64. Liquidity risk management
2019
Liquidity risk is the risk of inability to settle liabilities as they become due because of the absence of liquid assets. The lack of liquidity may be due to an inappropriate structure of assets and liabilities, including off-balance sheet, a mismatch of cash flows, customers’ failing to settle their liabilities, a sudden withdrawal of funds by the customers or other market events.
The Group also manages the financing risk which takes into account the risk of losing the existing sources of financing and inability of renewing the required means of financing or a loss of access to new sources of financing.
To ensure the necessary level of funds needed to settle current and future liabilities (also potential ones) as they become due, taking into account the nature of the activities conducted and the needs which may arise due to changes in the market environment, by appropriately establishing the structure of balance sheet and off-balance sheet assets and liabilities.
The Group uses the following measures of the liquidity risk:
- contractual and adjusted liquidity gap;
- liquidity reserve;
- liquidity surplus;
- the ratio of stable funds to illiquid assets;
- liquidity coverage ratio (LCR);
- domestic supervisory liquidity measures (M3-M4)
- measures of stability of the deposit and loan portfolios;
- liquidity stress tests
Control over the liquidity risk consists in determining liquidity risk limits and thresholds tailored to the scale andcomplexity of the Group’s operations, in particular the strategic limit of tolerance to liquidity risk.
The following measures are monitored by the Group on a regular basis:
- utilization of the strategic limit of tolerance to liquidity risk;
- utilization of regulatory liquidity standards;
- utilization of internal limits and thresholds of liquidity risk;
- concentration of the sources of financing;
- early warning indicators – monitored for the early detection of unfavourable occurrences which may have a negative impact on the Group’s or the financial sector’s liquidity position (when exceeded, early warning indicators trigger liquidity contingency plans).
The Group also makes regular liquidity forecasts which take into account the current developments in the Group’s
operations. Liquidity forecasts include primarily the levels of selected liquidity risk measures envisaged in the
forecasts of the Group’s statement of financial position and in selected stress test scenarios.
Liquidity reports are developed on a daily, weekly, monthly and quarterly basis and once a year, an in-depth longterm liquidity analysis is performed. The reports contain information on liquidity risk exposure and on the risk limits utilization. The reports are addressed mainly to: ALCO, RC, the Management Board, the Risk Committee and the Supervisory Board.
The main tools for liquidity risk management used by the Group are:
- procedures for liquidity risk management, in particular contingency plans;
- limits and thresholds to mitigate short-term, medium-term and long-term liquidity risk;
- national and European supervisory liquidity standards;
- deposit, investment and securities transactions and well as derivatives, including structural currency transactions and transactions for sale or purchase of securities;
- transactions ensuring long-term financing of the lending activities.
The Group’s policy concerning liquidity is based on keeping an appropriate level of liquidity surplus and supervisory and internal measures of liquidity risk and financing through an increase in the portfolio of liquid securities, and stable sources of financing (a stable deposit base, in particular). In liquidity risk management, money market instruments, including NBP open market operations, are also used.
Financial information
Liquidity gap
The adjusted liquidity gap comprises a set of particular balance sheet and off-balance sheet categories in respect of their adjusted maturities. The liquidity gaps presented below represent the sum of adjusted liquidity gaps of the Bank (adjustments relate to, among other things, the Bank’s core deposits from non-financial entities and their maturities, overdrafts and credit cards and their maturities, and liquid securities and their maturities), PKO Bank Hipoteczny, PKO Leasing SA, KREDOBANK SA and PKO Życie Towarzystwo Ubezpieczeń SA, and the contractual liquidity gaps of the other Group companies.
| on demand | 0-1 month |
1-3 months |
3-6 months |
6-12 months |
12-24 months |
24-60 months |
over 60 months |
|
|---|---|---|---|---|---|---|---|---|
| 31.12.2019 | ||||||||
| The Group – adjusted periodic gap in real terms | 11,355 | 30 783 | (8 092) | (7 285) | (3 317) | 5 024 | 18 205 | (46 673) |
| The Group – adjusted cumulative periodic gap in real terms |
11,355 | 42 138 | 34 046 | 26 761 | 23 444 | 28 468 | 46 673 | – |
| 31.12.2018* | ||||||||
| The Group -adjusted periodic gap in real terms | 23,472 | 22 809 | (8 470) | (6 419) | 2 860 | 12 441 | 14 482 | (61 175) |
| The Group -adjusted cumulative periodic gap in real terms |
23,472 | 46 281 | 37 811 | 31 392 | 34 252 | 46 693 | 61 175 | – |
* brought to comparability with the data as at 31 December 2019.
