appropriately decreases interest income or fee and commission income to be recognised.
2.6. Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the Group), and whose operating results are regularly reviewed by the Group's chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. As defined in IFRS 8, the Group has determined the Management Board of the Bank as its chief operating decision-maker.
In accordance with IFRS 8, the Group has the following business segments: “Corporate and Investment Banking Segment”, “Retail Banking”, “Treasury and Other business” and “FX Mortgage Loans”.
2.7. Financial assets
The Group classifies its financial assets to the following categories: financial assets valued at fair value through profit or loss, financial assets valued at fair value through other comprehensive income and financial assets valued at amortised cost. Classification of the debt financial asset to the one of the above categories takes place at its initial recognition based on business model for managing financial assets and contractual cash flow characteristics. An equity instrument is classified as a financial asset at fair value through profit or loss unless at the time of initial recognition the group made an irrevocable election of specific equity investments to present subsequent fair value changes in other comprehensive income.
Standardised purchases and sales of financial assets at fair value through profit or loss and measured at fair value through other comprehensive income are recognised on the settlement date – the date on which the Bank delivers or receives the asset. Changes in fair value in the period between trade and settlement date with respect to assets carried at fair value is recognised in profit or loss or in other components of
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equity. Loans are recognised when the funds are disbursed or made available to the borrower's account. Derivative financial instruments are recognised beginning from the date of transaction.
Derecognition of financial asset is when and only when the contractual rights to the cash flows from the financial assets expire or when the Group transfers the financial asset, and the transfer qualifies for derecognition or in case of substantial modification of the financial asset.
Financial assets measured at fair value through profit or loss
A financial asset is measured at fair value through profit or loss unless it is measured at amortized cost or at fair value through other comprehensive income.
Disposals of debt and equity securities held for trading are accounted according to the weighted average cost method.
The Group may, at the initial recognition, irrevocably designate a financial asset at fair value through profit or loss when doing so results in more relevant information, because either it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as “an accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.
As presented in these financial statements reporting periods, the Group did not designate any financial instrument on initial recognition as financial assets at fair value through profit or loss to reduce an accounting mismatch.
Financial assets classified to this category are measured at fair value upon initial recognition.
After initial recognition, financial assets classified in this category are measured at the end of the reporting period at fair value.
Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognised in the income statement in the period in which they arise.
Interest income on financial assets measured at fair value through profit or loss (Note 2.3), except for derivatives the recognition of which is discussed in Note 2.13, is recognised in net interest income. The valuation and result on disposal of financial assets measured at fair value through profit or loss is recognised in trading income for financial assets held for trading or in gains or losses on non-trading financial assets mandatorily at fair value through profit or loss.
Financial assets measured at amortised cost
Financial assets measured at amortised cost are assets that meet both of the following conditions, unless the Bank designated them to fair value through profit or loss: the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flow characteristics and contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are entered into books on the transaction date.
At initial recognition financial assets classified to this category are valued at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. After initial recognition, these assets are measured at amortised cost using the effective interest rate.
Financial assets measured at fair value through other comprehensive income
Financial assets measured at fair value through other comprehensive income are assets that meet both of the following conditions, unless the Bank designated them to fair value through profit or loss: the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Interest income and expense from financial assets measured at fair value through other comprehensive income are presented in net interest income. Gains and losses from sale of financial assets measured at fair value through other comprehensive income are presented in gains less losses from financial assets and liabilities not measured at fair value through profit or loss.
Financial assets measured at fair value through other comprehensive income are valued at the end of the reporting period according to their fair value.
Gains and losses arising from changes in the fair value of debt financial assets measured at fair value through other comprehensive income are recognised in other comprehensive income until the derecognition of the respective financial asset in the statement of financial position: at such time, the aggregate net gain or loss previously recognised in other comprehensive income is now recognised in the income statement. However, interest calculated using the effective interest rate is recognised in the income statement.
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The fair value of quoted investments in active markets is based on current market prices. If the market for a given financial asset is not an active one, the Bank determines the fair value by applying valuation techniques. These comprise recently conducted transactions concluded according to normal market principles, reference to other instruments, discounted cash flow analysis, as well as valuation models for options and other valuation methods generally applied by market participants.
Equity instruments
Investments in equity instruments are measured at fair value through profit or loss. Upon initial recognition, the Group may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value (the option of measurement at fair value through other comprehensive income) of an investment in an equity instrument that is not held for trading and does not constitute a contingent payment recognised by the Group as part of a business combination in accordance with IFRS 3.
In case of the financial instruments for which the option of measurement at fair value through other comprehensive income was used, all gains and losses related to change in fair value, including foreign exchange differences, are recognised in other comprehensive income. There is no possibility to reclassify them to profit and loss even if the instrument is derecognised. Only dividends received related to these instruments are recognised in profit and loss when the entity’s right to receive payment is established.
Modification of contractual terms for financial assets
The Group derecognises financial assets and re-recognises the financial assets in accordance with the measurement requirements for initial recognition in case of substantial modification of contractual terms of financial assets. As substantial modification the Group defines such a modification that meets one of the following criteria:
■ substantial increase of the credit amount of more than 10%,
■ substantial prolongation of the contractual maturity of more than 12 months,
■ change of currency not provided for in the terms of the contract. Change of currency provided for in the terms of the agreement is such a change that defines both the FX rate at which it would have place and the interest rate of the loan after the change of the currency,
■ change of the borrower – only if the current borrower is exempted from the debt,
■ change of the cash flow criterion from ‘SPPI compliance’ of a financial assets to ‘SPPI non-compliance’ and vice versa,
■ change of the financed asset in case of object finance or project finance,
■ change of the legal form/type of financial instrument.
In the event of substantial modification the deferred income and expense related to this asset is recognised in the income statement and the provision is released. At the same time there is re-recognition of financial assets in accordance with the requirements for initial recognition. Any other modifications of contractual terms that do not cause derecognition of financial assets are treated as not substantial modifications and the gain or loss on modification is recognised. The effects of all identified not substantial modifications of cash flows are recognised in net interest income. The result on modification is the difference between present value of the modified cash flows discounted using the original effective interest rate and the gross carrying amount of loan before modification. Commissions received related to minor modification are settled over time using effective interest rate. In case of substantial modification in Stage 2, for which as a consequence, the exposure was moved to Stage 1, the adjustment to fair value of the exposure at the initial recognition, adjusts the interest result in the subsequent periods.
In case contract terms are modified as a result of a market-wide reform of the interest rate benchmark, including the replacement of the interest rate benchmark with an alternative benchmark, when:
■ the basis for determining contractual cash flows has changed in the contract and the new basis is considered economically equivalent to the old basis, such change is recognised through a change in the effective interest rate;
■ changes concern other areas, or have not been considered economically equivalent, such changes are recognised on general principles, in particular they are evaluated for a significant modification.
Purchased or originated credit impaired financial assets (POCI assets)
POCI are financial assets measured at amortised cost that at initial recognition are credit impaired. POCI are also financial assets that are credit impaired at the moment of substantial modification. At the initial recognition POCI assets are recognised at fair value. The fair value of POCI assets at the initial recognition is calculated as present value of estimated future cash flows including credit risk discounted for the risk-free rate. After the initial recognition POCI assets are measured at amortised cost. With respect to these financial assets the Group uses credit adjusted effective interest rate in order to determine the
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amortised cost of financial asset and the interest income generated by these assets – CEIR. In case of POCI exposures the change of the expected credit losses relative to the estimated credit losses at the date of their initial recognition is recognised as an impairment loss. Its value can both reduce the gross book value of POCI exposure and increase it in the event of a decrease of expected losses relative to its value at the date of initial recognition.
Reclassification of financial assets
Debt financial assets are reclassified when, and only when, the Group changes its business model for managing financial assets. In such a case the assets affected by the change of business model are subject to reclassification. Financial liabilities are not subject to reclassification by the Group.
2.8. Offsetting of financial instruments
Financial assets and financial liabilities are offset, and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The conditions mentioned above are not satisfied and offsetting is inappropriate when: different financial instruments are used to emulate the features of a single financial instrument, financial assets and liabilities arise from financial instruments having the same risk exposure but involve different counterparties, financial or other assets are pledged as collaterals for non-recourse financial liabilities, financial assets are set aside in trust by a debtor for the purpose of discharging an obligation without those assets having been accepted by the creditor in the settlement of the obligation, or obligations incurred as a result of events giving rise to losses are expected to be recovered from a third party by virtue of a claim made under an insurance contract.
2.9. Impairment of financial assets
Financial instruments subject to estimation of expected credit losses are financial assets measured at amortised cost, financial assets measured at fair value through other comprehensive income, loan commitments if not measured at fair value through profit or loss, financial guarantee contracts if not measured at fair value through profit or loss, leases under IFRS 16, contract assets under IFRS 15.
A detailed description of issues regarding the principles of estimation of expected credit losses is presented in Note 3.3.6.
How exposures are classified to Stages
The transfer logic is an algorithm used to classify exposures to one of the four Stages: 1, 2, 3, POCI.
■ Stage 1 includes exposures for which expected credit losses are calculated on a 12-month basis.
■ Stage 2 contains exposures for which, as at the reporting date, a significant deterioration in credit quality was identified compared to the date of their initial recognition – expected credit losses are calculated over a lifetime period.
■ Stage 3 contains exposures identified as credit impaired.
■ Stage POCI contains assets identified as credit-impaired at initial recognition .
A detailed description of issues regarding the principles of classification of exposures to Stages is presented in Note 3.3.6.1.
Significant deterioration in credit quality
A significant deterioration in credit quality is recognised for the asset concerned on the basis of quantitative and qualitative criteria, with the asset being transferred to Stage 2 once at least one of such qualitative or quantitative criteria is met.
Rebuttable presumption
The Group’s approach that involves rejection of the presumption that a significant deterioration in credit quality occurs where DPD ≥ 31 days (rebuttable presumption) involves introducing a thresholds of materiality (thresholds of activation) for any outstanding amount payable to the Group. The DPD ≥ 31 days criterion (one of the qualitative criteria of the Transfer Logic) is not taken into account if at least one of the following conditions is not met:
1. the past due exposure amount exceeds PLN 400 for retail exposures in Polish branch and exposures of Private Banking debtors, registered in corporate systems, CZK 2500 for retail exposures in the foreign branch of the Bank in Czech Republic, EUR 100 for retail exposures in the foreign branch of the Bank in Slovakia and PLN 2000 for exposures in the area of corporate and investment banking,
2. the ratio of the past due exposure amount to the total balance sheet exposure amount exceeds 1%.
A detailed description of issues regarding the significant deterioration in credit quality is presented in Note 3.3.6.1.1.
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Low credit risk
According to the IFRS 9, the Group distinguishes a category of assets with low credit risk (ang. Low Credit Risk, LCR). Assets marked as LCR are not subject to the process of identifying indications of significant deterioration of credit quality (if they are not in the default status, they are in Stage 1).
A detailed description of issues regarding the low credit risk criteria is presented in Note 3.3.6.1.2.
Impairment
The Group applies a common default definition in all areas of credit risk management, including the calculation of expected credit losses and capital requirement. The basis for the adopted definition of default is the definition of default in the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending regulation (EU) No 648/2012 with further amendments (“CRR Regulation”).
The customer is reclassified to the default category in case of loss event occurrence. Reclassification of at least one customer credit liability to the default category reclassifies all credit and non-credit liabilities of the customer to the default category.
A detailed description of issues regarding loss events is presented in Note 3.3.6.1.3 (corporate) and 3.3.6.1.4 (retail).
Estimating expected credit losses (ECL)
An expected loss is measured for non-zero exposures that are active at the reporting date (balance sheet and off-balance sheet). An expected credit loss is estimated separately for on and off-balance sheet exposures. The calculation of expected credit losses uses:
■ portfolio approach: concerning all exposures for which no loss event was identified at the reporting date and exposures with identified loss event to natural persons and sole proprietorship handled in the transaction system dedicated to the retail portfolio,
■ individual approach: concerning all corporate exposures and all Private Banking customer exposures registered in corporate systems for which a loss event was identified.
A detailed description of issues regarding expected credit losses estimation is presented in Note 3.3.6.2.
Loan receivable write-off
Loan receivable write-off can be partial (corporate banking) or total.
In case of retail banking writing off receivables can be done in the case of:
1. debt recovery is not possible e.g.:
a. the claim limitation,
b. fraud – inability to identify the debtor,
c. limitation of inheritors’ liability,
d. the claim was questioned by the debtor in court.
2. recovery is not available e.g.:
a. the enforcement proceedings have been completed and the whole debt was not recovered – then the unrecovered portion is written off,
b. bankruptcy proceeding has been rejected or has been completed due to debtors’ lack of liquidation assets to cover the costs of the proceedings,
c. the conclusion is that a claim is as a bad debt,
d. limitation of heirs' liability for inheritance debts.
Cases that meet these criteria may also be included in the process of debt portfolio sale.
In case of corporate portfolio writing off receivables is carried out when all recovery options are exhausted. This happens when:
1. all options to recover the debt have been exercised:
a. bankruptcy proceedings ended, the debtor was removed from the National Court Register and the debt was not recovered in whole,
b. bankruptcy proceedings were discontinued on account of the debtor having no assets to cover the costs of the proceedings or having only enough assets to cover these costs,
c. petition for bankruptcy was dismissed on account of the debtor having insufficient assets to cover the costs of the proceedings,
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d. during judicial restructuring proceedings the terms and conditions of an arrangement assuming partial cancellation of the debt were approved,
e. enforcement proceedings were considered ineffective and discontinued on account of the debtor having no assets,
f. the debt was considered irrecoverable as the costs of recovering it exceed the potential proceeds;
2. it is impossible to pursue the debt, e.g.
a. the debtor challenges the debt in court. The debt is cancelled by a court decision,
b. the statute of limitations on the Group's claim.
Cases that meet these criteria may also be included in the process of debt portfolio sale.
2.10. Financial guarantee contracts
The financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
When a financial guarantee contract is recognised initially, it is measured at the fair value. After initial recognition an issuer of such a contract subsequently measures it at the higher of:
■ the amount of the loss allowance determined in accordance with IFRS9, the methodology is described in Note 3.3.6 Calculating expecting credit losses,
■ the amount initially recognised less the cumulative amount of income recognised in accordance with the principles of IFRS 15 when appropriate.
2.11. Cash and cash equivalents
Cash and cash equivalents comprise items with maturities of up to three months from the date of their acquisition, including: cash in hand and cash held at the Central Bank with unlimited availability for disposal and amounts due from other banks.
2.12. Sell and repurchase agreements
Repo and reverse-repo transactions are defined as selling and purchasing securities for which a commitment has been made to repurchase or resell them at a contractual date and for a specified contractual price and are recognised when the money is transferred.
Securities sold with a repurchase clause (repos or sell/buy back) are not eliminated from the statement of financial position. The liability towards the counterparty is recognised as amounts due to other banks, deposits from other banks, other deposits or amounts due to customers, depending on its nature. Securities purchased together with a resale clause (reverse repos or buy/sell back) are recognised as loans and advances to other banks or other customers, depending on their nature. For assets subject to repurchase agreements, the Group is exposed to the same risks as those associated with holding identical assets not subject to repurchase agreements.
When concluding a repo/sell/buy back or reverse repo/buy-sell-back transaction Group sells or buys securities with a repurchase or resale clause specifying a contractual date and price. Such transactions are presented in the statement of financial position as financial assets measured at fair value through profit or loss or at fair value through other comprehensive income, and also as liabilities in the case of repo or sell/buy back transactions and as receivables in the case of reverse repo/buy/sell back transactions measured at amortised cost.
Securities borrowed by the Group under buy/sell back transactions are not recognised in the financial statements, unless they are sold to third parties. In such case the purchase and sale transactions are recorded in the financial statements with a gain or a loss included in trading income. The obligation to return them is recorded at fair value as amounts due to customers. Securities borrowed under buy/sell back transactions and then lent under sell/buy back transactions are not recognised as financial assets.
As a result of repo/sell/buy back transactions concluded on securities held by the Group, financial assets are transferred in such way that they do not qualify for derecognition. Thus, the Group retains substantially all risks and rewards of ownership of the financial assets.
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2.13. Derivative financial instruments and hedge accounting
Derivative financial instruments are recognised at fair value from the date of transaction. Fair value is determined based on prices of instruments listed on active markets, including recent market transactions, and on the basis of valuation techniques, including models based on discounted cash flows and options pricing models, depending on which method is appropriate in the particular case. All derivative instruments with a positive fair value are recognised in the statement of financial position as assets, those with a negative value as liabilities.
The best fair value indicator for a derivative instrument at the time of its initial recognition is the price of the transaction (i.e., the fair value of the paid or received consideration). If the fair value of the particular instrument may be determined by comparison with other current market transactions concerning the same instrument (not modified) or relying on valuation techniques based exclusively on market data that are available for observation, then the Group recognises the respective gains or losses from the first day in accordance with the principles described under Note 2.14.
The hybrid contract in which derivative instrument is embedded in the host is a financial asset within the scope of IFRS 9. Such a derivative instrument is not separated and the hybrid contract is recognised in accordance with the requirements for classification of the financial assets.
Derivative instrument embedded in the hybrid contract, the host of which is not a financial asset within the scope of IFRS 9, is assessed for the need to separate it.
Derivative instruments, which are designated and constitute effective hedging instruments, are not classified under any of the categories specified above and are subject to the principles of hedge accounting.
In accordance with IFRS 9: (i), there is no need to separate the prepayment option from the host debt instrument for the needs of financial statements, if the option’s exercise price is approximately equal on each exercise date to the amortised cost of the host debt instrument. If the prepayment option does not meet the contractual cash flow characteristic test, then the financial asset as the whole shall be classified as a financial asset measured at fair value through profit or loss; (ii), exercise price of a prepayment option reimburses the lender for an amount up to the approximate present value of lost interest for the remaining term of the host contract. Lost interest is the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective interest rate of the host contract over the effective interest rate the entity would receive at the prepayment date if it reinvested the principal amount prepaid in a similar contract for the remaining term of the host contract.
The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a host debt instrument in accordance with IAS 32.
The method of recognising the resulting fair value gain or loss depends on whether the given derivative instrument is designated as a hedging instrument, and if it is, it also depends on the nature of the hedged item. The Group designates some derivative instruments either as (1) fair value hedge against a recognised asset or liability or against a binding contractual obligation (fair value hedge), or as (2) hedge against highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge).
Until 30 June 2022 the Group applied the hedge accounting requirements in accordance with IAS 39, instead of the requirements set forth in IFRS 9. Starting 1 July 2022 the Group applies IFRS 9 requirements in the area of hedge accounting to all hedge relations except for fair value portfolio hedges of interest rate risk where the hedged item is designated as portion that is a currency amount.
The hedge relations, which start 1 July 2022 are accounted for in line with IFRS 9, qualifies for hedge accounting provided that:
■ the hedging relationship consists only of eligible hedging instruments and eligible hedged items;
■ at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge. That documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements;
■ the hedging relationship meets all of the following hedge effectiveness requirements:
□ there is an economic relationship between the hedged item and the hedging instrument;
□ the effect of credit risk does not dominate the value changes that result from that economic relationship; and
□ the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.
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The IFRS 9 introduces also the option to recognise in a separate component of equity part of the fair value of the hedging derivative instrument related to time value of option, forward element of a forward contract or currency basis spread, and reclassify it to profit or loss in the same periods during which the hedged expected future cash flows affect profit or loss. The Group takes advantage of this option and includes in the line Other components of equity fair value changes of hedging CIRS contracts in the amount attributable to currency basis spread, provided that such fair value changes were not designated as part of the hedge relation.
The above change in accounting policy, as required by IFRS 9, was implemented prospectively from 1 July 2022 and did not have a material impact on the Group's financial statements. In particular, no hedge relationships were discontinued as a result of this change.
With regard to hedge relations recognised in line with IAS 39, hedge accounting is applied provided that the following criteria are met:
■ at the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. That documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk;
■ the hedge is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship;
■ for cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss;
■ the effectiveness of the hedge can be reliably measured, i.e. the fair value or cash flows of the hedged item that are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured;
■ the hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated.
The Group documents the objectives of risk management and the strategy of concluding hedging transactions, as well as at the time of concluding the respective transactions, the relationship between the hedging instrument and the hedged item. The Group also documents its own assessment of the effectiveness of fair value hedging and cash flow hedging transactions, measured both prospectively and retrospectively from the time of their designation and throughout the period of duration of the hedging relationship between the hedging instrument and the hedged item.
Due to the split of derivatives classified into banking book and into trading book, the Group applies a different approach to the presentation of interest income/expense for each of these groups of derivatives that is described in Note 2.3. The remaining result from fair value measurement of derivatives is recognised in Net trading income.
Fair value hedges
Changes in the fair value of derivative instruments designated and qualifying as fair value hedges are recognised in the income statement together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Hedging gain or loss on the hedged item adjusts the carrying amount of the hedged item.
In case a hedge has ceased to fulfil the criteria of hedge accounting, the adjustment to the carrying value of the hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity. The adjustment to the carrying amount of the hedged equity security remains in other comprehensive income until the disposal of the equity security.
Cash flow hedges
The effective part of the fair value changes of derivative instruments designated and qualifying as cash flow hedges is recognised in other comprehensive income. The gain or loss concerning the ineffective part is recognised in the income statement of the current period.
The amounts recognised in other comprehensive income are transferred to the income statement and recognised as income or cost of the same period in which the hedged item will affect the income statement (e.g., at the time when the forecast sale that is hedged takes place).
In case the hedging instrument has expired or has been sold, or the hedge has ceased to fulfil the criteria of hedge accounting, any aggregate gains or losses recognised at such time in other comprehensive income
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remain in other comprehensive income until the time of recognition in the income statement of the forecast transaction. When a forecast transaction is no longer expected to occur, the aggregate gains or losses recorded in other comprehensive income are immediately transferred to the income statement.
Derivative instruments not fulfilling the criteria of hedge accounting
Changes of the fair value of derivative instruments that do not meet the criteria of hedge accounting are recognised in the income statement of the current period.
The Group holds the following derivative instruments in its portfolio:
Market risk instruments:
■ Futures contracts for bonds, index futures
■ Options for securities and for stock-market indices
■ Options for futures contracts
■ Forward transactions for securities
■ Commodity swaps
Interest rate risk instruments:
■ Forward Rate Agreement (FRA)
■ Interest Rate Swap (IRS), Overnight Index Swap (OIS)
■ Interest Rate Options
Foreign exchange risk instruments:
■ Currency forwards, FX swap, FX forward
■ Cross Currency Interest Rate Swap (CIRS)
■ Currency options.
2.14. Gains and losses on initial recognition
The best evidence of fair value of a financial instrument at initial recognition is the transaction price (i.e., the fair value of the payment given or received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.
The transaction for which the fair value determined using a valuation model (where inputs are both observable and non-observable data) and the transaction price differ, the initial recognition is at the transaction price. The Group assumes that the transaction price is the best indicator of fair value, although the value obtained from the valuation model may differ. The difference between the transaction price and the model value, commonly referred to as “day one profit and loss”, is amortised over the period of time.
The timing of recognition of deferred day one profit and loss is determined individually. It is either amortised over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable data, or realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit and loss. Subsequent changes in fair value are recognised immediately in the income statement without reversal of deferred day one profits and losses.
2.15. Financial liabilities measured at amortised cost
Financial liabilities measured at amortised cost include borrowings, deposits taken, debt securities issued and subordinated liabilities. These liabilities are initially recognised at fair value reduced by the incurred transaction costs. After the initial recognition, these liabilities are recorded at adjusted cost of acquisition (amortised cost using the effective interest method). Any differences between the amount received (reduced by transaction costs) and the redemption value are recognised in the income statement over the period of duration of the respective agreements according to the effective interest rate method.
2.16. Intangible assets
The Group measures intangible assets initially at cost. After initial recognition, intangible assets are recognised at their cost of acquisition adjusted by the costs of improvement (rearrangement, development, reconstruction or modernisation) less any accumulated amortisation and any accumulated impairment losses. Amortisation is accrued by the straight-line method taking into account the expected period of economic useful life of the respective intangible assets.
Goodwill
Goodwill as of the acquisition date is initially recognised at cost of acquisition that comprises the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously
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held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Goodwill on acquisition of subsidiaries is included in Intangible assets. Goodwill is not amortised, but it is tested annually for impairment and if there have been any indication that it may be impaired, it is carried in the statement of financial position at cost reduced by accumulated impairment losses. The Group assesses at the end of each reporting period whether there is any indication that cash generating unit to which goodwill is allocated may be impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. Goodwill impairment losses should not be reversed.
Gains and losses on the disposal of the activity include the carrying amount of goodwill relating to the sold activity. Goodwill is allocated to cash generating units or groups of cash generating units for the purpose of impairment testing. The allocation is made as at the date of purchase to those cash-generating units or groups of cash generating units that are expected to benefit from the business combination in which the goodwill arose, not bigger than operating segments in accordance with IFRS 8 irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Computer software
Purchased computer software licences are capitalised in the amount of costs incurred for the purchase and adaptation for use of specific computer software. These costs are amortised on the basis of the expected useful life of the software (1.5-18 years). Expenses attached to the maintenance of computer software are expensed when incurred. Expenses directly linked to the development of identifiable and unique proprietary computer programmes controlled by the Bank, which are likely to generate economic benefits in excess of such costs expected to be gained over a period exceeding one year, are recognised as intangible assets. Direct costs comprise personnel expenses directly related to the software.
Capitalised costs attached to the development of software are amortised over the period of their estimated useful life (1.5-27 years).
Computer software directly connected with the functioning of specific information technology hardware is recognised as Tangible fixed assets.
Intangible assets are tested in terms of possible impairment always after the occurrence of events or change of circumstances indicating that their carrying value in the statement of financial position might not be possible to be recovered.
2.17. Tangible fixed assets
Tangible fixed assets are carried at historical cost reduced by accumulated depreciation and accumulated impairment losses. Historical cost takes into account the expenses directly attached to the acquisition of the respective assets.
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only where it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Any other expenses incurred on repairs and maintenance are expensed to the income statement in the reporting period in which they were incurred.
