57. Managing credit concentration risk in the Group

The Group defines credit concentration risk as the risk arising from a considerable exposure to single customers or groups of related customers whose repayment capacity depends on a common risk factor. The Group analyses the risk of concentration towards:

• the largest entities (customers);
• the largest groups of related customers;
• industry sectors;
• geographical regions;
• currencies;
• exposures secured with a mortgage;

The objective of concentration risk management is to ensure a safe structure of the loan portfolio by mitigating threats arising from excessive concentrations relating to exposures characterized by the potential to generate significant losses for the Group.

The Group measures and assesses concentration risk by examining the actual aggregate exposure to a customer or to a group of related customers and the actual aggregate exposure to individual groups of loan portfolios.

The Group’s actual exposure is defined in the CRR, which means all assets or off-balance sheet items, including exposures in the banking and trading book and indirect exposures arising from the collateral applied.

Concentration risk is identified by recognizing the factors due to which the risk may arise or the level of the Group’s exposure may change, including potential risk factors resulting, for example, from planned activities of the Group. In the process of identifying concentration risk, the Group:

• identifies and updates the structure of the group of related customers;
• aggregates the exposures towards a customer or a group of related customers;
• applies exemptions from regulatory limits for large exposures, in accordance with the CRR. The Group’s tolerance to concentration risk is determined by:
• external regulatory limits arising from Article 395 of the CRR and from Article 79a of the Banking Law;
• internal limits of the Group;
  • strategic limits of concentration risk tolerance;
  • limits that define the appetite for concentration risk.

The Group uses the following to measure concentration risk:

• the exposure concentration ratio of the Group towards a customer or a group of related customers in relation to the Group’s eligible capital;
• ratios evaluating the diversification level (e.g. the Herfindahl Hirschmann index);
• Gini coefficient;
• graphic measures of portfolio concentration (Lorenz curve).

To measure concentration risk and evaluate the effect of internal and external factors on this risk, the Group performs stress tests with respect to concentration risk for large exposures.

Group monitors concentration risk:

• on an individual level, by verifying the exposure concentration ratio for a customer or a group of related customers, each time before applying for a decision on granting financing, or increasing the amount of the exposure, and before taking other actions resulting in increasing the Bank’s exposure on other accounts;
• on a systemic level, by:
  • daily control over compliance with the external concentration limit and identifying large exposures;
  • monthly control over the limit arising from Article 79a of the Banking Law;
  • monthly or quarterly control over compliance with the Group’s internal limits with respect to concentration risk;
  • monitoring early warning ratios with respect to concentration;

The Group forecasts changes in the level of concentration risk as part of its analyses and reviews of internal limits and the concentration risk management policy, and in the process of concentration risk stress testing.

The Group performs stress tests to examine, for example, the effect of macroeconomic factors on individual concentrations, the impact of decisions of other financial market participants, decisions on customer mergers, dependency on other risks, for example, currency risk, which may contribute to the materialization of concentration risk, and the effect of other factors from the internal and external environment on the concentration risk.

Concentration risk is tested as part of comprehensive stress tests which enable evaluating the forecast effect of correlated credit, interest rate, currency, operating and liquidity risks and concentration risk on the expected credit losses of the Group.

Reports on concentration risk are prepared on a daily, monthly and quarterly basis.

Concentration risk reporting comprises periodic (monthly or quarterly) reporting to the Bank’s relevant bodies on the scale of exposure to concentration risk, which may lead to a significant change in the Bank’s risk profile, including in particular:

• on the utilization of limits defining the risk appetite and on potentially exceeding those limits;
• on early warning ratios;
• on stress test results;
• on portfolio concentration risk and concentration of the Group’s largest exposures and compliance with concentration standards arising from the Banking Law.

The purpose of management actions is to shape and optimize the concentration risk management process and concentration risk level at the Group (preventing excessive concentrations).

Management actions comprise in particular:

• publishing the Bank’s internal regulations on the process of concentration risk management, defining the tolerance level for concentration risk, determining limits and threshold amounts;
• issuing recommendations, guidelines for conduct, explanations and interpretations of internal regulations;
• taking decisions concerning an acceptable level of concentration risk, including in particular decisions determining the threshold values of limits reflecting concentration risk appetite;
• developing and improving concentration risk control tools which make it possible to maintain the concentration risk level within the limits acceptable to the Bank;
• developing and improving concentration risk assessment methods taking into account changeability of the macroeconomic situation, including crises on foreign and domestic markets and changeability of the regulatory environment
• developing and improving IT tools to support concentration risk management;

The Banking Law sets the limits of the maximum exposure of the Bank which are translated to the Group. The risk of concentration of exposures to individual customers and groups of related customers is monitored in accordance with the CRR, according to which the Group shall not assume an exposure to a customer or a group of related customers the value of which exceeds 25% of the value of its eligible capital.

As at 31 December 2019 and 31 December 2018, concentration limits were not exceeded. As at 31 December 2019, the largest exposure to a single entity accounted for 9.62% of eligible consolidated capital (7.55% as at 31 December 2018).

The Group’s exposure to 20 largest non-banking customers*:

The largest concentration of the Group’s exposure to a group of related borrowers amounted to 1.42% of the Group’s loan portfolio (1.24% as at 31 December 2018).

As at 31 December 2019, the largest concentration of the Group’s exposures amounted to 11.7% of eligible
consolidated capital (9.7% as at 31 December 2018).

The Group’s exposure to 5 largest capital groups*

The Group’s exposure to the industry portfolio has increased. The structure of the Group’s exposure by industry sector is dominated by entities operating in the “Financial and insurance activity” and “Industrial processing” sections. The Group’s exposure to these sectors represents approximately 32% of the entire industry portfolio.

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

The Group classifies the structure of the loan portfolio by geographical regions depending on the customer area – it is different for the Retail Market Area (RMA) and for the Corporate and Investment Banking Area (CaIBA).

In 2019, the largest concentration of the RMA loan portfolio was in the Warsaw region and Katowice region (these regions account for around 27% of the RMA portfolio) (27% as at 31 December 2018).

In 2019, as in 2018, the highest concentration of the CaIBA loan portfolio is in the central macro-region – 45% of the CaIBA portfolio.

As at 31 December 2019, the share of exposures in convertible currencies other than PLN in the entire Group’s portfolio amounted to 18% and it went down compared with 2018.

Exposures in CHF represent the largest part of the Group’s foreign currency exposure with a 46% share in the entireforeign currency portfolio of the Bank as at the end of 2019 (52% as at 31 December 2018). Loans in EUR went up, their share as at the end of 2019 increased to 45% of the foreign currency portfolio (from 42% as at the end of 2018)

The Group analyses the structure of its housing loan portfolio by LTV levels. Both in 2019 and in 2018, the largest concentration was in the LTV range of 61%-80%.

The average LTV of the portfolio of housing loans amounted to 55.32% as at 31 December 2019 and 59.22% as at 31 December 2018.