61. Management of currency risk associated with mortgage loans for households
2019
The Group analyses its portfolio of foreign currency mortgage loans to households in a specific manner. The Group monitors the quality of the portfolio on an on-going basis and reviews the risk of deterioration of the portfolio quality. Currently, the quality of the portfolio is at an acceptable level. The Group takes into consideration the risk of foreign currency mortgage loans for households in the capital adequacy and own fund management.
| HOUSING LOANS TO HOUSEHOLDS BY CURRENCY 31.12.2019 |
Individuals | Individual entrepreneurs, Non-commercial institutions operating for the benefit of households |
Total | ||||||
|---|---|---|---|---|---|---|---|---|---|
| brutto | allowance | net | brutto | allowance | net | brutto | allowance | net | |
| PLN | 89 745 | (1 034) | 88 711 | 4 081 | (11) | 4 070 | 93 826 | (1 045) | 92 781 |
| CHF | 21 410 | (692) | 20 718 | 4 | – | 4 | 21 414 | (692) | 20 722 |
| EUR | 2 825 | (53) | 2 772 | – | – | – | 2 825 | (53) | 2 772 |
| USD | 50 | (6) | 44 | – | – | – | 50 | (6) | 44 |
| UAH | 209 | (21) | 188 | – | – | – | 209 | (21) | 188 |
| OTHER | 9 | – | 9 | – | – | – | 9 | – | 9 |
| TOTAL | 114 248 | (1 806) | 112 442 | 4 085 | (11) | 4 074 | 118 333 | (1 817) | 116 516 |
| HOUSING LOANS TO HOUSEHOLDS BY CURRENCY 31.12.2018 |
Individuals | Individual entrepreneurs, Non-commercial institutions operating for the benefit of households |
Total | ||||||
|---|---|---|---|---|---|---|---|---|---|
| brutto | allowance | net | brutto | allowance | net | brutto | allowance | net | |
| PLN | 81 891 | (1 068) | 80 823 | 3 964 | (14) | 3 950 | 85 855 | (1 082) | 84 773 |
| CHF | 23 259 | (683) | 22 576 | 4 | – | 4 | 23 263 | (683) | 22 580 |
| EUR | 3 154 | (53) | 3 101 | – | – | – | 3 154 | (53) | 3 101 |
| USD | 59 | (6) | 53 | – | – | – | 59 | (6) | 53 |
| UAH | 135 | (19) | 116 | – | – | – | 135 | (19) | 116 |
| OTHER | 10 | – | 10 | – | – | – | 10 | – | 10 |
| TOTAL | 108, 508 | (1 829) | 106 679 | 3 968 | (14) | 3 954 | 112 476 | (1 843) | 110 633 |
The Bank includes the following customer groups to households: private individuals being mortgage banking clients, individual entrepreneurs and individual farmers.
| HOUSING LOANS AND ADVANCES IN FOREIGN CURRENCIES BY GRANTING DATE 31.12.2019 | INDEXED | DENOMINATED | Total | |
|---|---|---|---|---|
| up to 2002 year | Gross amount | – | 98 | 98 |
| Allowances for credit losses | – | (2) | (2) | |
| Net amount | – | 96 | 96 | |
| Number of loans granted | – | 6 704 | 6 704 | |
| from 2003 to 2006 | Gross amount | – | 4 974 | 4 794 |
| Allowances for credit losses | – | (107) | (107) | |
| Net amount | – | 4 867 | 4 867 | |
| Number of loans granted | – | 47 821 | 47 821 | |
| from 2007 to 2009 | Gross amount | – | 12 753 | 12 753 |
| Allowances for credit losses | – | (542) | (542) | |
| Net amount | – | 12 211 | 12 211 | |
| Number of loans granted | – | 54 056 | 54 056 | |
| from 2010 to 2012 | Gross amount | 3 362 | 3 085 | 6 447 |
| Allowances for credit losses | (39) | (57) | (96) | |
| Net amount | 3 323 | 3 028 | 6 351 | |
| Number of loans granted | 11 115 | 12 709 | 23 824 | |
| from 2013 to 2016 | Gross amount | 5 | 14 | 19 |
| Allowances for credit losses | – | (2) | (2) | |
| Net amount | 5 | 12 | 17 | |
| Number of loans granted | 18 | 47 | 65 | |
| Total | Gross amount | 3 367 | 20 924 | 24 291 |
| Allowances for credit losses | (39) | (710) | (749) | |
| Net amount | 3 328 | 20 214 | 23 542 | |
| Number of loans granted | 11 133 | 121 337 | 132 470 | |
| MORTGAGE LOANS AND ADVANCES IN FOREIGN CURRENCIES BY GRANTING DATE 31.12.2018 |
INDEXED | DENOMINATED | Total | |
|---|---|---|---|---|
| up to 2002 year | Gross amount | – | 130 | 130 |
| Allowances for credit losses | – | (3) | (3) | |
| Net amount | – | 127 | 127 | |
| Number of loans granted | – | 7 850 | 7 850 | |
| from 2003 to 2006 |
Gross amount | – | 5 491 | 5 491 |
| Allowances for credit losses | – | (120) | (120) | |
| Net amount | – | 5 371 | 5 371 | |
| Number of loans granted | – | 51 943 | 51 943 | |
| from 2007 to 2009 |
Gross amount | – | 13 899 | 13 899 |
| Allowances for credit losses | – | (527) | (527) | |
| Net amount | – | 13 372 | 13 372 | |