Land is not depreciated. Depreciation of other fixed assets is accounted for according to the straight-line method in order to spread their initial value reduced by the residual value over the period of their useful life which is estimated as follows for the particular categories of fixed assets:
Buildings and structures
20-40 years,
Equipment
2-15 years,
Vehicles
4-5 years,
Information technology hardware
2-10 years,
Investments in third party fixed assets
5-20 years, no longer than the period of the lease contract,
Office equipment, furniture
2-10 years.
Land and buildings consist mainly of branch outlets and offices. Residual values estimated useful life periods and depreciation method are verified at the end of the reporting period and adjusted prospectively in accordance with the arising need.
Group assesses at the end of each reporting period whether there is any indication that tangible asset may be impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. Depreciable fixed assets are tested for impairment always whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The value of a fixed asset carried in the statement of financial position is reduced to the level of its recoverable value if the carrying value in the statement of financial position exceeds the estimated recoverable amount. The recoverable value is the higher of two amounts: the fair value of the fixed asset reduced by its selling costs and the value in use.
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If it is not possible to estimate the recoverable amount of the individual asset, the Group shall determine the recoverable amount of the cash-generating unit to which the asset belongs (cash-generating unit of the asset).
The carrying amount of tangible fixed assets is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of tangible fixed assets are included in profit or loss when the item is derecognised. Gains and losses on account of the disposal of fixed assets are determined by comparing the proceeds from their sale against their carrying value in the statement of financial position and they are recognised in the income statement.
2.18. Investment properties
Investment properties are defined as land and buildings held for the purpose of earning rental income or because they are expected to increase in value. Investment property also includes right-of-use assets that meet the definition of investment property under IAS 40. On initial recognition investment properties are measured at cost including directly attributable transaction costs.
In subsequent measurements, investment properties are measured at fair value. The fair value of a right-of-use that meets the definition of investment property excludes the value of expected cash outflows from lease payments, which are presented separately in the Bank's statement of financial position as a lease liability in accordance with IFRS 16.
Current income and expenses are recognised in other operating income or expenses. Remeasurement changes arising from changes in fair value are also shown under other operating income or expenses in the income statement for the period. As at the date of reclassification of the property occupied by the Group to investment property, the difference between the carrying amount of the property determined in accordance with IAS 16 or IFRS 16 and its fair value is recognised by the Group (i) in the profit or loss account in the event of a decrease in the carrying amount or reversal of a previously recognised impairment loss on this property, or (ii) in other comprehensive income, in the event of an increase in the current value above the amount of the reversed impairment loss. On subsequent disposal of the investment property, the revaluation reserve in other comprehensive income is transferred to retained earnings. The transfer from other comprehensive income to retained earnings is not made through the income statement.
2.19. Inventories
Inventories comprise assets held for lease as well as assets taken over as a result of terminated lease agreements. Inventories are presented in the item Other assets and stated at the lower of cost of purchase/cost of construction and net realisable value. Cost of construction of inventories comprises direct construction costs, the relevant portion of fixed indirect production costs incurred in the construction process and the borrowing costs, which can be directly allocated to the purchase or construction of an asset. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling costs. The amount of any inventory write-downs to the net realisable value and any inventory losses are recorded as costs of the period in which a write-down or a loss occurred and they are classified as other operating costs. Reversals of inventory write-downs resulting from increases in their net realisable value are recorded as a reduction of the inventories recognised as cost of the period in which the reversals took place. Inventory disposals are valued through detailed identification of the individual purchase prices or costs of construction of the assets which relate to the realisation of the individual separate undertakings. When the inventories are sold, the carrying amount of the inventories is recognised as other operating expenses in the period in which the related revenue is recognised, which is recognised as other operating income.
2.20. Non-current assets held for sale and discontinued operations
The Group classifies a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sale of such assets and its sale must be highly probable, i.e., the appropriate level of management must be committed to a plan to sell the asset, and an active programme to locate a buyer and complete the plan must have been initiated. Furthermore, the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Non-current assets held for sale are priced at the lower of carrying value and fair value less costs to sell. Assets classified in this category are not depreciated.
When criteria for classification to non-current assets held for sale are not met, the Group ceases to classify the assets as held for sale and reclassifies them into appropriate category of assets. The Group measures a non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) at the lower of:
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■ its carrying amount at a date before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale, and
■ its recoverable amount at the date of the subsequent decision not to sell.
Discontinued operations are a component of the Group that either has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operation or is a subsidiary acquired exclusively with a view to resale.
The classification to this category takes places at the moment of sale or when the operation meets criteria of the operation classified as held for sale, if this moment took place previously. Disposal group which is to be taken out of usage may also be classified as discontinued operation.
2.21. Deferred income tax
The Group creates a deferred income tax on the temporary difference arising between the carrying amount of an asset or liability in the statement of financial position and its tax base. A taxable net difference is recognised in liabilities as Provisions for deferred income tax. A deductible net difference is recognised under Deferred income tax assets. Any change in the balance of the deferred tax assets and liabilities in relation to the previous accounting period is recorded under the item Income Tax or Other comprehensive income, depending on how the basis for deferred taxes is recognised.
Liabilities or assets for deferred income tax are recognised in their full amount according to the balance sheet method in connection with the existence of temporary differences between the tax value of assets and liabilities and their carrying value. Such liabilities or assets are determined by application of the tax rates in force by virtue of law or of actual obligations at the end of the reporting period. According to expectations such tax rates applied will be in force at the time of realisation of the assets or settlement of the liabilities for deferred income tax.
The main temporary differences arise on account of impairment write-offs recognised in relation to the loss of value of credits and granted guarantees of repayment of loans, amortisation of fixed assets and intangible assets, revaluation of certain financial assets and liabilities, including contracts concerning derivative instruments and forward transactions, provisions for retirement benefits and other post-employment benefits and also deductible tax losses.
The Group reviews the carrying amount of a deferred tax assets at the end of each reporting period. The Group reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.
The Group presents the deferred income tax assets and liabilities netted in the statement of financial position separately for each subsidiary undergoing consolidation. Such assets and provisions may be netted against each other if the Group possesses the legal rights allowing it to simultaneously account for them when calculating the amount of the tax liability.
In the case of the Bank, the deferred income tax assets and provisions are netted against each other separately for each country where the Bank conducts its business and is obliged to settle corporate income tax.
The Group discloses separately the amount of negative temporary differences (mainly on account of unused tax losses or unutilised tax allowances) for which the deferred income tax asset was not recognised in the statement of financial position, as well as the amount of temporary differences related to investments in subsidiaries and associates for which no deferred income tax provision has been formed.
Deferred income tax for the Group is provided on assets or liabilities due to temporary differences arising from investments in subsidiaries and associates, except where, on the basis of any probable evidence, the timing of the reversal of the temporary difference is controlled by the Group and it is possible that the difference will not reverse in the foreseeable future.
Deferred income tax on account of revaluation of financial instruments measured through other comprehensive income and on revaluation of cash flow hedging transactions is accounted for in the same way as any revaluation, directly in other comprehensive income, and it is subsequently transferred to the income statement when the respective investment or hedged item affects the income statement.
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2.22. Assets repossessed for debt
Assets repossessed for debt represents financial and non-financial assets acquired by the Group in settlement of overdue loans. The assets are initially recognised at fair value when acquired and included in tangible fixed assets, financial assets or other assets depending on their nature and the Group's intention in respect of recovery of these assets. In case the fair value of repossessed collateral exceeds the receivable from the debtor, the difference constitutes a liability toward the debtor.
Repossessed assets are subsequently measured and accounted for in accordance with the accounting policies relevant for these categories of assets.
2.23. Prepayments, accruals and deferred income
Prepayments are recorded if the respective expenses concern the months succeeding the month in which they were incurred. Prepayments are presented in the statement of financial position under Other assets.
Accruals include costs of supplies delivered to the Group but not yet resulting in its payable liabilities. Deferred income includes received amounts of future benefits. Accruals and deferred income are presented in the statement of financial position under the item Other liabilities.
2.24. Leasing
A contract is, or contains, a lease if it transfers the right of use of an identified asset for a period of time in exchange for consideration. The Group reassesses whether a contract is, or contains, a lease only if the terms and conditions of the contract are changed.
Transfer of the right-of-use occurs when it concerns an identified asset, for which the lessee possesses the right to obtain substantially all of the economic benefits and it controls the use of the asset throughout the period of use.
mBank S.A. Group as a lessee
If lease definition is fulfilled, the Bank recognises the right of use of the leased asset and a financial liability representing its obligation to make future lease payments in the amount of discounted future cash flows throughout the lease period.
The Group as a lessee applies simplified approach and it does not apply the requirements in terms of recognition, measurement and presentation for short-term lease contracts lasting no longer than 12 months for each class of underlying asset as well as for lease contracts for which the underlying asset is of low value, i.e. less than PLN 20 thousand for separate leases. Lease payments are recognised as costs using straight-line method throughout the lease period for lease contracts for which the Group applies simplified approach.
Perpetual usufruct is classified as a lease according to IFRS 16 due to the occurrence of future fees for the use of this right. The Group assumed that the lease period for this type of contracts is the remaining period of the right granted since the transition to IFRS 16.
The Group determines the period of lease for non-cancellable leases, taking into account both:
■ periods covered by an option to extend the lease if the Group as a lessee is reasonably certain to exercise that option and
■ periods covered by an option to terminate the lease if the Group as a lessee is reasonably certain not to exercise that option.
The Group reassesses whether it is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease. The Group considers all relevant facts and circumstances that create an economic incentive for the lessee to exercise an option to extend a lease, or not to exercise an option to terminate a lease. The Group reassesses whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that is within the control of the Group as a lessee, and that affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term. The Group revises the lease term if there is a change in the non-cancellable period of a lease.
At the commencement date, the Group as a lessee measures the right-of-use asset at cost. The cost of right-of-use assets includes:
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■ the amount of the initial measurement of the lease liability,
■ any lease payments made at or before the commencement date, less any lease incentives received,
■ initial direct costs incurred by the Group as a lessee in connection with the conclusion of the leasing contract and
■ an estimate of the costs to be incurred by the Group as a lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.
After the commencement date, the Group as a lessee measures the right-of-use asset at cost:
■ less any accumulated depreciation and any accumulated impairment losses and
■ adjusted for any remeasurement of the lease liability.
The Group applies the depreciation requirements of IAS 16 Property, Plant and Equipment in depreciating the right-of-use asset and requirements of IAS 36 Impairment of Assets to determine whether the right-of-use asset is impaired.
At the commencement date, the Group measures the lease liability at the present value of outstanding lease payments. At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments:
■ fixed lease payments less any lease incentives,
■ variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date,
■ amounts expected to be payable by the lessee under residual value guarantees,
■ the exercise price of a purchase option if the lessee is reasonably certain to exercise that option and
■ payment of penalties for terminating the lease, if the lease term provides for the lessee exercising an option to terminate the lease, unless it can be assumed with reasonable certainty that the Group will not exercise the termination option.
Variable lease payments that depend on an index or a rate include, for example, payments linked to a customer price index, payments linked to a benchmark interest rate or payments that vary to reflect changes in market rental rates.
After the commencement date, the Group shall measure the lease liability by:
■ increasing the carrying amount to reflect interest on the lease liability,
■ reducing the carrying amount to reflect the lease payments made and
■ remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments.
The Group discounts lease payments using the interest rate of lease if this rate can be easily determined. Otherwise, the Group applies the marginal interest rate of lessee. As the lessee the Group estimates the discount rate taking into account the duration and the currency of the contract.
The discount rates calculated by the Group were:
■ for contracts in EUR: 0.02%,
■ for contracts in PLN: 1.95%,
■ for contracts in USD: 2.93%,
■ for contracts in CZK: 2.19%.
All right-of-use assets are classified in tangible fixed assets (Note 26). Leasing liabilities are recognised as financial liabilities measured at amortised cost (Note 29).
Cash payments of lease liabilities are classified in statement of cash flows within financial activities. Short term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are classified in statement of cash flows within operating activities.
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mBank S.A. Group as a lessor
In operating lease
The Group recognises lease payments from operating leases as income on a straight-line basis or in another systematic manner. The Group recognises costs, including depreciation, incurred in order to obtain benefits from leasing. The Group adds the initial direct costs incurred in order to obtain operating leasing to the carrying value of the underlying asset and it recognises these costs as expenses incurred throughout the lease period on the same basis as lease revenues. The method of depreciation of leased out depreciable assets should be the same as that foreseen by the normal depreciation rules adopted by the Group with regard to similar assets, and the depreciation charges should be calculated in accordance with IAS 16 and IAS 38. In order to determine whether there has been any impairment of the object of the lease, the Group applies IAS 36.
In finance lease
At the commencement date the Group recognises assets held under a finance lease as receivable at an amount equal to the net investment in the lease. Initial direct costs are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term. The Group recognises finance income over the lease term on a systematic and rational basis. The lease payments relating to the period reduce gross investment in the lease lowering both the principal and the unearned finance income. The Group applies the derecognition and impairment requirements of IFRS 9 to the net investment in the lease.
2.25. Provisions
Loan commitments and financial guarantee contracts are subject to loan loss provisions requirements according to IFRS 9 Financial Instruments. Method of guarantee valuation is presented in Note 2.10.
According to IAS 37, provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.
2.26. Post-employment benefits and other employee benefits
Post-employment benefits
The Group forms provisions against future liabilities on account of post-employment benefits determined on the basis of an estimation of liabilities of that type, using an actuarial model. The Group uses a principle of recognition of actuarial gains or losses from the measurement of post-employment benefits related to changes in actuarial assumptions in other comprehensive income that will not be reclassified to the income statement. The Group recognises service cost and net interest on the net defined benefit liability in the overhead cost and in other interest expenses, respectively.
Equity-settled share-based payment transactions
The Group runs programmes of remuneration based on and settled in own shares. Equity-settled share-based payment transactions are accounted for in compliance with IFRS 2 Share-based Payment. In case of the part of the programme settled in shares, the fair value of the service rendered by employees in return for options and shares granted increases the costs of the respective period corresponding to own equity. The total amount which needs to be expensed over the period when the outstanding rights of the employees for their options and shares to become exercisable are vested is determined on the basis of the fair value of the granted options and shares. There are no market vesting conditions that shall be taken into account when estimating the fair value of share options and shares at the measurement date. Non-market vesting conditions are not taken into account when estimating the fair value of share options and shares but they are taken into account through adjustment on the number of equity instruments. At the end of each reporting period, the Group revises its estimates of the number of options and shares that are expected to become exercised. In accordance with IFRS 2 it is not necessary to recognise the change in fair value of the share-based payment over the term of the programmes.
Cash-settled share-based payment transactions
In case of the part of the programme based on cash-settled share-based payments based on shares of the ultimate parent of the Group, the fair value of the service rendered by employees in return for right to options/share appreciation rights increases the costs of the respective period, corresponding to liabilities. Until the liability related to the cash-settled share-based payments transactions is settled, the Group measures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.
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Other employee benefits
From September 2012, the incentive programme based on phantom shares in mBank Hipoteczny has been functioning in this bank. Cash-settled part of the programme as well as the part based on phantom shares increases the costs of the given period in relation to liabilities. Expenses are recognised over the term of the programme.
2.27. Equity
Equity consists of capital and own funds attributable to owners of the Bank, and non-controlling interest created in compliance with the respective provisions of the law, i.e., the appropriate legislative acts, the Bank by-laws or the Company Articles of Association.
Registered share capital
Share capital is presented at its nominal value, in accordance with the by-laws and with the entry in the National Court Register.
Own shares
In the case of acquisition of shares in the Bank by the Bank the amount paid reduces the value of equity as own shares until the time when they are cancelled. In the case of sale or reallocation of such shares, the payment received in return is recognised in equity.
Share premium
Share premium is formed from the share premium obtained from the issue of shares reduced by the attached direct costs incurred with that issue.
Costs directly connected with the issue of new shares and options reduce the proceeds from the issue recognised in equity.
Moreover, share premium takes into account the settlements related to incentive programs based on Bank’s shares.
Retained earnings
Retained earnings include:
■ other supplementary capital,
■ other reserve capital,
■ general risk reserve,
■ undistributed profit from previous years,
■ net profit (loss) for the current year.
Other supplementary capital, other reserve capital and general risk reserve are formed from allocations of profit and they are assigned to purposes specified in the by-laws or other regulations of the law.
Moreover, other reserve capital comprises valuation of incentive programs based on the Bank’s shares.
Dividends for a given year, which have been approved by the General Meeting but not distributed at the end of the reporting period, are shown under the liabilities due to dividends payable under Other liabilities.
Other components of equity
Other components of equity result from recognition in the books of the Bank or the Group:
■ valuation of financial assets at fair value through other comprehensive income,
■ exchange differences on translation of foreign operations,
■ actuarial gains and losses relating to post-employment benefits,
■ valuation of derivative financial instruments held for cash flow hedging in relation to the effective portion of the hedge,
■ fair value measurement of assets reclassified to investment property,
■ cost of hedge.
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2.28. Valuation of items denominated in foreign currencies
Functional currency and presentation currency
The items contained in financial reports of particular entities of the Group, including foreign branches of the Bank, are valued in the currency of the basic economic environment in which the given entity conducts its business (“functional currency”). The financial statements are presented in the Polish zloty, which is the presentation currency of the Group and the functional currency of the Bank.
Transactions and balances
Transactions denominated in foreign currencies are converted to the functional currency at the exchange rate in force at the transaction date. Foreign exchange gains and losses on such transactions as well as balance sheet revaluation of monetary assets and liabilities denominated in foreign currency are recognised in the income statement.
Foreign exchange differences arising on account of such monetary items as financial assets measured at fair value through profit or loss are recognised under gains or losses arising in connection with changes of fair value. Foreign exchange differences arising on account of such monetary items as equity instruments measured at fair value through other comprehensive income are recognised in other comprehensive income.
At the end of each reporting period non-monetary items that are measured in terms of historical cost in foreign currency are translated using the exchange rate at the date of the transaction, and non-monetary items that are measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value was measured.
When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange differences component of that gain or loss is recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange differences component of that gain or loss is recognised in profit or loss.
Changes in fair value of monetary items valued through other comprehensive income cover foreign exchange differences arising from valuation at amortised cost, which are recognised in the income statement.
Items of the statement of financial position of foreign branches are converted from functional currency to the presentation currency with the application of the average exchange rate as at the end of the reporting period. Income statement items of these entities are converted to presentation currency with the application of the arithmetical mean of average exchange rates quoted by the National Bank of Poland on the last day of each month of the reporting period. Foreign exchange differences so arisen are recognised in other comprehensive income.
Companies belonging to the Group
The performance and the financial position of all the entities belonging to the Group, none of which conduct their operations under hyperinflationary conditions, the functional currencies of which differ from the presentation currency, are converted to the presentation currency as follows:
■ assets and liabilities in each presented statement of financial position are converted at the average rate of exchange of the National Bank of Poland (NBP) in force at the end of this reporting period,
■ revenues and expenses in each income statement are converted at the rate equal to the arithmetical mean of the average rates quoted by NBP on the last day of each of 12 months of each presented periods,
■ all resulting foreign exchange differences are recognised as a distinct item of other comprehensive income.
Upon consolidation foreign exchange differences arising from the conversion of net investments in companies operating abroad are recognised in other comprehensive income. Upon the disposal of a foreign operation such foreign exchange differences are recognised in the income statement as part of the profit or loss arising upon disposal.
Leasing business
In the case of mBank Group as a lessee, the profit and loss account includes negative or positive foreign exchange differences from the conversion of the lease liability expressed in a foreign currency after conversion into PLN at the time of initial recognition.
In the case of mBank Group as a lessor in finance lease, exchange rate differences from the valuation of receivables in the amount equal to the net investment in the lease in a foreign currency are charged to the income statement at the end of the reporting period.
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In the case of mBank Group as the lessor in operating lease, exchange rate differences from the valuation of the leased asset are posted to the profit or loss account.
2.29. Trust and fiduciary activities
mBank S.A. operates trust and fiduciary activities covering domestic and foreign securities and services provided to investment and pension funds.
The Bank provides custody, trustee, corporate administration, investment management and advisory services to third parties. Fee and commission income from trust and fiduciary activities is recognised in accordance with IFRS 15 using a 5-step model for revenue recognition, described in the Note 2.4. In connection with these, the Bank makes decisions concerning the allocation, purchase and sale of a wide variety of financial instruments. Assets held in a fiduciary capacity are not included in these financial statements. The assets concerned are not shown in these financial statements as they do not belong to the Group.
Other companies belonging to the Group do not conduct any trust or fiduciary activities.
2.30. New standards, interpretations and amendments to published standards
These financial statements include the requirements of all the International Accounting Standards and the International Financial Reporting Standards endorsed by the European Union, and related interpretations which have been endorsed and binding for annual periods starting on 1 January 2022.
Standards and interpretations endorsed by the European Union
Published Standards and Interpretations which have been issued and binding for the first time in the
reporting period covered by the financial statements.
Standards and interpretations
Description of the changes
The beginning of the binding period
Impact on the Group’s financial statements in the period of initial application
Annual Improvements to IFRS Standards 2018-2020
Annual Improvements include changes to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, Illustrative Examples accompanying IFRS 16 Leases and IAS 41 Agriculture.
The amendment to IFRS 9 clarifies which fees the entity includes when it applies the ‘10 percent test’ in assessing whether to derecognise a financial liability.
The amendment to IFRS 16 removes the illustration of payments from the lessor relating to leasehold improvements.
1 January 2022
The application of the amended standard had no significant impact on the financial statements.
Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use
Amendments to IAS 16 prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.
1 January 2022
The application of the amended standard had no significant impact on the financial statements.
Amendments to IAS 37 Onerous contracts – Cost of Fulfilling the Contract
Amendments to IAS 37 specifies which costs to include in estimating the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous.
1 January 2022
The application of the amended standard had no significant impact on the financial statements.
Amendments to IFRS 3 Reference to the Conceptual Framework
Amendments to IFRS 3 replaced references to the Framework with references to the 2018 Conceptual Framework. They also added a requirement that, for transactions and other events within the scope of IAS 37 or IFRIC 21, an acquirer applies IAS 37 or IFRIC 21 (instead of conceptual framework) to identify the liabilities it has assumed in business combination. Moreover, the standard added an explicit statement that an acquirer does not recognise contingent asset acquired in a business combination.
1 January 2022
The application of the amended standard had no significant impact on the financial statements.
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Published Standards and Interpretations which have been issued but are not yet binding or have not been
adopted early
Standards and interpretations
Description of the changes
The beginning of the binding period
Impact on the Group’s financial statements in the period of initial application
Amendment to IAS 8, Definition of Accounting Estimates
In amendment to IAS 8, the definition of a change in accounting estimates was replaced with a definition of accounting estimates. Under the new definition, accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty. The introduction of a definition of accounting estimates and other amendments to IAS 8 was aimed to help entities distinguish changes in accounting policies from changes in accounting estimates.
1 January 2023
The application of the amended standard will have no significant impact on the financial statements.
Amendments to IAS 1 and IFRS Practice Statement 2 Disclosure of Accounting Policies
Amendments to IAS 1 and IFRS Practice Statement 2 are intended to help preparers in deciding which accounting policies to disclose in their financial statements. The amendments introduce the requirement to disclose material accounting policy information instead of significant accounting policies with some clarifications and examples how an entity can identify material accounting policy information.
1 January 2023
The application of the amended standard will have no significant impact on the financial statements.
Amendments to IAS 12, Deferred tax related to assets and liabilities arising from a single transaction
The amendments to the standards require that the entities recognise in the financial statements deferred tax assets and liabilities resulting from transactions, other than business combinations, in which equal amounts of deductible and taxable temporary differences arise on initial recognition.
1 January 2023
The application of the amended standard will have no significant impact on the financial statements.
IFRS 17, Insurance contracts
IFRS 17 defines a new approach to the recognition, valuation, presentation and disclosure of insurance contracts. The main purpose of IFRS 17 is to guarantee the transparency and comparability of insurers’ financial statements. IFRS 17 introduces a number of significant changes in relation to the existing requirements of IFRS 4. They concern, among others: methods for the valuation of insurance liabilities, recognition revenues and result from insurance contract.
1 January 2023
The application of the amended standard will have no significant impact on the financial statements.
Amendments to IFRS 17, Deferral of use and exclusion of certain products from the scope
Amendments to IFRS 17 include a two-year deferral of the effective date and the fixed expiry date of the temporary exemption from applying IFRS 9 granted to insurers meeting certain criteria. Preparers of financial statements are no longer required to apply IFRS 17 to certain credit cards and similar arrangements, and loans that provide insurance coverage.
1 January 2023
The application of the amended standard will have no significant impact on the financial statements.
Amendments to IFRS 17 and IFRS 9 - Comparative data
The amendment to the standards introduces optional facilities to minimise the accounting mismatch between financial assets and liabilities presented in the comparative data of the financial statements of entities applying IFRS 17 and IFRS 9 for the first time.
1 January 2023
The application of the amended standard will have no significant impact on the financial statements.
Standards and interpretations not yet endorsed by the European Union
These financial statements do not include standards and interpretations listed below which await endorsement of the European Union.
Standards and interpretations
Description of the changes
The beginning of the binding period
Impact on the Group’s financial statements in the period of initial application
Amendments to IAS 1, Classification of liabilities as current or non-current
Amendments to IAS 1 affect the requirements for the presentation of liabilities in the financial statements. In particular, they explain one of the criteria for classifying liabilities as non-current.
1 January 2024
The application of the amended standard will have no significant impact on the financial statements.
Amendments to IFRS 16 Leasing
Amendment to IFRS 16 requires a seller-lessee to subsequently measure lease liabilities arising from a leaseback in a way that it does not recognise any amount of the gain or loss that relates to the right of use it retains.
1 January 2024
The application of the amended standard will have no significant impact on the financial statements.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
36
The interest rate benchmark reform
Since year 2021, mBank continued efforts to implement the reform of reference rates (hereinafter IBOR reform) initiated by Regulation 2016/1011 of The European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (further “BMR”) which resulted, inter alia, in the Financial Conduct Authority’s (further “FCA”) decision to cease quoting or lose representativeness of LIBOR rates.