In all time horizons, the adjusted cumulative liquidity gap of the Group, determined as the sum of the adjusted liquidity gaps of the Bank, PKO Bank Hipoteczny SA, PKO Leasing SA, KREDOBANK and PKO Życie Towarzystwo Ubezpieczeń SA and the contractual liquidity gaps of the other Group companies with respect to items of the statement of financial position, was positive both as at 31 December 2019 and 31 December 2018. This means that the Group has a surplus of the assets receivable over the liabilities payable.
Supervisory liquidity measures
The following supervisory liquidity measures are regularly set and monitored at the Bank and the Group:
- Liquidity Coverage Ratio (LCR) – defining the relation of high-quality liquid assets to net outflows in the 30- day horizon in stress conditions (supervisory measure specified in the CRR Regulation);
- Net Stable Funding Ratio (NSFR) – a measure defining the relationship of items providing stable funding to items requiring stable funding;
The following supervisory liquidity measures are regularly set and monitored at the Bank:
- M3 – non-liquid assets to own funds (national supervisory ratio);
- M4 – non-liquid assets and assets with limited liquidity to own funds and stable external funds (national supervisory ratio);
| SUPERVISORY LIQUIDITY MEASURES | 31.12.2019 | 31.12.2018 |
|---|---|---|
| M3 – coverage ratio of non-liquid assets to own funds | 14.92 | 17.44 |
| M4 – coverage ratio of non-liquid assets and liquidity-restricted assets with own funds and stable external funds |
1.25 | 1.22 |
| NSFR – net stable funding ratio | 123.1% | 117.7% |
| LCR – liquidity coverage ratio | 146.3% | 132.0% |
In the period ended 31 December 2019 and 31 December 2018, liquidity measures remained above their respective supervisory limits. The LCR and NSFR ratios in the table refer to the Group, while the M3-M4 indicators refer to the Bank.
Core deposit base
As at 31 December 2019, the core deposit base constituted approx. 93.8% of all deposits placed with the Bank (excluding the interbank market), which represents a decrease of ca. 0.1 p.p. compared with the end of 2018.
Structure of the sources of financing
| 31.12.2019 | 31.12.2018 | |
|---|---|---|
| Total deposits (excluding interbank market) | 76.44% | 75.76% |
| Interbank market deposits | 0.40% | 0.63% |
| Equity | 11.59% | 12.05% |
| Market financing | 11.57% | 11.56% |
| Total | 100.00% | 100.00% |
Contractual cash flows from the group’s liabilities, excluding derivative financial instruments
The amounts disclosed comprise non-discounted future cash flows, both in respect of the principal and interest (if applicable), in accordance with the contract, for the entire period to the date of the liability’s maturity. Where the party to whom the Group has a liability is able to select the settlement deadline, it has been assumed that the earliest date on which the Group is obliged to settle the liability shall be taken into account. Where the Group is obliged to settle the liabilities in instalments, each instalment is allocated to the earliest period in which the Group might be obligated to settle. In the case of liabilities where instalment amounts are not fixed, the terms binding as at the reporting date have been adopted.