| Number of loans granted | – | 56 045 | 56 045 | |
| from 2010 to 2012 |
Gross amount | 3 562 | 3 373 | 6 935 |
| Allowances for credit losses | (33) | (52) | (85) | |
| Net amount | 3 529 | 3 321 | 6 850 | |
| Number of loans granted | 11 527 | 13 353 | 24 880 | |
| from 2013 to 2016 |
Gross amount | 5 | 17 | 22 |
| Allowances for credit losses | – | (4) | (4) | |
| Net amount | 5 | 13 | 18 | |
| Number of loans granted | 18 | 53 | 71 | |
| Razem | Gross amount | 3 567 | 22 910 | 26 477 |
| Allowances for credit losses | (33) | (706) | (739) | |
| Net amount | 3 534 | 22 204 | 25 738 | |
| Number of loans granted | 11 545 | 129 244 | 140 789 | |
Legal risk of mortgage loans in convertible currencies
As at 31 December 2019 the Group recognized the impact of legal risk related to the portfolio of mortgage loans in convertible currencies granted to households in its financial statements. In accordance with IAS 37, the Group recorded a provision for potential litigation of PLN 29 million for repaid loan agreements. For active agreements, the Group adjusted the gross carrying amount of mortgage loans to reflect the modified estimated cash flows arising from the agreements, in accordance with IFRS 9, and reduced their value by PLN 281 million. At the same time, as at 31 December 2019 the Group recorded a provision of PLN 141 million for pending litigation in its financial statements, and adjusted the gross carrying amount of mortgage loans by this amount. The aggregate impact of legal risk of PLN 451 million was recognized in the income statement in a separate line as the cost of legal risk related to mortgage loans in convertible currencies.
The Group applied two independent models of predicting potential losses arising from the legal risk and obtained similar amounts of expected loss. These models take into account the forecast increase in the number of suits in the three-year horizon and divide the portfolio of mortgage loans in convertible currencies into generations, among others, based on the following criteria: characteristics of the agreement, date of granting the loan, exchange rate as at the grant date, loan amount, type of product and entity granting the loan. The calculation of potential losses takes into account possible scenarios of how the litigation would be resolved and their probability, taking into account the history of former verdicts and assessments by independent law firms.
The Group calculated the legal risk-related loss using the statistical method in respect of the expected value being the sum of the products of the probabilities of specific litigation resolutions and the loss calculated for each scenario, taking into account alternative prediction methods with respect to the number of disputes within a three-year horizon. Additionally, the Group’s model takes into account the effect of customer characteristics on the amount of expected loss.
The Group applied simplifications in the calculation of expected loss in connection with legal risk following from an analysis of a long series of historical data, including data of the acquired entities and a number of scenarios of possible dispute resolutions. In the Group’s opinion, the simplifications adopted do not have a significant effect on the amount of potential loss.
Due to a short horizon of available historical data and significant uncertainty as to the direction of court decisions as well as the market conditions, the adopted methodology for estimating losses related to legal risk will be updated in subsequent reporting periods.
The Group conducted a sensitivity analysis of models under which a change in the following parameters would have the following effect on the amount of the estimated allowance for legal risk:
| Parameter | Scenario | Impact on the loss due to legal risk of the portfolio of mortgage loans in convertible currencies granted to households |
|---|---|---|
| Number of lawsuits | 20% | 62 |
| -20% | (62) | |
| Time horizon of the forecast | 4 year | 115 |
| 2 year | (106) |
If an additional 1% of the Bank’s customers holding mortgage loans in convertible currencies filed a lawsuit against the Bank, then the impact on the loss due to legal risk of the portfolio of mortgage loans in convertible currencies would increase by PLN 100 million.