In order to effectively implement the changes resulting from the IBOR reform a project has already been launched at mBank in 2020 involving Bank's units responsible for risk management, treasury, retail and corporate banking, financial markets, IT, accounting, reporting and compliance areas. The implementation of the project is supervised by the Steering Committee and the Capital, Asset and Liability Management Committee.
The key risks faced by the Bank in relation to the IBOR reform identified and managed under the project are:
■ risks resulting from lack of established market practices and uncertainty related to transition of the contracts to new alternative reference rates, which could lead to deterioration of the risk profile of these contracts,
■ risk of customers not cooperating with the Bank in the process of introducing IBOR reform required contractual changes and the resulting uncertainty concerning the appropriate basis to calculate the contractual cashflows after cessation of or losing representativeness of LIBOR indexes,
■ risk of delayed implementation of required IT changes which could hinder correct interest calculation or financial asset and liabilities valuation,
■ operational risks related to the number of contracts that require amending as a result of the IBOR reform, including risks related to mass processing of client’s personal data required to implement changes to client contracts.
As a result of the project, the Bank updated and implemented changes to its action plan in the event of material changes or discontinuation of an index or benchmark.
In the first half of 2022 activities related to IBOR reform were focused on of finalising implementation of alternative interest rates for LIBOR, including introducing fallback clauses in customer contracts.
Derivative instruments based on LIBOR rates (except for LIBOR USD) were converted to instruments based on alternative reference rates by clearing houses or in case of derivatives not cleared centrally in accordance with methodology developed by ISDA in the course of market consultations. LIBOR USD contracts are scheduled for conversion to USD SOFR in second quarter 2023.
Bank has also adjusted risk models to the new reference rates and implemented IT changes to properly handle the new reference rates as well as business relevant products and instruments based on those rates.
In the second half of 2022 the National Working Group on Reference Rate Reform (NGR) was established to prepare a 'roadmap' and a timetable of actions for the smooth and safe implementation of the various elements of the process leading to the replacement of the WIBOR interest rate index with a new reference index (hereinafter WIBOR reform).
Representatives of the Ministry of Finance, the National Bank of Poland, the Office of the Financial Supervision Authority, the Bank Guarantee Fund, the Polish Development Fund, the Warsaw Stock Exchange, the National Depository for Securities, Bank Gospodarstwa Krajowego, the GPW Benchmark, and banks participate in the NGR activities.
In line with the decision taken by the NGR Steering Committee, the WIBOR index will be replaced by the new WIRON index by the end of 2024.
Due to the role of the WIBOR index and its prevalence in the Polish financial market, the uncertainty related to how the WIBOR index will be replaced by the new WIRON index, as well as uncertainty regarding the final scope of the legislation sanctioning this change, the risks previously identified during the IBOR reform in the case of the WIBOR reform are of much higher severity.
In order to mitigate these risks, the Bank has launched a separate project for implementation of the WIBOR reform, actively participates it the NGR activities and takes advantage of the solutions developed during consultation process led by International Swaps and Derivatives Association (ISDA), Polish Bank Association and other international organisations.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
37
The Bank has also intensified activities related to implementing required changes to WIBOR based contracts with retail and corporate customers. Particular emphasis, in order to maximise the percentage of annexed agreements was placed on effective and transparent communication of the required changes.
The table below presents the Bank’s exposure as at 31 December 2022 to material reference rates in scope of the interest rate benchmark reform for which the transition to the alternative reference rates was yet not completed.
(PLN million)
The contractual amount of non- derivative financial asset
The contractual amount of non- derivative financial liabilities
Nominal amount of derivatives as a net amount of receivables and liabilities for derivative transactions
PLN WIBOR / WIBID
87 348
5 532
(21 647)
USD LIBOR
448
5
(44)
Others
7
-
-
mBank currently is not offering any products based on BMR non-compliant reference rates.
The impact of the IBOR reform on hedge accounting is presented in Note 20.
2.31. Comparative data
■ Reclassification of a portion of revenues from the sale of insurance linked to credit products
(adjustment 1)
Beginning with the financial statements for 2022, the Group has changed the recognition of revenue from the sale of mortgage-related insurance. Previously, the Group recognised the remuneration received monthly for insurance sales entirely as commission income. Currently the Group recognises the portion of the remuneration corresponding to the intermediary service as commission income. The remaining part of the remuneration the Group recognises now as interest income.
■ Separation of the item Lease liabilities (adjustment 2)
Beginning with the financial statements for 2022, in the consolidated statement of financial position, within the item Financial liabilities measured at amortised cost, the Group has separated a new item - Lease liabilities. Previously, lease liabilities were presented within the item Liabilities to customers.
■ Reclassification of loans and advances received from the European Investment Bank (adjustment 3)
Beginning with the financial statements for 2022, the Group has changed the presentation of liabilities from loans and advances received from the European Investment Bank and now presents them under Financial liabilities at amortised cost - Amounts due to banks. Previously, the Group presented these liabilities within Financial liabilities at amortised cost - Due to customers.
■ Reclassification of provisions for post-employment benefits (adjustment 4)
Beginning with the financial statements for 2022, the Group has changed the presentation of provisions for post-employment benefits and now presents them within Provisions. Previously, the Group presented these liabilities under Other Liabilities.
■ Reclassification of receivables from the settlement of cash deposit machines and cash sorting companies (adjustment 5)
Beginning with the financial statements for 2022, the Group has changed the presentation of receivables from the settlement of deposit machines and sorting plants and now presents them within Other assets. Previously, the Group presented these settlements under Financial assets measured at amortised cost - Loans and advances to customers.
■ Presentation of the fair value changes of the hedged items in portfolio hedge of interest rate risk (adjustment 6)
Beginning with the financial statement for 2022, the Group has changed the presentation of gains and losses on the hedged item for the fair value hedge of the interest rate exposure of a portion of portfolio of financial assets or financial liabilities. Currently the Group presents them in a single separate line item within assets, for those repricing time periods for which the hedged item is an asset or in a single separate line item within liabilities, for those repricing time periods for which the hedged item is a liability. Previously, changes in the fair value of hedged items in the interest rate hedge portfolio were presented in a separate line item on the asset or liability side depending on the sign of the balance in other words gains related to hedging the portfolio of assets or losses related to hedging the portfolio of liabilities were reported as a separate line item of assets, while losses related to hedging the portfolio of assets or gains related to hedging the portfolio of liabilities were reported as a separate line item of liabilities.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
38
The above changes were due to the adjustment of the presentation of selected assets and liabilities to the prevailing market practice. The changes did not affect equity levels and the Group's income statements in the comparative periods presented in these financial statements. Comparative figures as of 1 January 2021 and 31 December 2021 and for the period from 1 January to 31 December 2021 have been restated accordingly.
The impact of the introduced adjustments on the compara tive data is presented in the following tables.
Restatements in consolidated income statement flows for the period from 1 January to 31 December 2021
No
Period from 01.01.2021 to 31.12.2021 before restatement
restatement
Period from 01.01.2021 to 31.12.2021 after
restatement
Interest income, including:
4 431 737
22 270
4 454 007
Interest income accounted for using the effective interest method
1
3 947 950
22 270
3 970 220
Income similar to interest on financial assets at fair value through profit or loss
483 787
-
483 787
Interest expenses
(327 694)
-
(327 694)
Net interest income
4 104 043
22 270
4 126 313
Fee and commission income
1
2 714 896
(22 270)
2 692 626
Fee and commission expenses
(824 875)
-
(824 875)
Net fee and commission income
1 890 021
(22 270)
1 867 751
Dividend income
5 046
-
5 046
Net trading income
96 890
-
96 890
Gains or losses on non-trading financial assets mandatorily at fair value through profit or loss
4 608
-
4 608
Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss
93 690
-
93 690
Other operating income
232 384
-
232 384
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss
(873 226)
-
(873 226)
Costs of legal risk related to foreign currency loans
(2 758 079)
-
(2 758 079)
Overhead costs
(2 020 629)
-
(2 020 629)
Depreciation
(436 254)
-
(436 254)
Other operating expenses
(320 898)
-
(320 898)
Operating profit
17 596
-
17 596
Tax on the Bank's balance sheet items
(608 627)
-
(608 627)
Profit / (loss) before income tax
(591 031)
-
(591 031)
Income tax expense
(587 782)
-
(587 782)
Net profit / (loss)
(1 178 813)
-
(1 178 813)
Net profit / (loss) attributable to:
- Owners of mBank S.A.
(1 178 753)
-
(1 178 753)
- Non-controlling interests
(60)
-
(60)
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
39
Restatements in consolidated statement of financial position at 1 January 2021
ASSETS
No
01.01.2021
before restatement
restatement
01.01.2021
after
restatement
Financial assets at amortised cost, including:
130 179 902
(296 381)
129 883 521
Debt securities
15 952 501
-
15 952 501
Loans and advances to banks
7 354 268
-
7 354 268
Loans and advances to customers
5
106 873 133
(296 381)
106 576 752
Fair value changes of the hedged items in portfolio hedge of interest rate risk
6
-
(10 986)
(10 986)
Other assets
5
1 282 439
296 381
1 578 820
Other items
47 409 276
-
47 409 276
TOTAL ASSETS
178 871 617
(10 986)
178 860 631
LIABILITIES AND EQUITY
No
01.01.2021
before restatement
restatement
01.01.2021
after
restatement
Financial liabilities measured at amortised cost, including:
156 673 052
-
156 673 052
Amounts due to banks
3
2 399 740
3 254 591
5 654 331
Amounts due to customers
2,3
137 698 668
(4 026 526)
133 672 142
Lease liabilities
2
-
771 935
771 935
Debt securities issued
13 996 317
-
13 996 317
Subordinated liabilities
2 578 327
-
2 578 327
Fair value changes of the hedged items in portfolio hedge of interest rate risk
6
59 624
(10 986)
48 638
Provisions
4
501 691
33 488
535 179
Other liabilities
4
3 397 133
(33 488)
3 363 645
Other items
1 565 050
-
1 565 050
TOTAL LIABILITIES
162 196 550
(10 986)
162 185 564
TOTAL EQUITY
16 675 067
-
16 675 067
TOTAL LIABILITIES AND EQUITY
178 871 617
(10 986)
178 860 631
Restatements in consolidated statement of financial position at 31 December 2021
ASSETS
No
31.12.2021
before restatement
restatement
31.12.2021
after
restatement
Financial assets at amortised cost, including:
140 296 538
(377 379)
139 919 159
Debt securities
16 164 103
-
16 164 103
Loans and advances to banks
7 229 681
-
7 229 681
Loans and advances to customers
5
116 902 754
(377 379)
116 525 375
Fair value changes of the hedged items in portfolio hedge of interest rate risk
6
1 055 478
(1 165 511)
(110 033)
Other assets
5
1 366 820
377 379
1 744 199
Other items
56 820 049
-
56 820 049
TOTAL ASSETS
199 538 885
(1 165 511)
198 373 374
LIABILITIES AND EQUITY
No
31.12.2021
before restatement
restatement
31.12.2021
after
restatement
Financial liabilities measured at amortised cost, including:
179 348 925
-
179 348 925
Amounts due to banks
3
3 359 558
1 906 621
5 266 179
Amounts due to customers
2,3
159 935 129
(2 863 459)
157 071 670
Lease liabilities
2
-
956 838
956 838
Debt securities issued
13 429 782
-
13 429 782
Subordinated liabilities
2 624 456
-
2 624 456
Fair value changes of the hedged items in portfolio hedge of interest rate risk
6
110 033
(1 165 511)
(1 055 478)
Provisions
4
811 455
25 445
836 900
Other liabilities
4
3 469 950
(25 445)
3 444 505
Other items
2 080 606
-
2 080 606
TOTAL LIABILITIES
185 820 969
(1 165 511)
184 655 458
TOTAL EQUITY
13 717 916
-
13 717 916
TOTAL LIABILITIES AND EQUITY
199 538 885
(1 165 511)
198 373 374
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
40
Restatements in consolidated statement of cash flows for the period from 1 January to 31 December 2021
No
Period
from 01.01.2021
to 31.12.2021
before restatement
restatement
Period
from 01.01.2021
to 31.12.2021
after
restatement
Profit / (loss) before income tax
(591 031)
-
(591 031)
Adjustments, including:
11 394 965
-
11 394 965
Income taxes paid
(837 687)
-
(837 687)
Depreciation, including depreciation of fixed assets provided under operating lease
468 584
-
468 584
Foreign exchange (gains) losses related to financing activities
205 130
-
205 130
(Gains) losses on investing activities
14 965
-
14 965
Dividends received
(5 046)
-
(5 046)
Interest income (income statement)
1
(4 431 737)
(22 270)
(4 454 007)
Interest expense (income statement)
327 694
-
327 694
Interest received
1
4 676 029
22 270
4 698 299
Interest paid
(234 411)
-
(234 411)
Changes in loans and advances to banks
96 423
-
96 423
Changes in financial assets and liabilities held for trading and hedging derivatives
(1 452 131)
-
(1 452 131)
Changes in loans and advances to customers
5
(9 529 116)
80 998
(9 448 118)
Changes in financial assets at fair value through other comprehensive income
(2 054 013)
-
(2 054 013)
Changes in securities at amortised cost
(284 047)
-
(284 047)
Changes of non-trading securities mandatorily at fair value through profit or loss
(17 617)
-
(17 617)
Changes in other assets
5
(61 058)
(80 998)
(142 056)
Changes in amounts due to banks
3
991 300
(41 356)
949 944
Changes in amounts due to customers
2,3
23 322 323
83 582
23 405 905
Changes in lease liabilities
2
-
(42 226)
(42 226)
Changes in issued debt securities
(246 519)
-
(246 519)
Changes in provisions
4
309 764
(8 043)
301 721
Changes in other liabilities
4
136 135
8 043
144 178
A. Cash flows from operating activities
10 803 934
-
10 803 934
B. Cash flows from investing activities
(508 006)
-
(508 006)
Issue of debt securities
3 497 354
-
3 497 354
Issue of ordinary shares
72
-
72
Repayments of loans and advances from banks
3
-
(1 358 250)
(1 358 250)
Repayments of other loans and advances
3
(1 358 250)
1 358 250
-
Redemption of debt securities
(3 980 595)
-
(3 980 595)
Payments of lease liabilities
(93 616)
-
(93 616)
Interest paid from loans and advances received from banks and from subordinated liabilities
(59 691)
-
(59 691)
C. Cash flows from financing activities
(1 994 726)
-
(1 994 726)
Net increase / decrease in cash and cash equivalents (A+B+C)
8 301 202
-
8 301 202
Effects of exchange rate changes on cash and cash equivalents
(9 649)
-
(9 649)
Cash and cash equivalents at the beginning of the reporting period
4 249 046
-
4 249 046
Cash and cash equivalents at the end of the reporting period
12 540 599
-
12 540 599
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
41
3. Risk management
The mBank Group manages risk on the basis of regulatory requirements and best market practice, by developing risk management strategies, policies and guidelines.
The risk management process is conducted at all levels of the organisational structure, starting at the levels of the Supervisory Board (including Risk Committee of the Supervisory Board) and the Bank’s Management Board, through specialised committees and organisational units responsible for risk identification, measurement, monitoring, control and reduction, down to each business unit of the Group.
3.1. Risk management in mBank Group in 2022 – regulatory environment
The mBank Group takes actions on an ongoing basis to adapt the risk management principles to changing external conditions, including changes in the law.
Regulatory changes resulting from the work of the Basel Committee on Banking Supervision
The Group monitors regulatory changes resulting from the work of the Basel Committee on Banking Supervision, in particular those related to the review and revision of the methodologies for calculating capital requirements (the so-called Basel 4).
On 27 October 2021, the European Commission has proposed a draft amendment to the CRR/CRD IV regulatory package to implement the updated Basel standards (Basel 4), primarily with regard to the calculation of capital requirements for individual types of risk. The new requirements are planned to take effect in the European Union from 2025.
The Group analyses the proposed regulatory changes and assesses their impact in preparation for their implementation. The Bank also follows the legislative work, as the published draft amendments have not yet been finally approved in the EU and may still change.
AIRB models
In 2016-2022 the EBA published documents, as part of a broader regulatory initiative concerning revision of the Internal Ratings Based Approach (AIRB), which include:
■ draft Regulatory Technical Standards on assessment methodology for IRB approach,
■ guidelines on PD estimation, LGD estimation and treatment of defaulted assets,
■ guidelines and regulatory technical standard on estimation and identification of an economic downturn in IRB modelling (with regard to LGD parameter),
■ guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs,
■ Commission delegated regulation (EU) 2021/598 of 14 December 2020 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for assigning risk weights to specialised lending exposures.
In June 2021 mBank submitted the application for approval of material changes in all PD, CCF and LGD parameters models in portfolios covered by AIRB approach to banking supervisory authorities. The implementation of AIRB models adapted to the aforementioned guidelines is planned for 2023, immediately after the approval of the banking supervisory authorities.
The Group adjusted the CRE (Commercial Real Estate) dedicated model to Regulation 2021/598, which went live in April 2022. As part of this process, the Bank submitted notification addressing the model adjustment to the banking supervisory authorities in February 2022 and started using the adjusted model from May 2022. The model adjustment will not be classified as significant change according to the criteria specified in RTS 529/2014.
Recommendations of the Polish Financial Supervision Authority (PFSA)
In order to update good practices binding on banks, including in the context of new guidelines and requirements defined by the European supervisory authorities, taking into account regulatory solutions and practices applied in other countries, the Polish Financial Supervision Authority (PFSA) regularly works on updating recommendations addressed to banks.
On 1 January 2022, an updated Recommendation R on the principles of credit risk management and recognition of expected credit losses entered into force. The most important changes resulting from the implementation of Recommendation R in the area of the definition of default and expected credit losses are described in Note 3.3.6.2.3.
In 2022, the PFSA adopted the amended Recommendation A on the management by banks of risk related to derivatives activities, which replaced Recommendation A from 2010. The amendment is aimed at identifying good practices in the area of risk management on the derivatives market, unifying these rules and supplementing European guidelines and technical standards (ESMA, EBA). The PFSA set end of 2023
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
42
as the deadline for banks to comply with the provisions of the Recommendation. Recommendation A will be implemented by the Group within the time limit set by the PFSA.
In addition in 2022 the PFSA carried out work on updating:
■ Recommendation G on interest rate risk management,
■ Recommendation J on the principles of collecting and processing data on the real estate market by banks,
■ Recommendation U on good practices in the field of bancassurance.
Drafts of updated Recommendations J and U were subject to public consultations in 2022.
IBOR reform
The Bank has carried out work to convert LIBOR CHF, EUR and JPY, which were withdrawn in accordance with the Financial Conduct Authority (FCA) announcement of 5 March 2021. In the case of other currencies (GBP, USD), adjustment work is underway, as the indicators have not yet officially been liquidated.
The Bank is also involved in the work of the National Working Group on Benchmark Reform (NGR), which was established in connection with the planned reform of benchmarks in Poland and, among others, is to introduce a new interest rate benchmark, for which the input data is information representing O/N (overnight) transactions. The work of the NGR is aimed at ensuring the credibility, transparency and reliability of the development and application of the new reference interest rate index. The Bank has given this work an exceedingly high priority and is guided by the schedule published by the NGR.
Additional information on the impact of IBOR reform is presented in Note 2.30 and Note 20.
EBA guidelines and standards on interest rate risk in the banking book
In October 2022, EBA published final standards and guidelines with regard to the management of interest rate risk in the banking book as part of the review of existing guidelines:
■ revised guidelines on the interest rate risk in the banking book (IRRBB) and credit spread risk arising from banking book activities (CSRB); they will replace the current EBA Guidelines issued in 2018,
■ final draft technical standards on the standardised approach and the simplified standardised approach for the assessment of IRRBB,
■ final draft technical standards on supervisory outlier testing for interest rate risk in the banking book.
The indicated regulations contain provisions and requirements for the management of IRRBB. In particular they extend the CSRBB risk management rules analogous to the current IRRBB rules, clarify the rules for calculating the sensitivity of interest income and specify the calculation of regulatory measures, including the level of regulatory limits. The revised IRRBB guidelines enter into force on 30 June 2023, and on CSRBB on 31 December 2023.
Threats related to ESG factors
The Bank analyses threats posed by ESG factors, including adverse changes in the natural environment (especially climate change) or the long-term effects of these changes in a horizontal manner. This means that it examines their impact on the Bank's business profile in the widest possible spectrum, e.g. translates them into individual risk categories, including credit risk.
An essential element of risk management was the update of the risk assessment rules for corporate clients in the environmental, social and governance areas to better reflect the specificity of the Polish economy and ESG risk factors in individual sectors. ESG risk assessment is one of the elements of customer credit risk assessment. The result of the ESG risk analysis is taken into account when making a credit decision on granting financing and every year when renewing the customer's PD-rating.
The outcomes of ESG risk analysis during the credit risk analysis process impact neither credit pricings for corporate clients nor their PD-ratings in a quantitative manner. ESG risk assessment is qualitative, considered independently from clients’ financial results and credit risk parameters. In the case of smaller exposures, the analysis is simplified and conducted on a portfolio basis while in the case of exposures exceeding PLN 8 million (for K2 and K1 clients) – on case-by-case basis. Having committed to the Science-Based Targets initiative (SBTi) in 2022 and considering earlier Group’s strategic commitment to achieving net-zero emissions, preliminary analyses leading to decarbonisation pathways’ conceptualisation for the Group have been initiated.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
43
3.2. Principles of risk management
In 2022, after the beginning of armed conflict in Ukraine, the Group monitored the impact of the conflict on the economic situation in Poland, particularly the availability and changes in fuel and commodity prices, as well as the stability of supply chains. Managing credit risk, the Group focused on identifying factors that could significantly affect customers and the quality of the portfolio.
■ In the corporate banking area, the Bank was cautious in updating its credit risk policies. At the same time, the Bank continued projects that are expected to result in the automation and simplification of the credit process.
■ In the retail banking area, the Bank takes into account the risks associated with the current economic situation. The situation of households and SMEs is subject to intense pressure caused by high volatility of macroeconomic and geopolitical factors. The Bank adapts to this situation by maintaining a conservative credit policy, particularly in the area of creditworthiness.
3.2.1. Risk management culture
The foundations of the risk culture implemented in the Bank and the mBank Group have been specified in the Risk Management Strategy of mBank Group and strategies for managing individual types of risk (concentration risk, retail and corporate portfolio credit risk, market risk, liquidity risk, operational risk, reputational risk) approved by the Management Board and the Supervisory Board of mBank.
Risk management roles and responsibilities in the mBank Group are organised around the three lines of defence scheme:
■ The first line of defence consists of the Business (business units) which task is to take risk and capital aspects into consideration when making all business decisions within the risk appetite set for the Group.
■ The second line of defence, mainly the organisational units of the risk management area, Security, Data Protection Inspector and Compliance function, determines framework and guidelines for managing individual risks, supports and supervises Business in their implementation and independently analyses and assesses the risk. To ensure that the Business is supported and supervised in an objective manner, the second line functions act independently of the Business.
■ The third line of defence is Internal Audit, ensuring independent assessment of activities connected with risk management performed by the first and the second line of defence.
3.2.2. Responsibilities in the risk management process
Supervisory Board supervises the Bank's operations in the area of the risk management system. This includes approving the Risk Management Strategy of the mBank Group and supervising its implementation.
Risk Committee of the Supervisory Board exercises constant supervision over the risk, in particular issues recommendations regarding approval of risk management strategies, including the Risk Management Strategy of mBank Group, by the Supervisory Board.
Management Board of the Bank designs, implements and ensures the operation of the risk management system. In particular the Management Board defines and implements the Risk Management Strategy of the Group and is responsible for defining and implementing the principles of managing individual risk types and for their consistency with the Strategy. The Management Board establishes the organisational structure of the Bank and allocates tasks and responsibilities to individual organisational units, ensuring the appropriate distribution of roles in the risk management. The Management Board is also responsible for developing, implementing, effectiveness and updating written strategies, policies and procedures for: risk management system, internal capital adequacy assessment process, capital management and capital planning, and internal control system.
Chief Risk Officer is responsible for integrated risk and capital management of the Bank and the Group in the scope of defining strategies and policies, measuring, controlling and independent reporting on all risk types (in particular credit risk, market risk, liquidity risk, non-financial risk including operational risk), approving limits (in accordance with internal regulations), and for processes of managing the risk of the retail credit portfolio and corporate portfolio.
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The Committees:
■ The Committees of the Business and Risk Forum of mBank Group (Retail Banking Risk Committee – KRD, Corporate and Investment Banking Risk Committee – KRK, Financial Markets Risk Committee – KRF) are a platform for making decisions and dialogue for organisational units in particular business lines and the risk management area in mBank as well as between the Bank and the Group subsidiaries. In particular, the Committees take decisions and make recommendations concerning i.a.: risk policies, risk assessment processes and tools, risk limit system, assessment of the quality and profitability of the portfolio of exposures to clients, approval of introducing new products to the offer.
■ Model Risk Committee is responsible for supervising the model risk management process, performing an informative, legislative, decision-making and discussion function in this respect.
■ Capital, Assets and Liabilities Committee is responsible for the systematic monitoring of the balance sheet structure and capital, and the allocation of funds within acceptable risks. Its purpose is to optimise financial result, as well as to shape and allocate capital in a way that maximises return on equity of the mBank Group.
■ Sustainable Development Committee of mBank Group is a platform for making decisions, issuing recommendations and dialogue on sustainable development. The Committee shapes, promotes and monitors sustainable development in the mBank Group.
■ Credit Committee of the mBank Group is responsible, in particular, for the supervision of concentration risk and large exposures at the Group level by taken decisions and made recommendations. The Committee shall also take credit decisions as well as decisions on debt conversion into shares, stocks, and on taking over properties in return for debts.
■ Investment Banking Committee is responsible, in particular, for the control and management of risks (including market, credit, reputational and operational) of the Brokerage Bureau transactions and making decisions regarding the execution of these transactions.
■ Foreign Branch Supervision Committee of mBank S.A. is responsible, among others, for issuing recommendations on approval of the operational strategy and the rules for stable and prudent management of a particular foreign branch of the Bank, especially with reference to credit risk.
The function of management at the strategic level and the function of control of credit, market, liquidity and operational risks and risk of models used to quantify the aforesaid risk types are performed in the risk management area supervised by the Deputy Chairman of the Management Board, Chief Risk Officer.
3.2.3. Internal capital and liquidity adequacy assessment process (ICAAP/ILAAP)
The mBank Group applies the internal capital adequacy assessment process (ICAAP) aimed at maintaining own funds at the level adequate to the profile and the level of risk in its operations.
The ICAAP includes:
■ risk inventory in the mBank Group,
■ calculation of internal capital and own funds requirements for coverage of risk,
■ capital aggregation,
■ stress tests,
■ setting the limits on the utilisation of capital resources,
■ capital planning and allocation,
■ monitoring consisting in a permanent identification of risk involved in mBank Group operations and analysis of the level of capital for risk coverage,
■ annual review of the process .
The liquidity adequacy assessment process (ILAAP) implemented in mBank Group plays a key role in maintaining the Bank’s and the Group's business continuity by ensuring an appropriate liquidity and financial position. ILAAP comprises of:
■ Group’s liquidity and funding risk inventory,
■ calculation of liquidity measures, including modelling of selected banking products,
■ balance sheet planning and setting limits in line with the risk appetite,
■ management, taking into account the stress tests, risk measures, contingency plan, early warning indicators (EWI), recovery indicators (RI) and limits monitoring,
■ process review and assessment,
■ Funds Transfer Pricing (FTP) system,
■ model validation.
The ICAAP and ILAAP are reviewed by the Bank’s Management Board on a regular basis. Reviews of these processes are supervised by the Supervisory Board of the Bank.
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Material risks in the mBank Group’s operations
The Management Board is taking activities for ensuring that the Bank manages all material risks arising from the implementation of adopted business strategy of the mBank Group. Therefore, the mBank Group carries out an annual process of identifying and assessing risk materiality. All material types of risk are included in the Risk Management Strategy of mBank Group, in particular in the process of risk bearing capacity management.
The following risks were recognised as material for the Group as of 31 December 2022: credit risk, market risk, operational risk, business risk (including strategic risk), liquidity risk, compliance risk, reputational risk, model risk, capital risk (including risk of excessive leverage), tax risk and FX loans portfolio risk.
3.2.4. Risk appetite
Risk appetite is defined within the mBank Group as the maximum risk, in terms of both amount and structure, which the Group is willing and able to incur in pursuing its business objectives undergoing concern scenario.
Capital and liquidity buffers
mBank Group determines the risk appetite to ensure continued compliance with supervisory requirements on capital adequacy and liquidity, set in the European and Polish regulations. Therefore, the Group maintains capital and liquidity buffers above regulatory requirements to ensure that the Group is functioning in an uninterrupted manner in the case of negative changes in the Group or in its environment, thereby providing the ability to assure risk bearing capacity. Funding sources and capital position of the Group, both in the regulatory and economic perspective, are taken into consideration while defining the risk capacity and risk appetite. The Bank maintains capital and liquid assets on the levels ensuring to meet regulatory requirements under normal and realistic stress conditions. To determine the appropriate volume of the liquidity buffer, a minimum level of LCR above the regulatory requirement has been established.
mBank Group’s risk appetite covers all significant risks and key risk concentrations embedded in its business strategy by setting appropriate capital buffers necessary in case of materialisation of selected risk factors related to existing portfolios and planned business and addressing new regulatory requirements and potential negative macroeconomic changes.
As a result of internal discussion on risk appetite, the target capital ratios and internal liquidity buffers for the mBank Group are determined.
Risk Bearing Capacity
Risk bearing capacity is expressed in terms of capital, funding resources and liquidity reserves available for allocation so as to ensure safety in normal scenario and risk scenario. The maximum risk that mBank Group is willing and able to incur, while accepting threats resulting from mBank Group business strategy, is subject to the following conditions:
■ adequate risk bearing capacity must be ensured (limits must be ensured in normal conditions) in accordance with ICAAP principles,
■ internal targets set for regulatory capital ratios and liquidity must be observed,
■ financial liquidity and adequate structural liquidity of the Group must be ensured at all times in accordance with ILAAP principles.
The mBank Group’s approach to the assessment and control of mBank Group risk bearing capacity covers internal and regulatory requirements.
Risk limit system
The mBank Group applies a risk limit system in order to ensure effective allocation of risk appetite. The structure of limits translates the risk appetite into specific constraints on risks occurring in the Group’s activity. In addition to the limits, monitoring action triggers and early warning indicators are also used to ensure the safe operation of the Group.
3.2.5. Stress tests within ICAAP and ILAAP
Stress tests are used in the management and capital and liquidity planning of the Bank and the Group. Stress tests allow an assessment of the Group’s resistance in the context of adverse, yet plausible scenarios of external and internal events.
The stress tests are conducted assuming scenario of unfavourable economic conditions that may adversely affect the Group's financial and liquidity position.
As part of ICAAP, the Group carries out stress tests using various scenarios, including historical scenarios, macroeconomic scenarios for economic downturn, scenarios that take into account idiosyncratic events, in
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the context of specific risk concentrations in the Bank and Group. Such analyses take into account various levels of severity of the scenarios, which are characterised by different probability levels regarding their realisation.
The ILAAP scenarios include negative idiosyncratic events, events concerning the entire market and combined scenarios. These scenarios are supplemented by a reverse scenario that identifies risk factors. In addition, an integrated scenario is carried out, which also takes into account the impact of factors derived from other types of risk.
The analysed macroeconomic scenarios allow for a comprehensive analysis of all significant risk types and scenarios’ impact on the capital adequacy and liquidity of the Bank and the Group.
The Group and the Bank carry out so called reverse stress tests, the goal of which is to identify events potentially leading to unviability of the Bank and the Group. Reverse stress tests are used for making strategic decisions concerning the acceptable risk profile of the Group.
3.2.6. Financial results of mBank and mBank Group in the context of regulatory requirements
The Group monitors the recovery plan indicators in the areas of liquidity, capital, profitability and assets quality in accordance with the governance stipulated in the Recovery Plan for mBank Group including the scope of meeting the trigger of recovery plan.
In line with the guidelines of European Banking Authority (EBA/GL/2021/11) on recovery plan indicators, profitability indicators should capture any institution’s income-related aspect that could lead to a rapid deterioration in the institution’s financial position through lowered retained earnings (or losses) impacting own funds of the institution.
The profitability of core business model of the Group in 2022 remained at a very high level. The results for 2022 were influenced by extraordinary events, independent from the core business of the Group, mainly external factors, i.e. introduction of the credit holidays, establishment of the protection scheme of the commercial banks and changes to the Borrower’s Support Fund as well as additional legal costs related to FX mortgage loans.
It should be emphasised that despite the consolidated net loss in 2022 in the amount of PLN 702 527 thousand, in accordance with the applicable provisions regarding recovery plans, in particular Article 142(2) of the Banking Law, the prerequisite for triggering the recovery plan related to significant deterioration of the financial situation of the Bank and the Group has not been met.
Recovery plan indicators in other areas, i.e. liquidity, capital and assets quality demonstrate the stable and robust situation of the Bank and the Group and in 2022 remained above the warning thresholds set out in the Recovery Plan for mBank Group.
3.3. Credit risk
3.3.1. Organisation of risk management
The mBank Group actively manages credit risk in order to optimise the level of profit in terms of return on risk. Analysis of the risk in the Group operations is continuous. For the purpose of identification and monitoring of credit risk, uniform credit risk management rules are applied across the Bank’s structure and its subsidiaries; they are based, among others, on separation of the credit risk assessment function and the sales function at all levels up to the Management Board. A similar approach is applied to administration of credit risk exposures as this function is performed in the risk area and the operating area and is independent from sales functions. The model of Group-wide risk management assumes participation in the process of the Bank’s risk management area organisational units as well as the Credit Committee of the mBank Group (KKG).
Decision-making for credit exposures in the corporate area
Credit decisions are consistent with the accepted internal rules. Levels of decision-making competences are determined by a decision-making matrix. The determination of level of decision-making authority for credit decision is based on EL-rating and total exposure on client/group of affiliated entities. The total exposure includes also exposures on the client/group of affiliated entities in the mBank Group subsidiaries.
For clients applying for small exposure it is the only determinant of the right level of decision-making.
Decision-making for credit exposures in the retail banking area
Due to a profile of retail banking clients, the accepted amount of exposure per client and standardisation of products offered to those clients, the credit decision-making process differs from that applied to corporate clients. The decision-making process is automated to a large extent, both in terms of acquiring data on the borrower from internal and external data sources, and in terms of risk assessment by means of scoring techniques and standardised decision-making criteria. The tasks, which are not automated concern mainly the verification of credit documentation and potential derogations when a decision is made
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with the escalation to the decision-making level in accordance with the applicable rules. In addition, in case of mortgage loans, the value of the collateral is established (standard applications evaluated internally, other with the use of external appraisal report which is additionally evaluated internally).
3.3.2. Credit Policy
mBank manages credit risk based on supervisory requirements, market best practices, bank’s own experiences and expertise. Credit policies, established separately for retail banking and corporate banking, play the key role in the credit risk management process. Credit policies include e.g.:
■ target customer groups,
■ acceptable ratings’ levels defined by the expected loss value,
■ criteria for acceptance of financed subjects and collaterals,
■ rules for mitigating concentration risk,
■ rules for selected industries and customers segments.
3.3.3. Collateral accepted
Collateral accepted in the process of granting credit products
The collateral is an important part of the credit policy. The primary role of collateral is to reduce the credit risk of the transaction and provide the Group with a realistic opportunity to repay receivables. In making a decision about granting a credit risk bearing product, the Group strives to obtain collateral adequate to the accepted risk. The Group accepts collateral only upon its assessment and provided it meets the condition of no significant correlation between the credibility of the debtor and the collateral value. Specific types of collateral that are required depend on the risk bearing product, the tenor of the transaction and the risk of the client.
The most common collateral accepted are:
■ mortgage on real estate,
■ registered pledge,
■ cession of receivables (cession of rights),
■ monetary deposit,
■ guarantees and warranties
■ guarantee deposit or cash blocked,
■ transfer of ownership to vehicle.
The value of real estate taken as collateral is determined on the basis of a valuation prepared by a licensed expert. Valuations submitted to the Bank is verified by a team of specialists located in the risk management area, that verifies the correctness of the market value assumptions and assesses the liquidity of the collateral. Carefully selected, most liquid flats securing retail credits can be valuated using automatically based on current transactional data.
The value of other collaterals is determined on the basis of available documents, typical for each type of collateral.
Each collateral is monitored. Frequency of monitoring depends on the type of collateral and is specified in internal regulations.
In the corporate banking area, in the case of collateral on fixed assets or financial assets, the final value of collateral is brought to a most realistic value (MRV) using Empirical Coverage Factor (ECF), which reflects the pessimistic variant of debt recovery from the collateral through forced sale. Personal collateral is assessed taking into account the financial standing of provider. The Bank assigns the risk parameter PCV (which is an equivalent of Most Realistic Value for fixed assets collateral). In cases when PD parameter of the collateral provider is equal or worse than PD parameter of the debtor, then PCV parameter is zero.
mBank has a dedicated collateral policy in the area of corporate banking. The most important elements of this policy are:
■ indication of collateral preferred and unrecommended,
■ recommendations regarding the requirements of collateral in specific situations,
■ frequency of collateral monitoring,
■ Bank’s approach to collateral with MRV parameter equal to zero.
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Collateral accepted for transactions in derivative instruments
mBank manages the risk of derivative instruments. Credit exposures arising from concluded derivative transactions are managed as a part of clients’ general credit limits, taking into account potential impact of changes in market parameters on the value of the exposure. Existing master agreements with contractors obligate the Bank to monitor the value of exposure to the client on a daily basis and provide for additional collateral against the exposure to be contributed by the client or mBank in accordance with signed agreements. At the same time, the master agreements provide for early settlement of the transaction with the client in the event of breach of contract. mBank applies an Early Warning Process in order to monitor the usage of limits on derivatives and the Bank's ability to respond to the client when the exposure due to open derivative transactions nears the maximum limit. Moreover, taking into consideration credit risk related to a derivative limit granted to a specific client, the Bank may apply additional collaterals from standard catalogue of collaterals of credit risk-bearing products.
Collaterals accepted by the mBank Group subsidiaries
The mBank Group subsidiaries accept various forms of legal collateral of credit risk-bearing products. Their list depends on the specific nature of activities, type of offered products and transaction risk.
mBank Hipoteczny applies mortgage on the financed real estate as the basic collateral. Additional collateral may include bills of exchange or civil surety by the borrowing company’s owners, as well as pledge on shares in the borrower’s company. Loan insurance in an insurance company approved by the Bank may be accepted for a period necessary to effectively set up collateral.
mFaktoring accepts only highly liquid collateral. Apart from own blank bills of exchange, these are mainly bill of exchange surety of the owners of the customer's company, cession of receivables from bank accounts (mainly those maintained by mBank), insurance of receivables, cession of rights from insurance policies in respect of receivables, concluded by customers.
mLeasing applies types of collateral that are most similar to those of mBank. The subsidiary accepts both standard personal collateral: bill of exchange and civil surety, letters of comfort, guarantees, assuming the debt, debt take over, and tangible collateral: mortgage, registered liens, transfer of ownership of collateral, transfer of receivables and cession of receivables and rights to an insurance policy, as well as deposits. The company manages the residual value risk based on Eurotax Glass's Forecast. The residual value calculations includes the lease subject, lease term, estimated mileage, estimated condition of the vehicle after the lease term. The residual value also includes factors such as retrofitting, colour and year of manufacture (if the vehicle was manufactured earlier than the lease year). The obtained value is reduced by a safety factor to cover the risks associated with the fact that the user of the vehicle is not also its owner, i.e. the vehicle is the subject of the long-term rental. In the final stage, the residual value calculation is verified with the prices observed in the used car market and approved by authorised personnel. During the term of the contract, if for six-month periods, counting from the date of handover of the vehicle, the proportional mileage of the vehicle differs from the one agreed by the parties by more than 10%, the financing party has the right to recalculate the amount of the remuneration instalments based on the new estimated mileage of the vehicle. After the end of the contract, the company settles possible excess consumption and possible excess mileage by applying additional fees.
3.3.4. Rating system
The rating system is a key element of the credit risk management process in the corporate banking area. It consists of two main elements:
■ customer rating (PD-rating) – describing the probability of default (PD),
■ Loss Given Default (LGD) model for non-default portfolio (for default portfolio individual method of estimating recoveries is used). Model consists of components: recoveries from unsecured part of the credit (based on contractual and customer factors, information from financial statement), recoveries from secured part of exposure (based on collateral factors),
■ Exposure at Default (EAD) model, which includes Credit Conversion Factor (CCF) model and Limit Utilisation (LU) model. The components are based on contract and customer characteristics,
■ credit rating (EL-rating) – describing expected loss (EL) and taking into consideration both customer risk (PD) and transaction risk (LGD, Loss Given Default – loss resulting from default). EL can be described as PD*LGD. EL indicator is used mainly at the credit decision-making stage.
The rating produces relative credit risk measures, both as percentages (PD%, EL%) and on a conventional scale from 1.0 to 6.5 (PD-rating, EL-rating) for corporations (sales over PLN 50 million) and SMEs (sales up to and including PLN 50 million). PD rating calculation is a strictly defined process, which comprises seven steps including: financial analysis of annual reports, financial analysis of interim figures, assessment of timeliness of presenting financial statements, analysis of qualitative risks, warning indicators, level of integration of the debtor’s group, and additional discretionary criteria. Credit rating based on expected
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loss (EL) is created by combining customer risk rating and transaction risk rating, which results from the value of exposure (EAD, Exposure at Default) and the character and coverage with collateral for transactions concluded with the client (LGD). LGD, described as % of EAD, is a function of possibly executed value of tangible and financial collateral and depends on the type and the value of the collateral, the type of transaction and the ratio of recovery from sources other than collateral.
The rating system generates the borrower’s probability of default directly in the form of a PD ratio, expressed as a percentage (continuous scale). Rating classes are calculated on the basis of procedures of dividing percentage PD into groups based on geometric stepladder. In external reporting, the Bank maps the internal PD rating scale onto external ratings. The table below presents the mapping system.
Sub- portfolio
1
2
3
4
5
6
7
8
PD rating
1.0 – 1.2
1.4
1.6
1.8
2
2.2
2.4 – 2.6
2.8
3
3.2 – 3.4
3.6 – 3.8
4
4.2 – 4.6
4.8
5
5.2 – 5.8
No rating
6.1 – 6.5
AAA
AA+
AA, AA-
A+, A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
B-
CCC+ till C
n/a
D
S/P
Investment Grade
Sub-investment Grade
Non-investment Grade
Default
The following models comprised by the rating system are used in the retail banking area:
■ Loss Given Default (LGD) model, which covers the entire retail portfolio. The ultimate loss level is determined basing on integration of three components:
□ recovery rate for cured cases (based on mean recoveries achieved for cured defaults),
□ recovery rate for non-cured cases (based on contractual factors, bank-client relations and collateral characteristic),
□ probability of cure (based on socio-demographic factors and full product structure of contract owner).
Estimation of loss level takes place in homogenous segments, taking into account the type of product and the type of collateral. Separate models are in place for non-default and default portfolio;
■ Exposure at Default (EAD) model, which includes Credit Conversion Factor (CCF) model, Limit Utilisation (LU) model and Prepayments model. The components are based on contract and customer characteristics,
■ PD model with a modular structure, which integrates results of scoring cards dedicated to the retail area:
□ application scoring cards (based on socio-demographic factors, factors describing the characteristics of business activity and factors related to the specificity of applied credit products),
□ behavioural scoring cards (based on information on the history of credit and deposit relation with the Bank),
□ internal scoring card based on Credit Information Bureau data (regarding the data about liabilities held outside the Bank).
All the mBank Group subsidiaries, whose operations are burdened with credit risk, before concluding an agreement and upon its performance, apply a monitoring process to estimate the risk using rating systems applied by the mBank Group. Rating systems that are used by the Group subsidiaries are due to the nature of their business; at the same time the factoring and leasing companies use the PD-rating of the customer, and the leasing company applies additionally credit rating (EL-rating). A rating based on supervisory measures (slotting approach) is applied in the case of mortgage loans and real estate leasing.
3.3.5. Monitoring and validation of models
All models of risk parameters applied in mBank and in the Group subsidiaries (mLeasing, mBank Hipoteczny), including, i.a. PD models (with all components), LGD models and CCF models are subject to detailed and annual monitoring by modelling units. Moreover, the models are cyclically validated by mBank’s independent Validation Unit and/or Validation Unit in subsidiary (if relevant).
The monitoring includes tests to check discriminatory power of individual models or their components, stability over time, the materiality of individual deviations of empirical values from theoretical values and the impact on portfolio parameters. The modelling unit recalibrates the respective models, i.a. in case of identification of some mismatches.
Reports on the performed monitoring/back tests are presented to the model users and the independent Validation Unit.
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Validation
Validation is an internal, complex process of independent and objective assessment of model operation, which is consistent with the Recommendation W requirements and - in case of the AIRB method - meets the supervisory guidelines set out in the CRR. The validation rules are set out in general in the Model Management Policy and described in detail in other internal regulations of mBank and other Group subsidiaries. The validated models are those that are directly or indirectly used in the assessment of capital adequacy under the AIRB approach, those directly or indirectly used in the process of calculation of provisions under IFRS 9 and others listed in the Bank's List of Models PZM.
In case of AIRB models there is assured an independence of Validation Unit in the organisational structures of the Bank or the Group’s subsidiary in relation to the units involved in the model’s construction/maintenance, i.e. the model owner and users. The Validation Unit is responsible for the validation in mBank. The scope of validation performed by the Validation Unit covers the assessment of model concept and assumptions, correctness of their construction, implementation, their application process and effectiveness, together with the status of the remedial actions taken.
Depending on the materiality and complexity of the model, as well as the type of validation task to be performed, the validation may be complex (covering both quantitative and qualitative elements) or limited (mainly focused on the quantitative analyses and selected qualitative elements). The validation results are documented in the validation report containing, in particular, an assessment used for the purpose of approving the model, and recommendations, if any, in the form of precautionary and remedial actions, about the irregularities found.
Validation tasks are performed in accordance with the annual validation plan. Both validation plan and the results of performed validation tasks are approved by the Model Risk Committee.
IRB Method Change Policy
The Bank implemented the IRB Method Change Policy approved by the Management Board. The Policy contains internal rules for the management changes within the IRB approach, based on the supervisory guidelines and taking into account the organisational specifics of the Bank. The Policy specifies the stages of the change management process, defines roles and responsibilities, describes in detail the rules of classification of changes, in particular classification criteria based on the guidelines published by the European Central Bank.
3.3.6. Calculating expecting credit losses
The Group calculates expected credit losses consistently with the International Financial Reporting Standards and in accordance with Polish banking law requirements and requirements of the Polish Financial Supervision Authority.
3.3.6.1. How exposures are classified to Stages
The Bank, by implementing International Financial Reporting Standards classifies credit exposures to Stages:
■ Stage 1 – exposures for which the risk did not increase significantly since the initial recognition in the loan portfolio,
■ Stage 2 – exposures for which, as at the reporting date, a significant deterioration in credit quality was identified compared to the date of their initial recognition,
■ Stage 3 – exposures for which impairment triggers were identified during its lifetime in portfolio,
■ POCI (purchased or originated credit-impaired asset) – assets identified as credit-impaired at initial recognition.
In the Bank the assignment of exposure to Stage 2 takes place according to the Transfer Logic algorithm, which defines the qualitative and quantitative criteria indicating a significant increase of credit risk, while the classification exposure to the Stage 3 is determined by loss-events.
Once the quantitative or qualitative criteria that were used to classify the exposure in Stage 2 at the reporting date are no longer met (the client and the exposure assigned to them no longer meet any of the Transfer Logic qualitative or quantitative criteria), the exposure will be moved from Stage 2 to Stage 1. In case of exposures classified as forborne, the additional condition for reclassification to Stage 1 is the 24-month probation period during which the loan has a performing status.
The exposure may also be transferred from Stage 3 to Stage 2 or to Stage 1 if for each loss-events assigned to debtor, probation period has elapsed and, additionally in case of corporate clients, debtor's assessment carried out after probation period, has not shown that the debtor is unlikely to fully repay its obligations without recourse to realising security.
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Probation period refers to the period in which debtor properly fulfils its obligations, calculated from the moment event leading to loss-event ceases.
Probation period is calculated separately for each loss-event. Probation period is also maintained when the exposure due to which loss-event has occurred has been repaid, written off or sold. Probation period equals:
■ for distressed restructuring – 12 months,
■ for other loss-events – 3 months.
During probation period, the Bank assesses debtor's credit behaviour, and the exit from probation period depends on proper service.
3.3.6.1.1. Significant deterioration of credit quality (classification to Stage 2)
A significant deterioration in credit quality is recognised for the asset concerned on the basis of quantitative and qualitative criteria, with the asset being transferred to Stage 2 once at least one of such qualitative or quantitative criteria is met.
Qualitative criteria are:
■ the number of days of delay in paying the amount due is greater than or equal to 31 days, taking into account materiality thresholds:
□ the absolute threshold refers to the past due exposure amount and amounts to PLN 400 for retail exposures in Polish branch and exposures of Private Banking debtors, registered in corporate systems, CZK 2 500 for retail exposures in the foreign branch of the Bank in the Czech Republic, EUR 100 for retail exposures in the foreign branch of the Bank in Slovakia and PLN 2 000 for exposures in the area of corporate and investment banking,
□ the relative threshold refers to the ratio of the past due exposure amount to the total balance sheet exposure amount and amounts to 1%,
■ the number of days of delay in paying the amount due of exposure is greater than or equal to 91 days (without materiality thresholds),
■ occurrence of the Forborne performing flag (the client status shows that they are experiencing difficulties in repaying the loan commitment, as defined by the Bank),
■ occurrence of the Watch List flag (the Bank’s internal process designed to identify corporate clients who are subject to increased monitoring in terms of changes in credit quality, in accordance with the Watch List classification rules adopted by the Bank),
■ deterioration of the risk profile of the entire exposure portfolio due to the type of product, industry or distribution channel (for retail customers).
The Bank quantifies the level of credit risk in relation to all exposures or clients for which credit exposures exists. In the absence of available information to assess the credit risk of an exposure at initial recognition, the Bank classifies such an exposure to Stage 2 without the possibility to reclassify it to Stage 1.
The quantitative criterion of the Transfer Logic is based on a significant deterioration in credit quality, which is assessed on the basis of relative and absolute long-term change in Probability of Default (PD), specified for the exposure at the reporting date, relative to the long-term PD specified on initial recognition. This factor is determined separately for the retail and corporate portfolio within the homogeneous segments in terms of probability of default events and exposure characteristics. Where relative and absolute change in long-term PD exceeds “the transition thresholds”, the exposure is moved to Stage 2. An important issue in the process of calculating the credit quality deterioration is initial date recognition consistent in the entire Bank, against which the deterioration of credit quality is examined. Initial date re-recognition is determined for the exposures for which substantial modification of contractual terms took place. Each change of initial recognition date results in recalculation taking into account the new exposure characteristics, initial PD parameter at the new initial recognition date, against which the credit quality deterioration is examined.
3.3.6.1.2. Low credit risk criteria
For exposures whose characteristics are indicative of low credit risks (LCR), expected credit losses are always determined on a 12-month basis. Exposures designated as LCR may not be transferred from Stage 1 to Stage 2, although they can be moved from Stage 1 to Stage 3 upon being recognised as credit-impaired. The Group applies the LCR criterion to clients from the government and central bank segment with investment grade ratings and to clients from Local Government Units segment. The LCR criteria are not used in the retail banking segment.
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3.3.6.1.3. Impairment triggers – corporate portfolio
The list of definite loss events in corporate portfolio:
■ the number of days past due of the principal, interest or fees is over 90 days (in the case of exposures to banks over 14 days). Number of days past due is calculated at the debtor level and commences when both absolute and relative materiality thresholds have been exceeded, where:
□ absolute threshold refers to the sum of all overdue amounts related to the debtor's liabilities towards the Bank and amounts to PLN 2 000 for corporate and investment banking debtors and PLN 400 for Private Banking debtors registered in corporate systems,
□ relative threshold refers to the ratio of all overdue amounts related to the debtor's liabilities towards the Bank to the sum of balance sheet exposures related to given debtor and amounts to 1%;
■ the Bank's sale of the credit obligation with material economic loss related to change in creditworthiness of the debtor,
■ the Bank performed distressed restructuring (the materiality threshold from which the Bank considers a diminished financial obligation to be defaulted is 1%),
■ information about enforcement proceedings instigated against a debtor in the amount which in the Bank’s opinion is likely to result in a loss of creditworthiness,
■ information about a petition for bankruptcy, liquidation of a debtor, dissolution or annulment of a company, or about appointment of a guardian,
■ declaration of bankruptcy of a debtor or acquiring by him a similar legal protection resulting in his evasion of or delay in repayment of credit obligations towards the Bank, the parent or subsidiary entity of the Bank,
■ information about dismissal of a petition for bankruptcy of a debtor on grounds that the assets of the debtor are insufficient or are only sufficient to cover the costs of bankruptcy proceedings,
■ debtor’s failure to repay the amount of surety provided by the Government,
■ termination of part or whole credit agreement by the Bank or the beginning of restructuring/collection procedures,
■ fraud (embezzlement) of the debtor,
■ Bank expecting suffering a loss on the client,
■ occurrence of cross default,
■ information on filing a restructuring petition or instigating a restructuring proceedings with regard to a debtor within the meaning of the Restructuring Law Act,
■ information on major financial problems suffered by a debtor.
In addition, the Bank identifies loss-events specific to individual categories of entities, and so-called ‘soft’ loss events, introduced in order to signal situations, which may result in the loss of the debtor's ability to repay loan to the Bank. In the event of their occurrence, an in-depth analysis (taking into account the specificity of the entity’s operations) is performed and individual decision on the classification of the exposure to one of the Stages is made.
3.3.6.1.4. Impairment triggers - retail receivables
The list of definite loss events in retail portfolio:
■ the number of days past due of the principal, interest or fees is over 90 days. Number of days past due is calculated at the debtor level and commences when both absolute and relative materiality thresholds have been exceeded, where:
□ absolute threshold refers to the sum of all overdue amounts related to the debtor's liabilities towards the Bank and amounts to PLN 400 for Polish branch, CZK 2 500 for the foreign branch of the Bank in the Czech Republic and EUR 100 for the foreign branch of the Bank in Slovakia,
□ relative threshold refers to the ratio of all overdue amounts related to the debtor's liabilities towards the Bank to the sum of balance sheet exposures related to given debtor and amounts to 1%,
■ the Bank performed distressed restructuring (the materiality threshold from which the Bank considers a diminished financial obligation to be defaulted is 1%),
■ termination of the agreement by the Bank in the event of breach of the loan agreement by the debtor,
■ obtaining information on the submission of a petition for consumer bankruptcy by the debtor, conducting court proceedings in this matter or a judgment by the court of consumer bankruptcy,
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■ obtaining information about the submission of an application by the debtor to initiate or to conduct bankruptcy/restructuring proceedings against the debtor, which, in the Bank's opinion, may result in delay or failure to repay the liability,
■ recognition of the contract as fraudulent,
■ the Bank's sale of the credit obligation with material economic loss related to change in creditworthiness of the debtor,
■ uncollectable status of debt,
■ pay-out of low-down payment insurance,
■ occurrence of cross default.
3.3.6.2. Calculation of expected credit losses
Expected credit losses (ECL) are measured at the level of a single contract or exposure (agreement). In the portfolio approach, expected credit losses are the multiplication of individual for each exposure estimated value of PD, LGD and EAD and the final value of expected credit losses is the sum of expected credit losses in particular periods discounted with the effective interest rate. The calculation of expected credit losses does not use a collective approach (assigning one parameter value to selected portfolios).
In order to calculate the Lifetime PD parameter, an estimation was used in which the explanatory variable is the cumulative default-rate. In this procedure, using linear regression calculated by the least squares method, a Weibull distribution curve is fitted to the empirical data. Estimates are made separately for the retail and corporate portfolio within the homogeneous segments in terms of client and exposure characteristics. In order to determine Lifetime PD values that take into account macroeconomic expectations, a scaling factor, known as the z-factor, is additionally determined. Z-factor aims to adjust the average observed Lifetime PD values to values that reflect expectations about the development of future macroeconomic conditions. The scaling factor determines the phase of the business cycle in which the economy will be in the next years of the forecast by comparing the expected values of default rates to long-term averages.
For the purposes of calculating the long-term LGD parameter, the dependent variable in the form of a loss ratio calculated using the discounted cash flow method (workout approach) was determined. To determine the estimates, a set of statistical methods was used, consisting of e.g. fractional regression, linear regression, mean in pools, or regression trees. Estimates are made separately for the retail and corporate portfolios within homogeneous segments with the use of customer and exposure characteristics. During the estimation, macroeconomic expectations were also used, which adjusted the model values based on customer- and contract-level variables.
In order to calculate the long-term EAD parameter, a set of two dependent variables was used in the form of the future utilisation of the limit (Limit Utilisation - LU) and the credit conversion factor (CCF). Model values were determined using regression trees based on client- and contract-level variables. In the segments in which the analyses indicated the statistical significance of macroeconomic expectations, they were included in the EAD models.
If on the reporting date the exposure credit risk did not increase significantly since the initial recognition, expected credit losses are calculated in the minimum horizon of 12-month horizon and horizon to maturity. If the exposure credit risk increased significantly since the initial recognition (exposure is in Stage 2), the Bank calculates expected credit losses in the life-time horizon (Lt ECL). The parameters used to calculate an expected credit loss in Stage 1 are identical to those used to calculate a long-term credit loss in Stage 2 for t=1, where ‘t’ stands for year of the forecast.
The individual approach concerns all balance sheet and off-balance sheet credit exposures with an impairment in the corporate loan portfolio and Private Banking loan portfolio, which is registered in corporate systems. The expected credit losses are calculated as a difference between the value of exposure and the present value of the estimated future cash flows discounted with the effective interest rate. The method of calculating the expected recoveries takes place in scenarios and depends on the Bank’s chosen strategy for the client. In case of restructuring strategy, considered scenarios are developed for exposures and assume a significant share of recoveries from the customer’s own payments. In case of debt collection strategy, the scenarios are developed for each recovery source (collateral) separately. The Bank identifies scenarios per exposure/recovery source, minimum 2 are considered obligatory, provided one of them reflects a partial loss on exposure/recovery source. Weight of scenario results from an expert assessment of the likelihood of scenarios based on the relevant facts of the case, in particular on existing security and their type, client's financial situation, client’s willingness to cooperate, the risks that may occur in the case and micro- and macroeconomic factors.
For the valuation of expected credit losses the Bank uses data contained in the Bank's transaction systems and implemented in dedicated tools.
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3.3.6.2.1. Use of macroeconomics scenarios in ECL estimation
Approach to the use of macroeconomic scenarios in ECL estimation is adapted to the specificity of the subsidiaries belonging to the mBank Group. The Group is required to set an expected credit loss in a way which meets the expectations for various forward-looking macroeconomic scenarios. In case of portfolio estimation of ECL, the non-linearity factor (NLF) is set in order to adjust the value of an expected credit loss (calculated every month). NLF factor is determined separately for retail and corporate segments at least once a year. NLFs are used as scaling factors for individual ECLs that are determined at the level of individual exposures in each segment. NLFs are calculated based on results from three simulation calculations at the same reporting date, which result from relevant macroeconomic scenarios. In particular, NLF for a given segment is calculated as:
■ the probability-weighted average of the expected loss from three macroeconomic scenarios (‘average estimation’) comprising: baseline scenario, optimistic scenario and pessimistic scenario. The weights of scenarios are consistent with probabilities of realisation each scenario – 60% for base, 20% for optimistic and 20% for pessimistic,
■ divided by the expected loss determined under baseline scenario (reference estimate).
Simulation calculations, whose results are used to calculate NLF, are carried out on the basis of the same input data on exposure characteristics, but involve different risk parameter vectors, if the macroeconomic expectations defined in the scenarios are such as to affect the value of these parameters.
Additionally, the inclusion of forward-looking information takes place in the models of all three credit risk parameters estimated in the lifetime horizon (LtPD, LtEAD, LtLGD). In the estimates the Bank uses, among others, generally available macroeconomic and financial indicators (GDP, employment in the enterprise sector, unemployment rate, level of export/import, salaries, monetary financial institutions receivables from households), expectations regarding interest rates and exchange rates, as well as changes in property prices, separately for residential and commercial properties.
In the case of individual ECL estimation, each time, based on an expert assessment, the Bank estimates the impact of macroeconomic factors and other general factors (e.g. the Bank's previous cooperation with the borrower, the nature of the product) on the probability of the adopted scenarios in the calculation of the estimated loss and on the assumed amounts and dates of inflow from operating cash flows and from collateral. This is done through a comprehensive expert assessment of above factors (positive assessment, neutral or negative). For example, a positive assessment provides the basis for increasing the probability of a positive scenario against a negative one, or a baseline scenario against a negative one, where the baseline scenario is based on inflow from the borrower's operating activity. Macroeconomic factors used in individual ECL estimation are based on assumptions for budget forecasts and financial plans used for management and reporting at mBank. In addition, in terms of macroeconomic factors, conclusions from industry analyses prepared at the Bank are taken into account, in particular conclusions from expert assessments of industries prepared for the purpose of determining the Bank's industry limits, as well as from the assessment of industry prospects and the assessment of the attractiveness of a specific sector. Future economic conditions may not be taken into account in the process of estimating ECL if Bank does not identify connection between macroeconomic factors and the level of expected loss.
3.3.6.2.2. Significant model changes
In 2022 the Group introduced the following significant changes to the models used to calculate expected credit losses:
■ In the first half of 2022:
□ For the specialised lending portfolio there was provided a recalibration of long-term default probability and long-term loss models used for the calculation of expected credit losses and there was provided an update of macroeconomic forecasts, preceded in the first quarter of 2022 by the assignment of a weight of 100% for the pessimistic scenario in the expected credit loss model. The total impact on the level of expected credit loss of all changes for the specialised lending portfolio was a release of provisions in the amount of PLN 6.4 million (positive impact on the result),
□ For the remaining loan portfolio there was performed an analysis of an update of macroeconomic forecasts, preceded in the first quarter of 2022 by the assignment of a weight of 100% for the pessimistic scenario in the expected credit loss model. The impact of these changes on the level of expected credit loss, for the loan portfolio not including specialised lending, was recognised as a creation of provisions in the amount of PLN 55.2 million (negative impact on the result). Additionally, the impact on the fair value valuation of the non-mortgage loans portfolio amounted to PLN 1.8 million (negative impact on the result).
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IFRS Consolidated Financial Statements 2022 (PLN thousand)
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■ In the second half of 2022:
□ The lifetime LGD model for the corporate segment was rebuilt and the macroeconomic indicators used in the expected credit loss model were updated to take into account the volatility of the current and forecast economic situation in Poland. The total impact of these changes, in the context of the expected credit loss amounted to PLN 16.8 million (negative impact on the result). Additionally, the impact on the fair value valuation of the non-mortgage loans portfolio amounted to PLN 0.7 million (negative impact on the result).
3.3.6.2.3. The most important changes resulting from the implementation of Recommendation R
On 15 April 2021, the Polish Financial Supervision Authority (PFSA) issued Recommendation R on the principles of credit exposure classification, estimation and recognition of expected credit losses and credit risk management, which entered into force on 1 January 2022.
The revised Recommendation R is a set of best practices regarding the classification of credit exposures, estimation and recognition of expected credit losses, in accordance with the accounting and credit risk management policies adopted and applicable at banks. Within the Group the most important adjustments resulting from the content of the Recommendation covered the following areas:
■ definition of default - no need to change the definition of default was identified as part of the adaptation to Recommendation R. The rules of the recommendation influenced the specification of some loss events and the modification of the debt collection process;
■ classification into Stages - adjusting the catalogue of criteria of the Transfer Logic algorithm:
■ in terms of quality criteria, the following two elements have been added to the previously used criteria:
□ deterioration of the risk profile of the entire exposure portfolio, due to the type of product, industry or distribution channel - applies to retail banking,
□ a delay in repayment for a given exposure exceeding 90 days from the maturity of a loan/loan instalment – principal, interest or fees, in a situation where the materiality criteria of an overdue credit obligation are not met for a given exposure - applies to retail and corporate banking,
■ in terms of the quantitative criterion, the following changes were made:
□ adjusting the definition of the relative and absolute change of the long-term PD to the requirements of Recommendation R,
□ updating the thresholds of the Transfer Logic, taking into account the long-term perspective (departure from the cyclical recalibration of the thresholds based on the current portfolio data; ensuring the constancy of the thresholds expected by the supervisor throughout the life of the contract by determining the thresholds based on a long-term sample of data),
□ taking into account the model segmentation compliant with the cross-sections suggested in the R recommendation,
■ process changes:
□ extending the approval process of expected credit losses to include the Vice President of the Management Board for Risk Management (CRO),
□ increasing the frequency of back tests of expected credit losses and risk parameters up to quarterly.
3.3.6.3. Coverage by expected credit loss allowance of individual sub-portfolios
The tables below show the percentage of the Group’s balance sheet and off-balance sheet items relating to loans and advances, guarantees and letters of credit to individuals, corporate entities, public sector and the coverage of the exposure by expected credit loss allowance for each of the Bank’s internal rating categories (the description of rating model is included in Note 3.3.4).
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Portfolio measured at amortised cost
31.12.2022
31.12.2021
Sub - portfolio
Exposure
(%)
Coverage by expected credit losses allowances
(%)
Exposure
(%)
Coverage by expected credit losses allowances
(%)
1
8.64
0.05
20.22
0.02
2
33.65
0.04
28.77
0.05
3
17.55
0.17
14.16
0.17
4
19.76
0.53
17.16
0.59
5
10.77
1.69
10.23
2.00
6
0.40
4.58
0.54
4.40
7
1.59
10.07
2.11
7.44
8
1.20
0.05
0.39
0.11
Other
3.39
0.11
3.33
0.04
Default category
3.05
54.20
3.09
54.53
Total
100.00
2.17
100.00
2.21
As at 31 December 2022, 42.29% of the loans and advances portfolio for balance sheet and off-balance sheet exposures is categorised in the top two grades of the internal rating system (31 December 2021: 48.99%).
3.3.7. Fair value for credit assets
If the conditions for the measurement of a credit asset at amortised cost (IFRS 9, par. 4.1.2) are not met, then it is measured at fair value through profit and loss or by fair value through other comprehensive income.
3.3.7.1. Fair value valuation of non-impaired credit assets
The valuation for non-impaired exposure is based on its discounted estimated future cash flows.
Future cash flows are determined taking into account:
■ repayment schedule, and in the absence of a schedule (revolving products) - based on a statistical estimation of the credit limit utilisation in expected behavioural exposure period,
■ time value of money, based on risk-free interest rates set in the process of forecasting interest flows,
■ cash flows amount and their schedule fluctuations stemming from the option of prepayment (early partial or full repayment of the principal) included in the loan agreement by application of prepayment factors,
■ uncertainty of cash flows resulting from credit risk throughout the forecasted lifetime of the exposure by modification of contract flows using multi-year credit risk parameters Lt PD and Lt LGD,
■ other factors that would be taken into consideration by the potential exposure buyer (overhead costs and the profit margin expected by market participants) during the process of calibration of the discount rate used in the valuation process.
Due to requirements of IFRS 13 for the exposures for which there are no quotes on an active market, the Bank calibrates the discount rate based on fair value at the date of the initial recognition (i.e. the cost price of exposure). Calibration margin reflects market valuation of costs related to maintaining exposures in the portfolio and market expectations about profit margin realised on similar exposures.
3.3.7.2. Fair value valuation of impaired credit assets
Impaired credit assets are valuated based on expected recoveries. In case of retail exposures the valuation reflected by LGD parameters, and in case of corporate exposures it refers to individual recovery scenarios.
3.3.8. Repossessed collateral
The Group classifies repossessed collaterals as assets repossessed for debts and measures them in accordance with the adopted accounting policies described in the Note 2.22. Assets repossessed for debts classified as assets held for sale will be put up for sale on an appropriate market and sold at the soonest possible date. The process of selling collaterals repossessed by the Bank is arranged in line with the policies and procedures specified for individual types of repossessed collaterals.
The policy of the companies of the Group is to sell repossessed assets or - in the case of leases - lease them out again to another customer. Cases in which the repossessed collateral is used for own needs are
mBank S.A. Group
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rare – such a step must be economically justified and reflect the Group companies urgent need and must at each time be approved by their Management Boards.
In 2022 and 2021, the Group did not have any repossessed collaterals that were difficult to sell. As at 31 December 2022, value of repossessed collaterals was PLN 67 046 thousand (31 December 2021: PLN 64 613 thousand) included mainly leasing assets. The value of repossessed collaterals was included in the item inventories (Note 28).
3.3.9. The mBank Group Forbearance Policy
Definition
The mBank Group forbearance policy is a set of activities relating to renegotiation and restructuring of terms of loan agreements which is defined by internal regulations.
The Group offers forbearance to assist customers, who are temporarily or permanently in financial distress and are unable to meet their original contractual repayment terms, through agreements with less restrictive terms of repayment, without which financial difficulties would prevent satisfactory repayment under the original terms and conditions of the contract. These agreements may be initiated by the customer or the Group entities.
The type of concession offered should be appropriate to the nature and the expected duration of the customer’s financial distress. Financing entity’s belief in the customer’s willingness and ability to repay the loan is necessary to conclude an agreement. Prior to granting a concession, an assessment of its impact on improving customer’s ability to repay the loan is carried out.
The Group renegotiates loan agreements with customers in financial difficulties to maximise possibility of receivables repayment and minimise the risk of default (situation when client fails to fulfil his contractual obligation).
Exposures with modified terms and conditions under forbearance policy (hereinafter - forborne exposures) are subject to regulatory and internal reporting.
Instruments used
The Group maintains open communication with borrowers in order to detect any financial difficulties as early as possible and to know the reasons of such difficulties. In case of retail borrowers with temporary financial difficulties forbearance solutions focus on temporary reductions of contractual payments among others in form of capital repayments suspension with only interest repayments kept.
For borrowers under long term financial distress extension of contractual repayment schedule may be offered which can include instalments reduction.
For the corporate borrowers in financial distress, as part of the business support process, the Group offers concessions, starting from participating in debt standstills (abandonment of actions to which the Bank is authorised in case of violation of contractual terms or covenants) and finishing on debt restructuring agreements. Debt restructuring agreements may improve the Group’s security by replacing open financing (overdraft) with factoring or invoice discount and they can waive or ease covenants (additional conditions included in the primary agreement), if it represents optimal strategy for client’s business continuity.
The following list does not exhaust all possible actions that are subject to forbearance, but it includes the most common:
■ maturity extension/extension of loan duration,
■ restructuring (medium- or long-term refinancing),
■ capitalisation of interest,
■ interest deferrals,
■ full instalment deferrals,
■ principal deferrals,
■ suspension, withdrawal from the implementation of activities resulting from additional conditions contained in the contract (covenant waiver),
■ standstills.
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IFRS Consolidated Financial Statements 2022 (PLN thousand)
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Risk management
Forbearance measures have been an integral part of the Group’s risk management area for many years. Forborne portfolios are subject to regular review and reporting to the area management. The effectiveness of undertaken actions, regularity of restructured transactions service in respect of types of product and borrower’s segment are subject to assessment. The risk analysis of retail forborne portfolio is based on portfolio approach and corporate portfolio analysis is based on individual approach.
In corporate banking every Bank’s exposure to borrowers with recognised loss event is classified as default and impairment test is required to be carried out. Every exposure classified as default is being taken over by the specialised unit dedicated to restructuring. All exposures to borrowers in financial difficulties with granted concessions (incl. classified as default) have the forborne status. Non-default debtors, i.e. without recognised loss event, who received the concession (forbearance measures), are subject to close monitoring (Watch List – LW) by all units involved in the loan granting process. Their financial situation is subject to close monitoring and they are under constant review to establish whether any of impairment indicators had materialised.
The Group does not use dedicated models to determine level of portfolio provision and special-purpose provision for forborne portfolio.
Forborne exit conditions – corporate banking area
The Group ceases to recognise the exposure as forborne if all of the following conditions are met:
■ the debtor financial situation’s analysis showed improvement and the exposure has been recognised as performing,
■ at least two years after exposure had been recognised as performing have passed (probation period),
■ for the last 12 months of probation period significant and regular capital or interest payments have been made by the borrowers,
■ none of the debtor exposures is more than 30 days overdue at the end of probation period.
Forborne exit conditions – retail banking area
The Bank ceases to recognise the contract as forborne when all of the following conditions are met:
■ the contract is recognised as performing,
■ at least two years (probation period) have passed since the exposure was recognised as performing,
■ at least from the middle of the abovementioned probation period regular capital or interest payments were made (lack of significant delays in repayment longer than 30 days),
■ none of the debtor’s exposures are overdue more than 30 days and at the same time the due amount does not exceed material threshold defined in internal regulations of the Bank at the end of the 2-year probation period.
Portfolio characteristics
31.12.2022
31.12.2021
Gross carrying amount
Accumulated impairment
Net value/
fair value
Gross carrying amount
Accumulated impairment
Net value/
fair value
Loans and advances to customers at amortised cost
122 584 242
(3 254 212)
119 330 030
119 703 485
(3 178 110)
116 525 375
of which: forborne exposures
2 839 762
(657 473)
2 182 289
1 971 957
(419 194)
1 552 763
of which: defaulted
1 505 721
(622 951)
882 770
1 050 880
(383 925)
666 955
Loans and advances to customers mandatorily at fair value through profit or loss
813 392
1 111 674
of which: forborne exposures
2 233
11 991
of which: defaulted
920
7 487
Forborne exposures, total
2 184 522
1 564 754
of which: defaulted
883 690
674 442
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
59
Change of carrying value of forborne exposures
31.12.2022
31.12.2021
As at the beginning of the period
1 564 754
1 896 541
Outflow from forborne exposures
(440 835)
(841 642)
Inflow to forborne exposures
1 185 352
644 181
Changes in existing exposures
(124 749)
(134 326)
As at the end of the period
2 184 522
1 564 754
The analysis carried out for the above reporting periods showed a negligible share of exposures that leave the forbearance status and then return to it within one year.
Forborne exposures by client segment
31.12.2022
31.12.2021
Loans and advances to customers
Loans to individuals
1 149 903
861 609
including: housing and mortgage loans
856 714
562 047
Loans to corporate clients
1 034 619
703 145
Total
2 184 522
1 564 754
Forborne exposures by type of assistance
31.12.2022
31.12.2021
Refinancing
173 479
123 251
Modification of terms and conditions
2 011 043
1 441 503
Total
2 184 522
1 564 754
Forborne exposures by geographical breakdown
31.12.2022
31.12.2021
Poland
2 010 738
1 506 744
Other countries
173 784
58 010
Total
2 184 522
1 564 754
Forborne exposures by days past due
31.12.2022
31.12.2021
Not past due
307 534
196 632
Past due less than 30 days
1 522 450
974 417
Past due 31 - 90 days
92 142
122 736
Past due over 90 days
262 396
270 969
Total
2 184 522
1 564 754
Forborne exposures by industry
31.12.2022
31.12.2021
Individual customers
1 149 903
861 609
Real estate
307 810
222 589
Construction
262 656
78 525
Food sector
100 959
79 374
Construction materials
76 298
23 468
Metals
66 188
9 075
Wood, furniture and paper products
57 602
55 699
Wholesale trade
42 980
6 872
Motorisation
20 420
28 013
Transport and logistics
19 845
17 625
Other industries
79 861
181 905
Total
2 184 522
1 564 754
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
60
3.3.10. Counterparty risk that arises from derivatives transactions
The credit exposure on mBank portfolio to derivative transactions is calculated as the sum of the replacement cost of each transaction (which is its current net present value - NPV) and its estimated future potential exposure (Add-on). Moreover, the Bank uses credit mitigation techniques such as netting and collateralisation. The former is implemented if close-out netting agreement is signed, whereas the latter requires prior Credit Supported Annex (CSA) or suitable clauses in the framework agreement concluded in order to collateralise the exposure. CSA states that the variation margin may be called if current valuation of the portfolio exceeds the predefined level (threshold). Moreover, as far as existing agreements are concerned, additional collateral (initial margin, etc.) may also be exchanged. Credit exposure to the derivatives portfolio is adjusted appropriately depending on the collateral being paid or received in accordance with the binding agreements. For the purpose of the counterparty risk calculation only positive NPV at the derivative portfolio level is taken into account.
Credit exposure control is performed through an integrated system in real time. In particular the level of the allocated credit exposure limit usage is monitored on a daily basis. In addition, compliance with restrictions resulting from credit decisions, supervisory regulations and business decisions is controlled. Credit exposure limits are subject to limit decomposition into different products and maturities.
The decomposition of mBank credit exposure of the derivatives portfolio based on the counterparty type is as follows:
■ 41.0% banks,
■ 11.6% central counterparties (CCP),
■ 6.2% financial institutions,
■ 41.2% corporates, private banking and others.
The breakdown of mBank credit exposure of the derivatives portfolio based on client type is as follows:
Client type
Credit exposure 2022
(PLN million)
Credit exposure 2021
(PLN million)
Bank CSA
1 556
1 444
Central counterparties
442
491
Corporate customers with limit
1 568
1 712
Non-banking financial institutions
234
332
Corporate customers with cash collateral and others*
(5)
1
*negative exposure means overcollateralization
Positive NPV (netting included) and inflows/outflows of the collateral for mBank of the derivatives portfolio is depicted below:
Corporates and others
Banks*
CCP*
CSA
w/o CSA**
CSA
w/o CSA**
(PLN million)
2022
2021
2022
2021
2022
2021
NPV***
34.77
22.46
14.11
2.07
14.25
150.11
11.62
332.08
Collateral received (including collateral posted to custodian)
638.32
528.85
-
-
-
37.02
-
100.52
Collateral posted (including collateral posted to custodian)
495.07
463.80
493.86
583.31
-
-
-
-
*collateral excluding variation margin and default fund (collateral posted to the CCP lest one of its participants defaults)
**collateral based on NPV and its estimated future potential exposure;
***NPV with initial margin adjustment for banks, CCPs and corporates with CSA
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3.4. Concentration of assets, liabilities and off-balance sheet items
Geographic concentration risk
In order to actively manage the risk of concentration by country, the Group:
■ complies with the formal procedures aimed at identifying, measurement and monitoring this risk,
■ complies with the formal limits mitigating the risk by country and the procedures to be followed when the limits are exceeded,
■ uses a management reporting system, which enables monitoring the risk level by country and supports the decision-making process related to management,
■ maintains contacts with a selected group of the largest banks with good ratings, which are active in handling foreign transactions. On some markets, where the risk is difficult to estimate, the Bank uses the services of its foreign correspondent banks, e.g. Commerzbank, and insurance of the Export Credit Insurance Corporation (‘KUKE’), which covers the economic and political risk.
As at 31 December 2022 and as at 31 December 2021 there was no substantial level of geographical concentration in the credit portfolio of mBank Group. In terms of exposure relating to countries other than Poland there was no substantial share of impaired exposures.
Sector concentration risk
Monitoring exposures in sectors, defined in line with Polish Classification of Economic Activities, is carried out in individual subsidiaries of the Group.
mBank analyses the sector concentration risk in order to build its corporate portfolio in a safe and effective way and manages industrial concentration risk determining industrial limits.
Limiting covers all the sectors in which the Bank’s exposure exceeds 5% of the total amount of corporate exposures at the end of a given reporting period and sectors indicated by the Corporate and Investment Banking Risk Committee (KRK).
The Bank set industrial limits on a level not higher than:
■ 12% of the gross loan corporate portfolio for low-risk sectors but not higher than 60% of Tier I,
■ 10% of the gross loan corporate portfolio for medium risk sectors but not higher than 50% of Tier I,
■ 7% of the gross loan corporate portfolio for high-risk sectors but not higher than 35% of Tier I.
In the case when the utilisation of the limit exceeds 90%, activities preventing the exceeding of limits are implemented. Decision in this regard shall be taken by the KRK.
The table below presents the concentration structure of mBank S.A. balance sheet exposure into individual industries. The industry division is built on the basis of the value chain concept, in which entities operating in a given market (suppliers, manufacturers, sellers) are concentrated within one industry.
The table includes loans and advances at amortised cost and does not include the loans and advances measured at fair value through profit or loss.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
62
The structure of concentration of carrying amounts of exposure of the mBank Group
31.12.2022
Gross carrying amount
Accumulated impairment
No.
Sectors
Carrying
amount
Stage 1
Stage 2
Stage 3
POCI
%
Stage 1
Stage 2
Stage 3
POCI
1.
Individual customers
68 586 288
64 086 758
3 967 237
2 224 949
152 423
57.46%
(221 770)
(290 339)
(1 303 175)
(29 795)
2.
Real estate
6 448 613
5 307 400
713 098
629 903
41 720
5.46%
(29 221)
(18 305)
(200 004)
4 022
3.
Construction
4 943 126
4 216 920
449 131
527 031
13 881
4.25%
(22 610)
(13 583)
(232 226)
4 582
4.
Food sector
3 563 638
3 264 491
242 562
128 296
7 803
2.97%
(7 912)
(10 774)
(71 774)
10 946
5.
Financial activities
3 200 993
3 187 639
14 238
11 232
16
2.62%
(3 169)
(335)
(8 628)
-
6.
Transport and logistics
3 099 420
2 632 006
462 569
84 117
774
2.59%
(9 209)
(15 203)
(68 953)
13 319
7.
Metals
2 689 412
2 482 146
193 827
45 230
1 727
2.22%
(7 074)
(1 612)
(24 537)
(295)
8.
Construction materials
2 108 970
1 704 001
391 618
62 080
1 694
1.76%
(4 283)
(2 152)
(43 504)
(484)
9.
Chemicals and plastic products
2 079 293
1 951 744
107 919
39 045
(4)
1.71%
(4 359)
(932)
(16 384)
2 264
10.
Power and heating distribution
1 958 350
1 952 663
13 812
75 667
-
1.67%
(26 033)
(71)
(57 688)
-
11.
Motorisation
1 987 472
1 796 521
175 013
49 108
198
1.65%
(3 361)
(1 526)
(28 402)
(79)
12.
Scientific and technical activities
1 707 462
1 626 160
86 986
47 558
8 172
1.44%
(10 822)
(1 872)
(40 548)
(8 172)
13.
Wholesale trade
1 547 459
1 428 352
98 613
84 819
-
1.31%
(3 397)
(2 584)
(58 344)
-
14.
Retail trade
1 497 261
1 428 114
69 460
22 010
27
1.24%
(4 267)
(1 199)
(16 884)
-
15.
Wood, furniture and paper products
1 383 059
1 240 989
93 888
83 596
192
1.16%
(1 824)
(1 093)
(79 614)
46 925
16.
Fuel
1 180 621
1 138 306
33 345
18 420
943
0.97%
(4 256)
(339)
(5 283)
(515)
17.
IT
1 167 188
1 158 771
12 153
8 088
1
0.96%
(5 860)
(293)
(5 672)
-
18.
Human health
1 024 432
979 698
47 606
10 542
62
0.85%
(4 676)
(1 163)
(7 631)
(6)
19.
Rental and leasing activities
963 976
915 222
44 306
27 632
-
0.81%
(2 057)
(456)
(20 671)
-
20.
Other
8 192 997
7 033 104
1 094 510
332 712
(318)
6.90%
(26 456)
(22 049)
(221 280)
2 774
Total
119 330 030
109 531 005
8 311 891
4 512 035
229 311
100.00%
(402 616)
(385 880)
(2 511 202)
45 486
31.12.2021
Gross carrying amount
Accumulated impairment
No.
Sectors
Carrying
amount
Stage 1
Stage 2
Stage 3
POCI
%
Stage 1
Stage 2
Stage 3
POCI
1.
Individual customers
70 018 368
67 511 357
2 038 199
2 231 602
141 139
60.08%
(249 886)
(203 492)
(1 459 152)
8 601
2.
Real estate
6 499 531
5 027 958
1 124 407
501 866
7 333
5.57%
(16 973)
(55 700)
(110 731)
21 371
3.
Construction
4 483 192
4 003 701
344 271
315 379
13 674
3.91%
(13 030)
(18 371)
(160 282)
(2 150)
4.
Transport and logistics
3 132 999
2 679 529
432 355
96 566
13 692
2.69%
(11 133)
(17 287)
(60 543)
(180)
5.
Food sector
2 984 393
2 762 130
188 859
90 241
40 333
2.57%
(12 355)
(2 664)
(64 828)
(17 323)
6.
Metals
2 561 888
2 428 104
122 236
39 714
3 693
2.17%
(7 656)
(1 303)
(19 257)
(3 643)
7.
Construction materials
2 016 190
1 811 977
188 739
79 126
1 580
1.74%
(7 491)
(2 205)
(55 353)
(183)
8.
Motorisation
1 911 996
1 803 294
89 729
48 766
2 171
1.62%
(4 516)
(1 481)
(24 483)
(1 484)
9.
Chemicals and plastic products
1 918 967
1 869 358
52 370
8 514
-
1.61%
(6 048)
(657)
(4 570)
-
10.
Financial activities
1 864 060
1 852 385
17 295
10 287
17
1.57%
(6 760)
(513)
(8 651)
-
11.
Power and heating distribution
1 578 467
1 595 892
5 795
52 867
-
1.38%
(29 039)
(113)
(46 935)
-
12.
Scientific and technical activities
1 553 843
1 422 673
140 162
48 055
8 855
1.35%
(11 364)
(3 337)
(42 591)
(8 610)
13.
Wholesale trade
1 477 737
1 401 753
56 355
90 788
-
1.29%
(4 244)
(1 023)
(65 892)
-
14.
Retail trade
1 339 498
1 296 664
41 840
19 832
193
1.13%
(4 315)
(824)
(13 892)
-
15.
Wood, furniture and paper products
1 264 643
1 119 826
100 043
49 467
193
1.06%
(2 245)
(7 637)
(41 023)
46 019
16.
IT
1 130 311
1 123 395
12 891
6 780
1
0.95%
(6 819)
(272)
(5 665)
-
17.
Fuel
1 065 595
1 029 942
34 998
6 542
3
0.90%
(2 289)
(227)
(3 374)
-
18.
Human health
984 179
917 682
71 570
7 983
3
0.83%
(5 475)
(1 661)
(5 923)
-
19.
Rental and leasing activities
879 492
801 471
63 911
41 528
-
0.76%
(2 474)
(804)
(24 140)
-
20.
Other
7 860 026
6 446 490
1 097 857
593 960
1 279
6.82%
(30 760)
(26 684)
(223 216)
1 100
Total
116 525 375
108 905 581
6 223 882
4 339 863
234 159
100.00%
(434 872)
(346 255)
(2 440 501)
43 518
The table below presents the risk of limited sectors (i.e. sectors for which, as at the balance sheet date, the Group/Bank had maximum exposure limits in relation to the corporate exposure portfolio) at the end of 2022 and at the end of 2021.
No.
Sectors
31.12.2022
31.12.2021
1.
Financial sector
low
low
2.
Food sector
medium
medium
3.
Construction
high
high
4.
Metals
medium
medium
5.
Power
medium
medium
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
63
Large exposures concentration risk
The purpose of management of the large exposures’ concentration risk is an ongoing monitoring of the level of limits set by the CRR Regulation. In order to ensure safety against the risk of exceeding the regulatory limits in mBank:
■ internal limits, lower than those specified in the CRR Regulation, are set,
■ daily monitoring of large exposures is carried out and the participants of the lending and investment processes are immediately informed in the case of internal limits exceeding.
These activities have a direct impact on the Bank’s decisions concerning new exposures and the increase of existing exposures.
mBank pays particular attention to the correct identification of the scale of risk of significant credit exposures defined in the Bank’s internal regulations. In the case of exceeding specified amount of exposure/limit to a customer/group of affiliated customers identified as bulk risk, the financing requires additional decision of the Bank’s Management Board irrespective of the PD-rating and the decision-making level.
The Bank monitors large exposures that are subject to exposure limit i.e. exposures after taking into account the effect of the credit risk mitigation (in accordance with art. 401-403 of CRR Regulation) and exemptions (art. 390 paragraph 6, Art. 400, Art. 493, paragraph 3 of CRR Regulation), which are equal or exceed 10% of Tier 1. At the end of 2022, the Bank recorded one large exposure (after exemptions) for the Commerzbank Group in the amount of PLN 1 379 million, which accounted for 11.35% of mBank Group's Tier1.
The Credit Committee of mBank Group is responsible for the supervision over risk concentration and large exposures at the level of mBank subsidiaries.
3.5. Market risk
In its operations, the mBank Group is exposed to market risk, which is defined as a risk resulting from unfavourable change of the current valuation of financial instruments in the mBank Group’s portfolios due to changes of the market risk factors, in particular:
■ interest rates;
■ foreign exchange rates;
■ stock share prices and indices;
■ implied volatilities of relevant options;
■ credit spreads (to the extent reflecting market fluctuations of debt instruments prices, reflecting credit spread for corporate bonds, and spread between government yield curve and swap curve – for government bonds).
In terms of the banking book, the mBank Group distinguishes the interest rate risk, which is defined as the risk of an adverse change in both the current valuation of the banking book position and the net interest income as a result of changes in interest rates.
3.5.1. Organisation of market risk management
In the process of organisation of the market risk management, mBank follows requirements resulting from the law and supervisory recommendations, in particular the PFSA Recommendations (among others A, C, G and I) and the EBA guidelines, concerning market risk management.
The fundamental principle applied in the organisation of the market risk management is the separation of the market risk control and monitoring functions from the functions related to opening and keeping open market risk positions.
3.5.2. Tools and measures
For the purpose of internal management, the Bank quantifies exposure to market risk, both for banking and trading book, by measuring:
■ the Value at Risk (VaR);
■ expected loss under condition that this loss exceeds Value at Risk (ES – Expected Shortfall);
■ the Value at Risk in stressed conditions (Stressed VaR);
■ economic capital to cover market risk;
■ stress tests scenario values;
■ portfolio sensitivities to changes of market prices or market parameters (IR BPV – Interest Rate Basis Point Value, CS BPV – Credit Spread Basis Point Value).
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
64
The Bank allocates market risk to positions in the banking book, irrespective of the method of presentation of the financial result on those positions used for financial accounting purposes. Market risk measures for interest rate positions in the banking books are determined on the basis of Net Present Value (NPV).
The Bank monitors market risk on a daily basis. For selected risk measures, the measurement is conducted on a weekly basis (Stressed VaR, CS BPV by rating classes) or monthly (economic capital).
For the banking book, the Bank also uses the following measures (described in more detail in the chapter on interest rate risk):
■ sensitivity of the economic value of capital (delta EVE);
■ sensitivity of net interest income (delta NII);
■ repricing gap.
The Value at Risk (VaR) is calculated for each risk factor using the historical method for a 1-day and a 10-day holding period and a 95%, 97.5% and 99% confidence level, assuming a static portfolio. In this method, historical data concerning risk factors for last 254 business days are taken into consideration.
The expected loss under condition that it exceeds Value at Risk (ES) is calculated on the basis of VaR calculation as the average of six worst losses.
The Value at Risk in stressed conditions is a measure of the potential portfolio loss under adverse market conditions that deviate from typical market behaviour. The calculation is analogous to the Value at Risk calculation, the only difference being the period of occurrence of stressed conditions, which is determined on the basis of series of Value at Risk based on 12-month window of risk factors changes since half of 2008.
The economic capital for market risk is a capital to cover losses in the course of one year coming from changes in valuation of financial instruments which built the mBank Group’s portfolios and resulting from changes of prices and values of market parameters.
Stress tests are additional measures of market risk, supplementing the measurement of the Value at Risk. They show the hypothetical changes in the current valuation of the mBank Group’s portfolios, which would take place as a result of realisation of the so-called stress scenarios, i.e. market situations at which the risk factors would reach specified extreme values, assuming a static portfolio.
Stress tests consist of two parts: standard stress tests designated for standard risk factors (foreign exchange rates, interest rates, stock prices and their volatility), as well as stress tests, which involve changes in credit spreads. In this way, there was addressed among others, the need for covering in stress tests analysis the independent effect of basis risk (the spread between government yield curve and swap curve), which the Group is exposed to, due to maintaining the portfolio of Treasury bonds.
IR BPV is a sensitivity measure of the current valuation of the portfolios to an increase in interest rates by 1 basis point, and CS BPV to an increase in credit spread by 1 basis point.
In order to reflect the interest rate risk of the retail and corporate banking products with unspecified interest revaluation dates or rates administered by mBank, the Bank uses the so-called replicating portfolio models. The approach to current accounts takes into account the division of the stable part into the parts sensitive and insensitive to changes in interest rates. The tenor structure adopted for stable parts of the capital and current accounts, insensitive to changes in interest rates, reflects the approved Bank’s strategy to stabilise the net interest income. The tenor structure for the stable part of savings accounts is modelled.
The VaR and IR BPV measurement results presented later in the report show the perspective including modelling of stable parts of capital and non-maturity products (NMD – non-maturity deposits).
The measurement methodology is subject to initial and periodic validation carried out by the Validation Unit and control by the Internal Audit Department.
In order to mitigate market risk exposure the limits are established on:
■ VaR at 97.5% confidence level for a 1-day holding period;
■ stress tests results;
■ sensitivity measures IR BPV and CS BPV.
Decisions regarding the values of market risk limits are taken by:
■ the Supervisory Board (with respect to the mBank Group’s portfolio);
■ the Management Board (with respect to mBank’s portfolio);
■ the Financial Markets Risk Committee (with respect to the business unit’s portfolios).
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
65
3.5.3. Risk measurement
mBank’s positions are the main source of market risk for the mBank Group.
Value at Risk
In 2022, the Bank’s market risk exposure, as measured by the Value at Risk (VaR, for a 1-day holding period, at 97.5% confidence level), was in relation to the established limits on moderate level.
The table below presents VaR and Stressed VaR for the Group’s and mBank’s portfolios.
2022
2021
mBank Group
mBank
mBank Group
mBank
PLN 000's
31.12.2022
Mean
31.12.2022
Mean
31.12.2021
Mean
31.12.2021
Mean
VaR IR
16 300
15 448
16 102
15 913
16 199
10 693
15 825
11 024
VaR FX
1 051
1 515
1 104
1 485
2 096
3 312
2 095
3 276
VaR CS
90 321
89 876
88 835
87 931
86 724
63 057
85 154
61 846
VaR
91 139
91 924
89 048
90 313
83 808
59 744
79 934
59 744
Stressed VaR
91 415
110 049
88 261
108 174
139 372
155 427
136 733
153 259
VaR IR – interest rate risk (without separate credit spread)
VaR FX - currency risk
VaR CS – credit spread risk
The measurement results are presented taking into the account the estimation of stable parts of capital and current accounts.
The value at risk (VaR) was largely influenced by the portfolios of instruments sensitive to interest rates and the credit spread - mainly the portfolios of Treasury debt securities (in banking and trading book) and positions resulting from interest rate exchange transactions. The increase of VaR value was caused by increased volatility on the financial markets, while the decrease in Stressed VaR resulted mainly from the reduction of the bond portfolio.
Sensitivity measures
The table presents the values of IR BPV and CS BPV (+1 b.p.) measures for the Group's and mBank's portfolios, broken down into banking and trading book.
IR BPV
CS BPV
mBank Group
mBank
mBank Group
mBank
PLN 000's
31.12.2022
31.12.2021
31.12.2022
31.12.2021
31.12.2022
31.12.2021
31.12.2022
31.12.2021
Banking book
129
1 199
230
1 302
(7 297)
(11 709)
(7 136)
(11 499)
Trading book
(118)
112
(118)
112
(242)
(209)
(242)
(209)
Total
11
1 311
112
1 414
(7 539)
(11 918)
(7 378)
(11 708)
The credit spread sensitivity (CS BPV) for mBank’s banking book decreased significantly in 2022 due to reduction of the bond portfolio and results in c.a. 70% from the positions in debt securities valued at amortised cost. Changes in market prices have no impact on the revaluation reserve or the income statement for these positions.
Economic capital for market risk
The Bank calculates economic capital to cover market risk with taking into account the modelling of stable parts of capital and current accounts, insensitive to changes in interest rates.
As of the end of 2022 the economic capital for market risk for the mBank Group was PLN 1 655.7 million and for mBank was PLN 1 539.0 million. For comparison, at the end of 2021, values of this measure amounted to PLN 1 292.4 million and PLN 1 238.7 million, respectively. The amount of economic capital for market risk in 2022 was determined mainly by the change in the interest rate position. It grew despite reduction of the treasury bonds portfolio due to the increase of the volatility on the financial markets.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
66
3.6. Currency risk
The Group is exposed to changes in currency exchange rates due to other than PLN financial assets and liabilities. The following tables present the exposure of the Group to currency risk as at 31 December 2022 and 31 December 2021. They present carrying amount of assets and liabilities of the Group broken down by currency.
31.12.2022
PLN
EUR
USD
CHF
CZK
Other
Total
ASSETS
Cash and cash balances with central banks
3 337 488
12 150 242
231 016
1 341
292 326
1 905
16 014 318
Financial assets held for trading and hedging derivatives
2 088 813
401 543
26 720
5 182
1 878
516
2 524 652
Non-trading financial assets mandatorily at fair value through profit or loss, including:
934 779
42 225
66 696
-
489
-
1 044 189
Equity instruments
183 478
1 821
-
-
489
-
185 788
Debt securities
-
-
45 009
-
-
-
45 009
Loans and advances to customers
751 301
40 404
21 687
-
-
-
813 392
Financial assets at fair value through other comprehensive income
34 864 893
18 511
213 774
-
20 272
-
35 117 450
Financial assets at amortised cost, including:
104 688 289
20 869 899
1 338 481
6 442 783
14 593 586
205 781
148 138 819
Debt securities
19 002 527
-
-
-
-
-
19 002 527
Loans and advances to banks
709 367
1 318 607
204 493
2 011
7 534 690
37 094
9 806 262
Loans and advances to customers
84 976 395
19 551 292
1 133 988
6 440 772
7 058 896
168 687
119 330 030
Fair value changes of the hedged items in portfolio hedge of interest rate risk
3 064
-
-
-
-
-
3 064
Non-current assets and disposal groups classified as held for sale
26 747
-
-
-
-
-
26 747
Intangible assets
1 389 759
12
-
-
1 936
-
1 391 707
Tangible assets
1 433 425
7 711
-
-
43 797
-
1 484 933
Investment properties
136 909
-
-
-
-
-
136 909
Current income tax assets
-
457
-
-
27 845
-
28 302
Deferred income tax assets
1 869 813
3 147
-
-
2 768
-
1 875 728
Other assets
1 654 431
200 743
13 005
142
236 849
125
2 105 295
TOTAL ASSETS
152 428 410
33 694 490
1 889 692
6 449 448
15 221 746
208 327
209 892 113
LIABILITIES
Financial liabilities held for trading and hedging derivatives
1 431 588
570 043
27 149
56 783
-
548
2 086 111
Financial liabilities measured at amortised cost, including:
129 673 220
34 078 984
7 799 379
5 570 505
12 112 841
1 332 732
190 567 661
Amounts due to banks
599 715
723 986
35 446
1 910 911
-
165
3 270 223
Amounts due to customers
125 139 916
26 902 115
7 763 933
933 166
12 081 249
1 310 535
174 130 914
Lease liabilities
126 129
780 571
-
-
31 592
22 032
960 324
Debt securities issued
2 259 760
5 672 312
-
1 533 407
-
-
9 465 479
Subordinated liabilities
1 547 700
-
-
1 193 021
-
-
2 740 721
Fair value changes of the hedged items in portfolio hedge of interest rate risk
(1 528 582)
-
-
-
-
-
(1 528 582)
Liabilities classified as held for sale
7 375
-
-
-
-
-
7 375
Provisions
752 232
7 431
654
595 312
6 629
1
1 362 259
Current income tax liabilities
511 847
8 160
-
-
51 449
-
571 456
Other liabilities
3 427 562
402 582
162 260
6 344
87 760
24 294
4 110 802
TOTAL LIABILITIES
134 275 242
35 067 200
7 989 442
6 228 944
12 258 679
1 357 575
197 177 082
Net on-balance sheet position
18 153 168
(1 372 710)
(6 099 750)
220 504
2 963 067
(1 149 248)
12 715 031
Loan commitments and other commitments
29 387 015
2 991 861
206 688
3
576 929
1 519
33 164 015
Guarantees, banker's acceptances, documentary and commercial letters of credit
5 891 110
1 671 974
512 950
238
176
36 137
8 112 585
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
67
31.12.2021
PLN
EUR
USD
CHF
CZK
Other
Total
ASSETS
Cash and cash balances with central banks
8 472 636
3 356 377
75 411
1 029
285 356
11 457
12 202 266
Financial assets held for trading and hedging derivatives
1 277 894
1 293 039
16 052
2
1 719
370
2 589 076
Non-trading financial assets mandatorily at fair value through profit or loss, including:
1 264 660
51 449
100 782
-
300
-
1 417 191
Equity instruments
222 303
1 786
-
-
300
-
224 389
Debt securities
-
-
81 128
-
-
-
81 128
Loans and advances to customers
1 042 357
49 663
19 654
-
-
-
1 111 674
Financial assets at fair value through other comprehensive income
35 747 501
150 972
288 845
-
18 741
-
36 206 059
Financial assets at amortised cost, including:
98 053 043
18 500 801
1 349 298
9 390 545
12 497 646
127 826
139 919 159
Debt securities
16 164 103
-
-
-
-
-
16 164 103
Loans and advances to banks
286 780
940 640
209 785
1 727
5 758 863
31 886
7 229 681
Loans and advances to customers
81 602 160
17 560 161
1 139 513
9 388 818
6 738 783
95 940
116 525 375
Fair value changes of the hedged items in portfolio hedge of interest rate risk
-
-
-
-
(110 033)
-
(110 033)
Non-current assets and disposal groups classified as held for sale
31 247
-
-
-
-
-
31 247
Intangible assets
1 282 649
12
-
-
1 292
-
1 283 953
Tangible assets
1 507 374
9 090
-
-
25 786
-
1 542 250
Investment properties
127 510
-
-
-
-
-
127 510
Current income tax assets
70
-
-
-
28 077
-
28 147
Deferred income tax assets
1 390 472
-
-
-
1 878
-
1 392 350
Other assets
1 538 637
124 808
2 307
3 716
74 731
-
1 744 199
TOTAL ASSETS
150 693 693
23 486 548
1 832 695
9 395 292
12 825 493
139 653
198 373 374
LIABILITIES
Financial liabilities held for trading and hedging derivatives
821 901
1 174 908
14 055
-
-
318
2 011 182
Financial liabilities measured at amortised cost, including:
126 408 570
29 595 038
4 947 345
6 477 715
11 062 474
857 783
179 348 925
Amounts due to banks
2 384 266
278 097
30 087
2 573 695
-
34
5 266 179
Amounts due to customers
119 464 918
20 250 208
4 917 258
530 921
11 050 616
857 749
157 071 670
Lease liabilities
120 689
824 291
-
-
11 858
-
956 838
Debt securities issued
2 926 950
8 242 442
-
2 260 390
-
-
13 429 782
Subordinated liabilities
1 511 747
-
-
1 112 709
-
-
2 624 456
Fair value changes of the hedged items in portfolio hedge of interest rate risk
(1 055 478)
-
-
-
-
-
(1 055 478)
Liabilities classified as held for sale
7 425
-
-
-
-
-
7 425
Provisions
725 737
4 184
880
105 109
985
5
836 900
Current income tax liabilities
33 288
1 840
-
-
26 782
-
61 910
Deferred income tax liabilities
-
89
-
-
-
-
89
Other liabilities
2 823 805
292 785
204 575
9 267
75 885
38 188
3 444 505
TOTAL LIABILITIES
129 765 248
31 068 844
5 166 855
6 592 091
11 166 126
896 294
184 655 458
Net on-balance sheet position
20 928 445
(7 582 296)
(3 334 160)
2 803 201
1 659 367
(756 641)
13 717 916
Loan commitments and other commitments
28 533 925
1 922 468
278 099
3
638 255
2 538
31 375 288
Guarantees, banker's acceptances, documentary and commercial letters of credit
4 956 447
1 503 796
493 112
146
1 839
33 201
6 988 541
3.7. Interest rate risk
mBank S.A.
In the process of management of interest rate risk in the banking book, the Group ensures independence of risk identification, measurement, monitoring and control functions from operational activity creating the Group’s positions.
Interest rate risk of the banking book is the risk resulting from the exposure of the Bank's interest income and capital to the adverse impact of interest rates movements. Following recommendations of the Polish Financial Supervisory Authority (PFSA), in particular Recommendation G, and EBA guidelines (EBA/GL/2018/02) the Bank monitors the banking book structure in terms of repricing risk, basis risk, yield curve risk and customer option risk.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
68
The basic measures of interest rate risk of the banking book are:
■ the repricing gap (the difference between assets, liabilities and off-balance sheet banking book positions, measured in defined repricing buckets, based on repricing date of the interest rate sensitive products);
■ sensitivity of net interest income (delta NII), i.e. the difference of net interest income between the base and alternative scenarios, assuming different shifts in the yield curve and changes in the balance sheet structure;
■ sensitivity of the economic value of equity (delta EVE), i.e. the difference in the present value of cash flows between the base scenario and the alternative scenario, assuming various shifts in the yield curve, including those in line with the EBA guidelines on the regulatory outlier test (SOT).
The interest rate risk in the banking portfolio is hedged and managed based on the repricing gap limits, SOT, delta NII limit, limits for market risk - imposed on Value at Risk (VaR), stress tests as well as IR BPV and CS BPV.
The Bank calculates and monitors on monthly and quarterly basis the level of sensitivity of net interest income calculated for more than 22 scenarios of interest rate changes, including parallel yield curve shifts, its steepening and flattening, and the basis risk, both in constant, dynamic and run-off balance. The main assumptions used to calculate the measure are:
■ the use of customer rates, decomposed into a commercial margins and market rates;
■ for products without a specific maturity date, assigning repricing dates based on the replicating portfolio model;
■ limits applied to the level of lower and upper clients interest rate changes resulting from legal provisions;
■ behavioural options including deposit termination and loan prepayments are calculated on the basis of the historical average.
In addition, the Bank calculates monthly and reports quarterly the sensitivity of the economic value of capital for 14 scenarios taking into account changes in the level and slope of the yield curve as well as currency and credit spreads, broken down into values in currencies together and separately for material currencies based on the following assumptions:
■ taking into account cash flows from interest rate sensitive assets and liabilities, including commercial margins;
■ use of risk-free curves, except for debt securities, in the case of which the curve includes credit spread;
■ exclusion of capital from liabilities;
■ run-off balance sheet.
In the case of calculated sensitivity measures of net interest income, the Bank takes into account the risk of partial or total early repayment of the loan before its maturity/ withdrawal of funds from term deposits before their maturity. The prepayment/withdrawal algorithm used is based on the historical average and its result is the annual prepayment rate/deposits withdrawal rate by major currencies (PLN, CHF, EUR, CZK) and the portfolio of retail and corporate clients.
The Bank aims at stabilisation of the net interest income (NII) and optimisation of profit and loss and EVE changes within the accepted risk appetite.
As at 31 December 2022 and 31 December 2021, the sensitivity of net interest income (based on a static balance sheet over a 12-month horizon) in Bank is presented in the table below.
∆ NII
31.12.2022
31.12.2021
Sudden parallel up by 100 bp
117 442
351 795
Sudden parallel down by 100 bp
(768 800)
(715 290)
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
69
The sensitivity of the economic value of equity (for the run-off balance) in shock scenarios of interest rate changes is presented in the table below:
∆ EVE
31.12.2022
31.12.2021
Sudden parallel up by 200 bp
(498 048)
(398 397)
Sudden parallel down by 200 bp
548 877
425 964
Parallel shock up
(588 426)
(513 194)
Parallel shock down
653 462
552 547
Steepened shock
34 315
87 539
Flattener shock
(144 514)
(187 360)
Short rates shock up
(335 028)
(349 279)
Short rates shock down
348 674
364 488
Maximum
(588 426)
(513 194)
Tier I Capital
12 153 665
13 552 027
A similar level of delta NII year to year in decreasing interest rates scenario results from the adjustment of the Bank's position to the market situation and investing funds in short-term assets sensitive to changes in interest rates. Taking into account the expected further growth of the inflation and a possible increase on the market interest rates, the Bank kept large part of its assets in instruments with a floating interest rate. Moreover the sensitivity of delta NII in increasing interest rates scenario was influenced by the updated assumptions concerning the higher pricing of deposit accounts. This measure is calculated taking into account specific methodological assumptions, including constant balance sheet, historical margins for rolled products, price elasticity of deposit base, adequate in a given market situation, which means that measure should not be treated as a forecast of the net interest income, but a sensitivity measure for a given moment in certain conditions.
Current and saving accounts balances as well as the Bank's capital decreased in 2022. As a result, the Bank adjusted its investment strategy - it reduced the portfolio of treasury bonds and the portfolio of interest rate swaps. At the same time, there was an increase in the balance of loans with a fixed 5-year interest rate in PLN. As a result of these actions, the delta EVE measure in scenarios of parallel changes in interest rates increased in absolute values. In the remaining scenarios, the delta EVE decreased due to holding funds in assets with a floating short-term interest rate.
Changes of delta NII and delta EVE were caused also by increase of balance sheet total which was observed between 2021 and 2022.
mBank Hipoteczny S.A.
Repricing date mismatch gap and interest earnings at risk (EaR) based on the former are the key interest rate risk measures at mBank Hipoteczny S.A.
A sudden, lasting and disadvantageous change of market interest rates by 100 basis points for all maturities would result in decrease in the annual interest income by the following amounts:
EaR (PLN thousand)
31.12.2022
31.12.2021
for position in PLN
1 975
5 115
for position in USD
2
41
for position in EUR
816
91
To calculate these values, there was assumed that the structure of financial assets and liabilities disclosed in the financial statements as at 31 December 2022 and 31 December 2021 would be fixed and the mBank Hipoteczny S.A. would not take any measures to change related exposure to interest rate change risk.
mLeasing Sp. z o.o.
Market risk means a potential loss caused by disadvantageous changes of market prices or parameters affected by market prices. The Company is exposed to risk arising from open currency positions and non-adjustment of products charged with the interest rate risk within the scope of maturity and/or revaluation periods.
The Company applies a global measure to measure the value of bank portfolio exposed to currency and interest rate risk, namely VaR (Value at Risk).
The sum of VaR of interest rate and VaR of exchange rate constitutes the global VaR of the Company. VaR of the interest rate risk presents the impact of interest rate changes on the value of the Company's portfolio. VaR of exchange rate risk presents the impact of changes of exchange rates on estimation of items of balance-sheet assets and liabilities until the date of their revaluation (change of interest).
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
70
Pursuant to the decision of the Risk Committee of mBank SA concerning the rules of monitoring the level of market risk in subsidiaries belonging to the mBank Group, mBank provides indicated values of risk measures for the portfolio of mLeasing.
The amount of VaR (97.5% confidence level, holding period 1 day) cannot exceed the basic VaR limit for mLeasing applied by mBank SA in a given period (PLN 0.6 million at the end of 2022 and 2021).
The table below presents VaR values as at 31 December 2022 and 31 December 2021, calculated using the parameters specified above.
VaR
PLN thousand
31.12.2022
31.12.2021
Interest rate risk
115
165
Currency risk
126
32
Total VaR
241
197
mBank S.A. Group interest rate risk
The following tables present the Group's exposure to interest rate risk. The tables present the Group’s financial instruments at carrying amounts, categorised by the earlier of contractual repricing or maturity dates.
31.12.2022
Up to 1 month
1-3 months
3-12 months
1-5 years
More than 5 years
Non-interest bearing
Total
ASSETS
Cash and balances with the Central Bank
13 921 633
-
-
-
-
2 092 685
16 014 318
Loans and advances to banks
9 469 469
97 037
54 929
50 889
-
133 938
9 806 262
Debt and equity securities and investments in subsidiaries
22 205 051
2 834 036
12 734 838
13 540 773
3 828 446
191 867
55 335 011
Loans and advances to customers
63 443 841
40 999 502
2 794 092
11 823 625
1 085 134
36 948
120 183 142
Other assets and derivative financial instruments
242 767
117 355
120 327
3 783
5 433
3 116 325
3 605 990
Total assets
109 282 761
44 047 930
15 704 186
25 419 070
4 919 013
5 571 763
204 944 723
LIABILITIES
Amounts due to banks
1 128 281
26 267
202 824
1 910 721
-
2 130
3 270 223
Amounts due to customers
155 313 271
13 597 144
4 698 919
40 514
302
480 764
174 130 914
Lease liabilities
1 884
1 323
5 227
7 137
-
944 753
960 324
Debt securities issued
684 336
2 250 674
534 250
5 797 039
199 180
-
9 465 479
Subordinated liabilities
1 975 193
-
765 528
-
-
-
2 740 721
Other liabilities and derivative financial instruments
133 779
31 135
42 708
421 998
237 442
5 069 313
5 936 375
Total liabilities
159 236 744
15 906 543
6 249 456
8 177 409
436 924
6 496 960
196 504 036
Total interest repricing gap
(49 953 983)
28 141 387
9 454 730
17 241 661
4 482 089
31.12.2021
Up to 1 month
1-3 months
3-12 months
1-5 years
More than 5 years
Non-interest bearing
Total
ASSETS
Cash and balances with the Central Bank
3 358 985
-
-
-
-
8 843 281
12 202 266
Loans and advances to banks
7 031 001
84 178
114 497
-
-
5
7 229 681
Debt and equity securities and investments in subsidiaries
10 893 068
1 731 419
12 159 580
22 746 304
5 522 422
219 508
53 272 301
Loans and advances to customers
63 980 055
42 514 658
3 040 821
7 654 434
464 901
22 606
117 677 475
Other assets and derivative financial instruments
152 212
146 010
63 605
78 458
9 360
3 246 582
3 696 227
Total assets
85 415 321
44 476 265
15 378 503
30 479 196
5 996 683
12 331 982
194 077 950
LIABILITIES
Amounts due to banks
2 625 925
559 921
170 353
1 906 621
-
3 359
5 266 179
Amounts due to customers
150 937 059
3 320 520
1 710 105
748 326
1 627
354 033
157 071 670
Lease liabilities
1 177
1 274
5 069
8 678
-
940 640
956 838
Debt securities issued
764 879
2 834 964
3 856 656
4 633 291
1 339 992
-
13 429 782
Subordinated liabilities
758 076
1 112 710
753 670
-
-
-
2 624 456
Other liabilities and derivative financial instruments
255 909
127 668
112 698
135 706
19 190
4 719 742
5 370 913
Total liabilities
155 343 025
7 957 057
6 608 551
7 432 622
1 360 809
6 017 774
184 719 838
Total interest repricing gap
(69 927 704)
36 519 208
8 769 952
23 046 574
4 635 874
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
71
3.8. Liquidity risk
Sources of liquidity risk
The liquidity risk is understood as the risk of failure to fund assets and meet payment obligations arising from balance sheet and off-balance sheet items owed by the Bank in a timely manner and at a market price.
The reasons for liquidity risk may appear with respect to assets, liabilities and can also arise from off-balance sheet commitments.
As regards assets, their main sources of liquidity risk are market liquidity risk and untimely repayments of loans. Market liquidity risk is a threat of complete or partial impossibility of liquidating the assets held, or the possibility of selling these assets only at an unfavourable price.
As regards liabilities, the risks posed by funding and withdrawal of funds by the clients are the most common source of the liquidity risk. The former is a type of risk in terms of which, should the crisis occur, funding can be acquired only at a higher price, and in an extreme situation, it is not possible to acquire new funding or renew existing. The latter is a type of threat associated with uncertainty as to the behaviour of clients whose decisions (for instance, about withdrawal of deposited funds) may weaken the Bank's ability to service its current financial obligations.
A source of risk for off-balance sheet liabilities is a risk posed by clients' behaviour and unexpected drawdown of granted lines. It also concerns the use of intraday and overdraft lines by custody and corporate clients. Materialisation of such a risk may be experienced as severe especially in the case of high concentration of commitments. In respect of derivative transactions concluded within framework agreements or settled by CCP, liquidity risk can materialise in consequence of adverse and severe changes in market conditions resulting in sudden decrease in valuation of derivative instruments and related to necessity of pledging the collateral.
Daily operations of the Bank require settlements of various payment operations. Such activity generates high level of liquidity needs during a business day.
Taking into account the mBank Group the liquidity risk is also identified as a possibility of unexpected growth in significant liquidity needs of subsidiaries of mBank. In the Group a centralised approach to the management of financing was introduced in order to increase the effectiveness of the used liquidity resources and to ensure better tenor match of financing with assets.
Liquidity risk may also appear as a result of usage of inappropriate models in liquidity analysis (e.g. deposit base stable part model), which may lead to underestimation of liquidity risk. It is monitored by verification and back-testing models pursuant to the Model Management Policy.
Organisation of risk management
In order to ensure that the liquidity risk management process is effective, the Management Board of the Bank lies down an adequate organisational structure and delegates powers to dedicated units and Committees. Liquidity risk management is conducted based on three lines of defence.
Liquidity risk management aims at ensuring and maintaining the Bank’s and the Group’s ability to fulfil both current and future liabilities taking into account the cost of liquidity. The liquidity management process consists of procedures that aim at identification, measurement, controlling, monitoring, reducing and defining the acceptable level of exposure to risks. This process can be divided into two main elements in the operational sense: the part involving all forms of liquidity management and the part of controlling and monitoring liquidity risk.
mBank S.A.
The objective of liquidity risk management is to ensure and maintain the Bank’s ability to fulfil both current and future commitments. The Bank achieves this objective by diversifying stable funding sources in terms of clients’ groups (from whom it acquires deposits), products and currencies groups, and at the same time, maintains liquidity buffer and optimises its balance sheet in terms of profitability. Long-term activities of mBank in this scope are carried out taking into account conditions on funding capacity and business profitability.
The liquidity position of mBank in 2022 was significantly affected by tense geopolitical conditions related to the outbreak of war in Ukraine. The increase in inflationary pressure forced the NBP to tighten the monetary policy by restoring the required reserve rate to level before the COVID-19 pandemic and a series of interest rate increases that took place in Poland from October 2021 to September 2022. As a result of interest rate increases, the Bank adjusted the prices offered to customers for their deposits. At the same time, high-interest government retail bonds represented competition for bank deposits. Interest rate increases and the weakening of Polish currency necessitated increasing collaterals placed in derivative transactions. In addition, decline in valuation of securities that qualified as liquid assets of the Bank resulted
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
72
in a decrease in value of available liquidity buffers. The described events led to a temporary decrease in mBank's liquidity position in mid-2022, which was rebuilt in the second half of 2022. Despite such unfavourable market conditions, liquidity measures were well above regulatory minimum levels throughout the reporting period.
The internal liquidity adequacy assessment process (ILAAP)
In order to review the liquidity risk management system in the Bank and the Group, the ILAAP process was developed. As part of this process all elements of the liquidity risk management system are subject to review, including:
■ liquidity risk management strategy,
■ stress tests,
■ liquidity contingency plan,
■ liquidity buffer,
■ intraday liquidity risk management,
■ early warning system,
■ identification and measurement of liquidity risk,
■ reporting system.
The review is performed annually. The conclusions of the conducted review serve for further improvement and development of the liquidity risk management.
Tools and measures used in measuring liquidity risk
As part of liquidity risk management, a range of risk measures is being analysed, out of which the mismatch gap is the basic. It includes all assets, liabilities and off-balance sheet items of the Bank for all currencies in the time horizons set by the Bank. In 2022, the Bank maintained a liquidity surplus level adequate to its operating activity and current market situation in the form of a portfolio of liquid treasury bonds and bills, for which there is a possibility of pledging or selling at any time without significant loss of value.
In accordance with Commission Delegated Regulation (EU) No 2015/61 of 10 October 2014 amended by the Commission Delegated Regulation (EU) 2018/1620 of 13 July 2018, effective since 30 April 2020 and Commission Implementing Regulation (EU) 2021/451 of 17 December 2020 the Bank calculates the supervisory liquidity measures. In 2022 and in 2021, the supervisory limits were not exceeded. Moreover, the Bank conducts an in-depth analysis of long-term liquidity and sets internal limits (management action triggers) on involvement in long-term assets. Internal limits and appropriate buffers are also imposed on supervisory measures. Relevant analysis of the stability and structure of the funding sources, including the core and concentration level of term deposits and current accounts are performed. Additionally the Bank analyses the volatility of balance sheet and off-balance sheet items, in particular open credit line facilities and current accounts and overdrafts limits utilisation.
The ongoing analysis covers liquidity under normal and stressed conditions, which may result in potential liquidity loss. In order to determine the Bank's resistance to major unfavourable events, the Bank conducts scenario analyses covering extreme assumptions on the operation of financial markets and/or behavioural events relative to the Bank's clients. For this purpose stress test scenarios are regularly calculated in the short- and long-term, in the Bank stress, market stress and combined scenarios. In addition, a reverse stress test for liquidity risk is performed in the Bank on annual basis and an intraday liquidity crisis scenario on a monthly basis. Liquidity stress tests are used in the Bank for operational management of liquidity risk.
The Bank has also adequate procedures in case mBank is threatened with financial liquidity loss. Base on severity of risk factors and the degree of the threat of financial loss relevant actions are defined either in the Contingency Plan in the case of a threat of losing financial liquidity by mBank Group (Contingency Plan) or in the Recovery Plan of mBank Group (Recovery Plan). Scenarios used in both plans are consistent with the above stress tests.
Execution of the strategy of ensuring liquidity of the Bank consists in active management of the balance sheet structure of future cash flows and keeping liquidity reserves adequate to the liquidity needs, resulting from the activity and structure of the balance sheet of the Bank, obligations to subsidiaries and the current market situation as well as the demand for liquid assets, resulting from the conducted stress tests. For this purpose, the Bank keeps a surplus of liquid and unencumbered assets constituting the Liquidity Reserves, for which there is a possibility of pledging, transaction on repo market or selling at any time without significant loss in value. Liquidity reserves were composed mainly of the Polish government debt securities in PLN and EUR, bills issued by National Bank of Poland in PLN, government debt securities in CZK and USD and other debt securities meeting the criteria of collateral for a refinancing loan with National Bank of Poland. Values of these reserves amounted to:
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
73
Value of liquidity reserves (in PLN million)
31.12.2022
31.12.2021
60 147
54 097
In addition, mBank also maintains cash surpluses placed on accounts with central banks in Poland, the Czech Republic and Slovakia.
In the Group the liquidity reserves are held also by mBank Hipoteczny. Liquidity reserves of mBank Hipoteczny were composed of the Polish Government debt securities in PLN and bills issued by the National Bank of Poland in PLN and amounted to:
Value of liquidity reserves (in PLN million)
31.12.2022
31.12.2021
1 190
750
In order to support the process of liquidity risk management, a system of early warnings indicators and recovery indicators was developed in the Bank. It is composed of indicators monitoring the level of regulatory and internal limits and additionally, indicators monitoring significant changes of market factors, as well as changes in the Bank’s balance sheet structure. Exceedance of thresholds by defined indicators may be a trigger for the launch of the Contingency Plan or the Recovery Plan.
Due to the use by the Bank of FX swap and CIRS instruments to convert surpluses in local currencies into foreign currencies, internal limits are in place in the Bank on the use of these instruments. Moreover, in order to limit the concentration in FX swaps, the amounts obtained in such transactions are monitored in monthly time bands up to 1 year.
Other measures of liquidity risk are calculated and reported in the Bank as follows:
■ concentration of funding sources,
■ stability of deposit base,
■ early withdrawals of deposits,
■ ratio of long-term funding for the real estate market,
■ liquidity risk concentration within off-balance sheet positions related to financial and guarantee liabilities.
The Bank includes product’s liquidity in its liquidity risk management framework. It is reflected in terms of measuring market liquidity of Treasury bonds, which make up Liquidity Reserves. The analysis is performed on daily basis and takes account of market liquidity determinants such as market turnover, order book depth, purchase/sale transaction spread and issue volume. The measurement of market liquidity is reflected in internal liquidity measures, where the scenario structure provides for liquidating Treasury bonds held by the Bank in line with market trading in particular series of bonds. A similar check is carried out in the context of the market potential of pledging particular bond series.
The measurement, limiting and reporting the liquidity risk
At the Bank, there is a reporting process of liquidity risk. It covers both daily information delivery to entities engaged in operational management of liquidity risk and entities controlling liquidity risk management on operational level, as well as regular reporting to higher management levels for the purpose of making strategic decisions on liquidity risk.
Daily reporting covers:
■ regulatory measures,
■ liquidity gaps for mBank, the mBank Group and the material subsidiaries from liquidity risk perspective with the utilisation of limits imposed on these measures,
■ intraday liquidity,
■ other internal liquidity risk measures.
The following measures are reported weekly:
■ early warning indicators (EWI),
■ recovery indicators.
Monthly reporting covers:
■ regulatory measures and internal liquidity measures to the Management Board Members and Financial Markets Risk Committee (KRF),
■ regulatory measures, internal liquidity measures and forecasts of liquidity measures based on business development forecasts to the Capital, Assets and Liabilities Committee of the mBank Group (CALCO).
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
74
Regulatory measures and internal liquidity measures are reported on a quarterly basis to the mBank’s Supervisory Board.
For the purpose of current monitoring of liquidity, the Bank establishes values of realistic, cumulated gap of cash flows according to internally adopted LAB methodology. In accordance with this methodology, the Bank calculates the realistic liquidity gap in base scenario (LAB Base Case) and stress scenarios, assuming a conservative approach in method of presenting the liquidity of assets and the amount of outflows resulting from fulfilment of Bank's obligations. The realistic gap is calculated on the basis of contractual cash flows (Note 3.8.1). Mainly cash flows in portfolios of non-banking customers’ deposits, overdrafts and term loans are amended. In the calculation of the liquidity measures the Bank takes into account the possibilities of raising funds by selling or pledging the debt securities from Bank’s Liquidity Reserves.
In the LAB methodology, the LAB Base Case measure is the primary management measure and it is also used for limiting the liquidity gap in particular foreign currencies.
Value of realistic, bucket and cumulative gap of cash flows mismatch (in PLN million)
gap LAB Base Case - 31.12.2022
gap LAB Base Case - 31.12.2021
Time range
bucket
cumulative
bucket
cumulative
up to 1 working day
40 223
40 223
33 864
33 864
up to 3 working days
1 441
41 664
2 267
36 131
up to 7 calendar days
8
41 672
515
36 646
up to 15 calendar days
(2 092)
39 580
(1 476)
35 170
up to 1 month
(2 619)
36 961
(1 795)
33 375
up to 2 months
786
37 747
(775)
32 600
up to 3 months
(3 163)
34 584
(502)
32 098
up to 4 months
(507)
34 077
(158)
31 940
up to 5 months
(1 572)
32 505
(531)
31 409
up to 6 months
(874)
31 631
(264)
31 145
up to 7 months
(1 101)
30 530
(260)
30 885
up to 8 months
(1 225)
29 305
(475)
30 410
up to 9 months
65
29 370
(2 462)
27 948
up to 10 months
33
29 403
(850)
27 098
up to 11 months
(1 434)
27 969
(987)
26 111
up to 12 months
(1 399)
26 570
(1 148)
24 963
The above values should be interpreted as liquidity surplus/deficit in relevant time buckets. The dynamics of development of non-bank term deposits and current accounts had a positive impact on change in liquidity gap in the amount of PLN 15.4 billion, calculated with the exchange rate of 31 December 2022 as well as a simultaneous decrease in development of lending activities in the amount of PLN 2.2 billion calculated with the exchange rate of 31 December 2022 (in 2021, respectively: PLN 22.1 billion and PLN 7 billion, calculated with the exchange rate of 31 December 2021).
The Bank has a limited number of transactions with rating downgrade trigger clauses, which require the Bank to provide additional security or to prepay outstanding obligations if Banks’s credit rating deteriorates. The amount of the maximum liability resulting therefrom, in the event that the Bank's rating is downgraded to BB+ or lower by two rating agencies, as at the 31 December 2022, amounted to CHF 314 million (CHF 314 million as of 31 December 2021). However, this potential liability is not unconditional. Contract clauses do not preclude the parties from agreeing the amount, form and timing of additional security on a case-by-case basis.
In 2022 the Bank’s liquidity remained at a safe level which was reflected in surplus of liquid assets over short-term liabilities according to LAB in various scenarios and supervisory liquidity measures.
LAB cash flows gaps mismatch in terms up to 1 month and up to 1 year within 2022 and 2021 and values of regulatory measures LCR and NSFR are presented in the following table.
31.12.2022
31.12.2021
LAB Base Case 1M
36 961
33 375
LAB Base Case 1Y
26 570
24 963
LCR
186%
203%
NSFR
150%
152%
LAB measures are shown in PLN million, LCR and NSFR are relative measures presented as a decimal.
The LCR and NSFR regulatory measures remained on safe level, significantly exceeding 100%.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
75
Funding sources
The strategic assumptions concerning the diversification of funding sources and profitable structure of the balance sheet are reflected in the financial plan of the mBank Group defined by selected measures, e.g. L/D ratio (Loans to Deposits). The Bank measures a specific relation of loans to deposits in order to maintain a stable structure of its balance sheet. From the end of 2021 to the end of 2022 the L/D ratio slightly declined from 66.3% to 62.1% for the Bank and from 74.0% to 69.0% for the Group. The Bank aims at building a stable deposit base by offering to the clients the deposit and investment products, regular and specific-purpose savings offerings. Funds acquired from the Bank’s clients constitute the major funding source for the business activity along with the portfolio of long-term loans from banks and issuances of debt securities (with maturities over 1 year) (Note 29). The loans and issuances together with subordinated loans (Note 29) are the core funding source for the portfolio of mortgage loans in CHF. According to the suspension of granting new mortgage loans in CHF and an increase in level of provisions for legal risk related to loans denominated in this currency, the Bank’s receivables and obligations in this currency have been decreasing successively.
In order to acquire funding (also in foreign currencies) the Bank uses mid-term and long-term instruments, including credit line facilities on the international markets, unsecured issuances, bilateral loans as well as FX swap and CIRS transactions.
In the Group except mBank, access to external funding have only mBank Hipoteczny via issuance of mortgage covered bonds and short-term debt securities and mLeasing via short-term debt securities.
When making funding-related decisions, in order to match the term structure of its funding sources with the structure of long-term assets, the Group takes into consideration the supervisory liquidity measures and limits, as well as the internal liquidity risk limits.
The financing strategy is based on the following assumptions:
■ diversifying sources and timing of financing,
■ maintaining safe regulatory levels and internal liquidity measures,
■ stable increase in transaction deposits,
■ incurring liabilities eligible for the MREL indicator or ensuring the implementation of the ESG strategy e.g. by issuing green bonds,
■ maintaining the issuing capacity of mBank Hipoteczny, but with the Bank's greater involvement in financing the subsidiary by purchasing its covered bonds,
■ increasing financial independence from the majority shareholder.
mBank S.A. Group
Liquidity risk in the mBank Group is generated mainly by mBank’s items. Nevertheless, liquidity risk level in the mBank Group subsidiaries, where liquidity risk was deemed significant, is also subject to monitoring. In the subsidiaries generating the greatest liquidity risk (mBank Hipoteczny and mLeasing) the Bank monitors the level of liquidity risk on a daily basis. The data provided by these companies allow for reporting contractual cash-flow mismatch as well as calculation of a realistic cash-flows mismatch based on LAB model and modelling assumptions for selected products according to risk profiles, funding possibilities and products specificity of the subsidiary.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
76
The levels of realistic, cumulative cash-flow mismatch in the mBank Group is presented in the following table.
Value of realistic, bucket and cumulative gap of cash flows mismatch (in PLN million)
gap LAB Base Case - 31.12.2022
gap LAB Base Case - 31.12.2021
Time range
bucket
cumulative
bucket
cumulative
up to 1 working day
42 168
42 168
35 454
35 454
up to 3 working days
1 714
43 882
2 335
37 789
up to 7 calendar days
10
43 892
580
38 369
up to 15 calendar days
(2 109)
41 783
(1 616)
36 753
up to 1 month
(2 406)
39 377
(1 646)
35 107
up to 2 months
756
40 133
(636)
34 471
up to 3 months
(2 997)
37 136
(213)
34 258
up to 4 months
(504)
36 632
(390)
33 868
up to 5 months
(1 428)
35 204
(474)
33 394
up to 6 months
(956)
34 248
(765)
32 629
up to 7 months
(922)
33 326
(564)
32 065
up to 8 months
(1 094)
32 232
(314)
31 751
up to 9 months
(1 089)
31 143
(2 860)
28 891
up to 10 months
(258)
30 885
(711)
28 180
up to 11 months
(1 266)
29 619
(803)
27 377
up to 12 months
(1 273)
28 346
(1 077)
26 300
LAB gaps mismatch in terms up to 1 month and up to 1 year within 2022 and 2021 and supervisory liquidity measure LCR on Group level are presented in the following table.
31.12.2022
31.12.2021
LAB Base Case 1M
39 377
35 107
LAB Base Case 1Y
28 346
26 300
LCR Group
201%
216%
NSFR Group
150%
149%
LAB measures are shown in PLN million, LCR and NSFR are relative measures presented as a decimal.
For other subsidiaries, due to lower total assets and simpler products, the process of monitoring has been worked out based on two criteria: the size of the balance sheet and, if the subsidiary is covered by LCR measure for the Group in accordance with Commission Delegated Regulation (EU) No 2015/61 of 10 October 2014, amended by Commission Delegated Regulation (EU) 2018/1620 of 13 July 2018, which has been in force since 30 April 2020, its share in total outflows. In case of exceedance of imposed thresholds, the decision is made on the possible inclusion of the subsidiary into the liquidity risk management system.
3.8.1. Cash flows from transactions in non-derivative financial instruments
The table below shows cash flows the Group is required to settle, resulting from financial liabilities. The cash flows have been presented as at the year-end date, categorised by the remaining contractual maturities. The amounts disclosed in maturity dates analysis are undiscounted contractual cash flows.
31.12.2022
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Total
Amounts due to banks
1 011 168
32 891
215 200
2 047 115
-
3 306 374
Amounts due to customers
153 657 628
15 266 973
5 920 674
39 966
804
174 886 045
Lease liabilities
16 738
28 219
113 573
505 337
339 329
1 003 196
Debt securities issued
142 042
1 291 052
1 021 430
7 605 640
409 599
10 469 763
Subordinated liabilities
84 976
9 389
133 588
1 288 631
2 059 395
3 575 979
Other liabilities
2 544 557
11 131
122
270
2
2 556 082
Total liabilities
157 457 109
16 639 655
7 404 587
11 486 959
2 809 129
195 797 439
Total assets
47 029 399
10 082 173
31 519 556
97 767 147
90 623 206
277 021 481
Net liquidity gap
(110 427 710)
(6 557 482)
24 114 969
86 280 188
87 814 077
81 224 042
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
77
31.12.2021
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Total
Amounts due to banks
2 684 647
561 539
171 634
1 284 125
615 590
5 317 535
Amounts due to customers
151 141 376
3 822 057
1 804 041
296 785
3 663
157 067 922
Lease liabilities
10 075
15 424
89 642
478 684
396 929
990 754
Debt securities issued
208 191
332 061
4 451 285
9 620 700
324 018
14 936 255
Subordinated liabilities
21 385
5 479
41 832
948 576
1 931 767
2 949 039
Other liabilities
2 219 224
8 699
136
224
-
2 228 283
Total liabilities
156 284 898
4 745 259
6 558 570
12 629 094
3 271 967
183 489 788
Total assets
34 265 728
6 551 546
29 971 815
83 215 352
76 078 496
230 082 937
Net liquidity gap
(122 019 170)
1 806 287
23 413 245
70 586 258
72 806 529
46 593 149
The assets which ensure the payment of all the liabilities and lending commitments comprise cash in hand, cash at the Central Bank, cash in transit and treasury bonds and other eligible bonds, amounts due from banks, loans and advances to customers.
In the normal course of business, some of the loans granted to customers with the contractual repayment date falling within the year, will be prolonged. Moreover, a part of debt securities, were pledged as collateral for liabilities. The Group could ensure cash for unexpected net outflows by selling securities and availing itself of other sources of financing, such as the market of assets backed securities.
Remaining contractual maturities for guarantees issued are presented in the Note 35.
3.8.2. Cash flows from derivatives
Derivative financial instruments settled on a net basis
Derivative financial instruments settled in net amounts by the Group comprise:
■ forward Rate Agreements (FRA),
■ options,
■ warrants,
■ overnight index swaps (OIS)
■ interest rate swaps (IRS),
■ cross currency interest rate swaps (CIRS),
■ commodity swaps,
■ bonds forwards,
■ commodity forwards,
■ CO 2 emission forwards.
In the Group financial instruments for commodities are concluded back-to-back.
The table below shows derivative financial liabilities of the Group, the valuation of which was negative as of end of 2022 and 2021. Cash flows from these instruments are grouped by appropriate remaining maturities as at the balance sheet date and are presented in undiscounted values.
31.12.2022
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Total
Forward Rate Agreements (FRA)
8 778
396
13 015
-
-
22 189
Overnight Index Swap (OIS)
3 189
9 736
26 804
104 290
-
144 019
Interest Rate Swaps (IRS)
492 025
1 257 164
4 835 098
7 480 858
719 649
14 784 794
Cross Currency Interest Rate Swaps (CIRS)
(704)
(9 014)
(40 774)
(47 126)
-
(97 618)
Options
4 645
6 167
21 398
20 454
313
52 977
Other
8 013
14 715
22 520
13 477
-
58 725
Total derivatives settled on a net basis
515 946
1 279 164
4 878 061
7 571 953
719 962
14 965 086
31.12.2021
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Total
Forward Rate Agreements (FRA)
10 523
9 284
23 322
687
-
43 816
Overnight Index Swap (OIS)
944
5 243
(14 568)
(7 110)
4 004
(11 487)
Interest Rate Swaps (IRS)
33 614
212 177
1 853 907
6 016 108
339 724
8 455 530
Cross Currency Interest Rate Swaps (CIRS)
(3 532)
(1 612)
26 245
5 116
1 087
27 304
Options
32
336
(14 192)
(10 391)
(448)
(24 663)
Other
2 495
26 753
25 247
2 446
-
56 941
Total derivatives settled on a net basis
44 076
252 181
1 899 961
6 006 856
344 367
8 547 441
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
78
Derivative financial instruments settled in gross amounts
Derivative financial instruments settled in gross amounts by the Group comprise foreign exchange derivatives: currency forwards and currency swaps.
The table below shows derivative financial liabilities/assets of the Group, which are settled on a gross basis, grouped by appropriate remaining maturities as at the balance sheet date.
31.12.2022
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Total
Currency derivatives:
- outflows
26 105 075
10 845 587
7 283 157
3 615 017
-
47 848 836
- inflows
26 033 382
10 814 899
7 321 120
3 619 234
-
47 788 635
31.12.2021
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Total
Currency derivatives:
- outflows
20 651 873
9 887 238
9 148 596
4 478 284
-
44 165 991
- inflows
20 627 103
9 854 123
9 155 092
4 420 085
-
44 056 403
The amounts disclosed in the table are undiscounted contractual outflows/inflows.
The amounts presented in the table above are nominal cash flows of currency derivatives, which have not been settled, while the Note 20 shows nominal values of all open derivative transactions.
Detailed data concerning liquidity risk related to off-balance sheet items are presented in the Note 35.
3.9. Operational risk
Operational risk is understood as the possibility of a loss resulting from inadequate or failed internal processes, people and systems or from external events, including also legal risk.
It is comprehensive in nature, which may have a significant impact on the Group's operations and standing. Apart from the environment and external events, its source may be the organisation itself. Due to their dynamic nature, external and internal factors influencing operational risk are subject to constant analysis and assessment.
According to the Risk Catalogue of the mBank Group, operational risk includes in particular:
■ legal risk,
■ conduct risk,
■ IT risk,
■ risk of cyber threats,
■ risk of external fraud,
■ risk of internal fraud,
■ outsourcing risk,
■ personnel and organisational risk,
■ physical security risk,
■ the risk of errors in implementation, delivery and process management.
Operational risk does not include reputational risk; however materialisation of operational risk may increase reputational risk.
Operational risk management is performed in mBank and, at the consolidated level, in the mBank Group. While organising the operational risk management process, the Bank takes into account regulatory requirements, which are the starting point for preparation of framework for the operational risk control and management system in the Bank and the Group.
The aim of operational risk management in the Group is to reduce the causes of operational events, the probability of their occurrence and the severity of potential consequences. When deciding on the acceptable level of operational risk, the following analysis is considered: costs vs. benefits. Activities undertaken by the Group are also focused on increasing operational risk awareness and building a risk culture that allows mBank to develop appropriate risk management mechanisms and thus increase the security of the Group's activities.
Due to the dynamics of changes in factors affecting operational risk, the key elements of the risk management process are identification, assessment, control and monitoring, counteracting the materialisation of operational risk and risk reporting.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
79
The basic tools used in the operational risk management process include:
■ Self-Assessment of Operational Risk Management Effectiveness, which is performed by organisational units of the Bank and the Group companies. The purpose of this process is to ensure the risk identification and assessment and to take appropriate risk mitigation activities. In addition, Self-Assessment supports the process of introducing changes and improving control processes. The final result of the Self-Assessment is the assessment of processes, sub-processes and key operational risks and the creation of corrective action plans.
■ The Register of Operating Losses is a database of losses resulting from operational events that arise. mBank also uses access to external databases on operational losses and uses them to analyse operational risk and potential threats to which institutions operating in the financial sector are exposed.
■ The key risk indicators (KRI) and risk indicators (RI) support the ongoing monitoring of risk. The process makes it possible to predict in advance the occurrence of an increased level of operational risk and to react appropriately by organisational units in order to avoid the occurrence of operational events and losses. Thanks to the system of warning and alarm thresholds, KRI and RI allow to determine the level of risk tolerance.
■ Operational risk scenarios that analyse the risks associated with the occurrence of rare but potentially very severe operational risk events.
■ Providing opinions on products before the implementation of a new or modified product offer and the impact analysis of the outsourcing agreement on the operational risk profile.
mBank Group identifies and assesses operational risks for all significant areas of operations as well as new and modified products, processes and systems. Risk identification takes into account both internal and external factors.
The mBank Group has a system of regular monitoring of operational risks and events, which enables the monitoring of the operational risk profile and ensures regular remedial actions. Regular monitoring allows to quickly detect weaknesses in the risk management system. Thanks to the identification and analysis of the circumstances related to the recorded event and the operational loss, the Group can better understand the reasons for the occurrence of an operational event and adequately prevent their repetition also in other areas of the organisation.
The Group has a management information system covering information on the level and profile of risk as part of management reports and reports dedicated to operational risk, including reports submitted to the Management Board and the Supervisory Board.
Operational losses
In 2022, as part of operational risk management, the mBank Group faced in particular losses connected with legal risk related to the foreign currency loan portfolio, credit holidays and external fraud.
The vast majority of the Group’s operational losses refers to the following business lines (separated in accordance with the CRR Regulation): commercial banking and retail banking.
The level of operational risk losses is monitored on an ongoing basis and regularly reported to the Bank's Management Board, the Bank's Supervisory Board and to the committees of the Business and Risk Forum. There are monitoring and escalation mechanisms in the mBank Group when the operational loss thresholds are exceeded. They ensure an appropriate analysis of operational events and trigger corrective actions.
Detailed information on the amount of operational losses incurred in 2022 and 2021 is presented in the Management Board Report on the Performance of mBank S.A. Group in 2022, in Chapter 3.2. Main risks of mBank Group’s business (section on operational risk).
3.10. Compliance risk
Compliance risk management is realised in mBank in accordance with the provisions of the Compliance Policy at mBank S.A. The Policy sets forth general rules for ensuring compliance of operations pursued by the Bank with provisions of law, internal regulations and market standards.
Compliance risk is the risk posed by consequences of failure to observe the law, internal regulations and market standards in processes executed in the Group. The objective of compliance risk management is the minimisation of this risk.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
80
Regulatory non-compliance of the Group is understood as specific situations in which:
■ the Group’s internal regulations do not conform with the domestic and international law and market standards,
■ the Group fails to implement recommendations issued by the Polish Financial Supervision Authority (PFSA), other supervision authorities and the external auditor,
■ the Group fails to implement the recommendations issued following internal investigations, audits and inspections covering compliance risk,
■ the Group employees operate in breach of the law and internal regulations.
Compliance assurance uses the three-lines-of-defence model:
n First line of defence comprises units which manage compliance risk when implementing business goals and exercise the control function in operational processes.
n Second line of defence comprises:
□ the Compliance Department, which coordinates, oversees and supervises the performance of compliance risk management obligations at the Group and exercises the control function in compliance assurance,
□ other second-line-of-defence units entrusted with certain tasks from the compliance assurance process.
n Third line of defence comprises the Internal Audit Department, which carries out independent and objective assessment of the adequacy and effectiveness of the internal control system and the risk management system at the Group.
In all three lines of defence, the Group’s employees duly apply control mechanisms or independently monitor the observance of control mechanisms.
Compliance of the Group’s internal regulations with the law (both local and international) and market standards as well as their observance by the employees guarantees the achievement of the internal control system objectives in this scope. In particular, it mitigates or eliminates the following risks: legal risk, reputation risk, risk of administrative sanctions and penalties, risk of financial losses resulting from materialisation of compliance risk.
All the Group employees are responsible for the implementation of compliance risk management process in line with the scope of their duties as well as granted authorisations. The Compliance Department is responsible for the coordination and supervision of the compliance risk management process.
The supervision over the implementation of common compliance standards by the mBank Group subsidiaries is exercised in a manner that does not violate applicable law, prudential regulations and independence of employees performing the compliance function in the subsidiaries, in particular under agreements concluded with the subsidiaries.
3.11. Business risk
Business risk means the risk of losses resulting from deviations between actual net operating result of the mBank Group and the planned level. The calculation of deviations between actual and planned values is done separately for revenues and costs. In particular, the business risk includes strategic risk connected with the possibility of occurrence of negative financial consequences as a result of wrong or disadvantageous decisions or their wrong implementation. It is assumed, that the results of the strategic decisions are reflected in deviations between actual operating result and the planned level in one-year horizon.
Business risk is included in the calculation of economic capital of mBank and the mBank Group.
In order to manage effectively and reduce business risk, the following actions are taken:
■ assurance of high quality of data within planning process,
■ regular analysis of reasons behind deviations of the actual financial results from plan reported by the organisational units and informing the Management Board about results of the above analyses,
■ periodic verification of adopted strategy,
■ regular analysis of competitors’ activities.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
81
3.12. Model risk
Model risk is understood as the risk of negative consequences connected with the decisions made on the basis of the output data of models which have been improperly constructed or are improperly administered. Model risk may result in financial losses, improper business or strategic decisions or negatively influence the Bank’s reputation.
The following specific subcategories can be distinguished in model risk: risk inextricably linked with the restrictions connected with modelling a given phenomenon, assumption/methodology risk, data risk, models administration risk, and risk of interdependence.
Model risk is managed in the Bank on a systemic basis by proper internal regulations concerning model and their risk management process, in particular monitoring and validation of models.
An important role in the model and their risk management process is played by the Model Risk Committee. It recommends, among others, model risk tolerance level, which is finally approved by the Management Board and the Supervisory Board.
3.13. Reputational risk
The aim of management of reputational risk, defined as a risk resulting from a negative perception of the image of the bank or other member of the group among their stakeholders, is to identify, assess and reduce reputational risk in specific processes in order to protect and strengthen the good name of mBank and the mBank Group.
All of the Bank's organisational units, foreign branches, and subsidiaries are directly responsible for any reputational risk arising from their own business activities.
Reputation risk can be secondary to other types of risk, such as credit, market, liquidity and operational risks. Reputation risk is also a primary risk when it arises directly from an ethically, environmentally or socially controversial activity. This risk is identified, measured and monitored.
To monitor and manage reputation risk, the Group uses various tools and methods:
■ implementation of policies and regulations in the area of compliance, security, human and employee rights as well as services for industries and areas sensitive to the reputation risk of the Bank,
■ reputation risk assessment based on negative publications,
■ customer satisfaction analysis,
■ employee satisfaction research,
■ employer brand research,
■ crisis management,
■ reputation risk analysis when implementing new and modifying existing products,
■ analysis of customer complaints,
■ building awareness in the area of compliance,
■ analysis of violations of employee rights and other rules of the bank's operation.
3.14. Capital risk
In the mBank Group there is a capital management process in order to prevent materialisation of capital risk, understood as risk resulting from the lack of capital as well as lack of the possibility to achieve sufficient capital adequate to the business activity’s risk undertaken by the Bank, required to absorb unexpected losses and meet regulatory requirements enabling further independent functioning of the Bank. Capital risk encompasses the risk of excessive leverage.
Capital risk management is performed, at an individual level, in mBank and, at a consolidated level, in the mBank Group.
The capital management in the mBank Group is organised as a process including planning, steering and controlling regulatory and internal capital. Within the framework of capital management process, regular monitoring of capital adequacy and effectiveness is conducted, aimed at assurance that adequate and optimum level of capital is maintained in the mBank Group. This is supported by stress test analyses, which – among others – are based on scenarios of macro environment change, aiming to provide in depth view on current capital position, as well as its probable future developments resulting from the stress scenarios adopted for the analysis.
More information on capital adequacy of the mBank Group is provided in Note 47.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
82
3.15. FX loans portfolio risk
The FX loan portfolio risk is related to mortgage and housing loans in foreign currencies, granted to individual borrowers until 2011. This risk may result in particular from the materialisation of operational (legal), as well as credit and reputational risk in relation to the above-mentioned borrowers.
The legal risk of the portfolio of loans in foreign currencies (loans indexed with a foreign exchange rate) relates to the portfolio of mortgage-secured loans granted to natural persons in the years 2004-2011.
This risk relates to the possibility of realising losses resulting from court decisions unfavourable for the Bank in cases brought by borrowers.
In managing this risk, the Group takes action to protect the Bank's interests in court proceedings, aimed at obtaining decisions favourable to the Bank as well as runs settlement program for customers with CHF indexed loans.
For effective management of legal risk of the FX loans portfolio, mBank has established the Disputed Loans Department, whose tasks include in particular:
■ preparation of materials used in court proceedings,
■ coordinating the activities of legal representatives,
■ calculation of legal risk costs related to loans in foreign currencies,
■ cooperation and communication with external institutions on indexed loans,
■ organising and coordinating the settlement program.
More information on legal risk related to mortgage and housing loans granted to individual customers in CHF is included in the Note 34.
Credit risk and reputational risk related to the FX loans portfolio are managed in line with the principles of managing these risks.
3.16. Tax risk
The purpose of the tax risk management (process) is effective and safe performance of all obligations provided for by the tax law. Therefore, the Group identifies tax risks and eliminates or limits them in connection with the role of:
■ taxpayer,
■ an entity providing tax information to the Bank's clients, the Bank's contractors or tax authorities.
The Bank manages tax risk by ensuring:
■ integration of tax law with accounting law and financial reporting in the Bank's internal regulations,
■ correct tax processes in accordance with the applicable tax law,
■ cooperation of organisational units preparing, giving opinions and offering products to the Bank's clients,
■ correct identification and monitoring of tax risks,
■ rules for concluding transactions with customers,
■ monitoring changes in the tax law and jurisprudence.
3.17. Fair value of assets and liabilities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction of selling the asset or transferring a liability occurs either:
■ on the main market for an asset or a liability,
■ in the absence of a main market, for the most advantageous market for an asset or a liability.
In line with IFRS 9, for accounting purposes, the Group determines the valuation of its assets and liabilities at amortised cost or at fair value. In addition, for the positions that are valued at amortised cost, fair value is calculated, but only for disclosure purposes – according to IFRS 7.
The approach to the valuation method used for the loans at fair value in line with IFRS 9 requirements, is described in the point 3.3.7.
Following market practices the Group values open positions in financial instruments using either the mark-to-market approach or is applying pricing models well established in market practice (mark-to-model method) which use as inputs market prices or market parameters, and in few cases, parameters estimated internally by the Group. All significant open positions in derivatives are valued by marked-to-model using
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
83
prices observable in the market. Domestic commercial papers are marked to model (by discounting cash flows), which in addition to market interest rate curve uses credit spreads estimated internally.
For disclosure purposes, the Group assumed that the fair value of short-term financial liabilities (less than 1 year) is equal to the balance sheet values of such items. In addition, the Group assumes that the estimated fair value of financial assets and financial liabilities longer than 1 year is based on discounted cash flows using appropriate interest rates.
Financial Assets and Liabilities at amortised cost
The following table presents a summary of balance sheet values and fair values for each group of financial assets and liabilities not recognised in the statement of financial position of the Group at their fair values.
31.12.2022
31.12.2021
Carrying value
Fair value
Carrying value
Fair value
Financial assets at amortised cost
Debt securities
19 002 527
16 716 128
16 164 103
14 890 079
Loans and advances to banks
9 806 262
9 808 593
7 229 681
7 227 533
Loans and advances to customers, including:
119 330 030
118 635 928
116 525 375
116 739 370
Loans and advances to individuals
68 586 288
68 379 524
70 018 368
71 256 978
Current receivables
7 334 567
7 776 122
7 252 733
7 488 229
Term loans
61 230 344
60 582 025
62 752 303
63 755 417
Other
21 377
21 377
13 332
13 332
Loans and advances to corporate entities
50 637 195
50 150 850
46 354 886
45 329 509
Current receivables
6 522 197
6 368 367
5 135 475
4 996 982
Term loans, including finance lease
39 179 352
38 846 942
37 423 062
36 747 140
Reverse repo or buy/sell back transactions
1 611 154
1 611 154
187 630
187 630
Other loans and advances
3 258 910
3 258 805
3 599 368
3 388 406
Other
65 582
65 582
9 351
9 351
Loans and advances to public sector
106 547
105 554
152 121
152 883
Financial liabilities at amortised cost
Amounts due to other banks
3 270 223
3 270 223
5 266 179
5 266 179
Amounts due to customers
174 130 914
174 126 884
157 071 670
157 054 611
Debt securities issued
9 465 479
9 216 032
13 429 782
13 518 622
Subordinated liabilities
2 740 721
2 631 352
2 624 456
2 616 703
The following sections present the key assumptions and methods used by the Group for estimation of the fair values of financial instruments.
Loans and advances to banks and loans and advances to customers
The fair value for loans and advances to banks and loans and advances to customers is disclosed as the estimated value of future cash flows (including the effect of prepayments) using current interest rates, taking into account the level of the credit spread, the cost of liquidity and the cost of capital. The level of credit spread is determined based on market quotation of median credit spreads for Moody’s rating grade. Attribution of a credit spread to a given credit exposure is based on a mapping between Moody’s rating grade and internal rating grades of the Group. To reflect the fact that the majority of the Group’s exposures is collateralised whereas the median of market quotation is centred around unsecured issues, the Group applied appropriate adjustments. Moreover, as the benchmark for valuation of mortgage loans in PLN fair value of mortgage loans classified as valuated through fair value in accordance with IFRS 9 was used, with an adjustment relating to credit quality of the portfolio. For exposures in mBank Hipoteczny the adjustment included also a factor relating to the gap in revenue margin between the valuated portfolio and the portfolio of similar loans in mBank.
Financial liabilities
Financial instruments representing liabilities for the Group include the following:
■ contracted borrowings,
■ current accounts and deposits,
■ issues of debt securities,
■ subordinated liabilities.
mBank S.A. Group
IFRS Consolidated Financial Statements 2022 (PLN thousand)
84
The fair value for these financial liabilities with more than 1 year to maturity is based on discounted cash flows by the use of discounting factor including an estimation of a spread reflecting the credit spread for mBank and the liquidity margin. For the loans