| GROUP’S LIABILITIES AS AT 31 DECEMBER 2019, BY MATURITY |
Up to 1 month |
1 month to 3 |
3 months to 1 year |
1 year to 5 year |
Over 5 years | Contractual amount |
Carrying amount |
|---|---|---|---|---|---|---|---|
| Liabilities: | |||||||
| Amounts due to banks |
2 124 |
16 | 384 | 637 | – | 3 161 | 2 885 |
| Amounts due to customers |
197 831 |
17 260 | 29 862 | 6 064 | 10 521 | 261 538 | 258 199 |
| Liabilities in respect of securities in issue |
914 |
797 | 2 769 | 27 267 | 811 | 32 558 | 31 148 |
| Subordinated liabilities |
– |
45 | 45 | 473 | 2 913 | 3 476 | 2 730 |
| Lease liabilities |
19 |
37 | 155 | 495 | 411 | 1 117 | 894 |
| Other liabilities |
2 706 |
– | – | – | – | 2 706 | 2 706 |
| Total |
203 594 |
18 155 | 33 215 | 34 936 | 14 656 | 304 556 | 298 562 |
| Off-balance sheet liabilities: | |||||||
| financing, granted |
15 936 |
3 567 | 15 086 | 12 000 | 8 779 | 55 368 | – |
| guarantees, granted |
161 |
1 653 | 5 185 | 3 176 | 1 335 | 11 510 | – |
| GROUP’S LIABILITIES AS AT 31 DECEMBER 2018, BY MATURITY |
Up to 1 month | 1 month to 3 months |
3 months to 1 year |
1 year to 5 year | Over 5 years | Contractual amount |
Carrying amount |
| Liabilities: | |||||||
| Amounts due to the Central Bank | 7 | – | – | – | – | 7 | 7 |
| Amounts due to banks | 1 722 | 67 | 152 | 103 | – | 2 043 | 2 001 |
| Amounts due to customers | 182 651 | 21 468 | 27 168 | 11 568 | 8 041 | 250 895 | 242 816 |
| Liabilities in respect of securities in issue | 722 | 610 | 3 278 | 12 768 | 5 992 | 23 370 | 28 627 |
| Subordinated liabilities | – | 62 | 62 | 542 | 3 362 | 4 028 | 2 731 |
| Other liabilities | 3 685 | 3 685 | 3 685 | ||||
| Total | 188 787 | 22 207 | 30 660 | 24 981 | 17 395 | 284 029 | 279 867 |
| Off-balance sheet liabilities: | |||||||
| financing, granted | 12 626 | 2 874 | 13 293 | 12 026 | 9 058 | 49 877 | – |
| guarantees, granted | 290 | 693 | 4 823 | 3 313 | 816 | 9 935 | – |
Contractual cash flows from liabilities in respect of derivative financial instruments for which the valuationas at the balance sheet date was negative (a liability) and which are settled on a net basis
In the case of IRS and NDF transactions, non-discounted future net cash flows in respect of interest and principal have been presented and in the case of the remaining derivative instruments settled on a net basis, the amount of the valuation as at 31 December 2019 and as at 31 December 2018 respectively was adopted as the cash flow amount.
| As at 31 December 2019 | Up to 1 month | 1 month to 3 months |
3 months to 1 year |
1 year to 5 year | over 5 years | Contractual amount |
|---|---|---|---|---|---|---|
| Derivative financial instruments – liabilities: | ||||||
| – Interest rate swap (IRS) | (114) | (199) | (89) | 3 | 61 | (338) |
| – other derivatives (options, FRA, NDF) | (610) | (962) | (2 061) | (2 495) | – | (6 128) |
| As at 31 December 2018 | Up to 1 month | 1 month to 3 months |
3 months to 1 year |
1 year to 5 year | over 5 years | Contractual amount |
| Derivative financial instruments – liabilities: | ||||||
| – Interest rate swap (IRS) | (13) | 6 | 235 | (1 104) | (276) | (1 153) |
| – other derivatives (options, FRA, NDF) | (455) | (1 393) | (2 876) | (2 062) | – | (6 788) |
Contractual cash flows from liabilities in respect of derivative financial instruments for which the valuation as at the balance sheet date was negative (a liability) and which are settled on a gross basis
The amounts disclosed comprise non-discounted future cash flows, both in respect of principal and interest (if applicable).
| As at 31 December 2019 | Up to 1 month | 1 month to 3 months |
3 months to 1 year |
1 year to 5 year | over 5 years | Contractual amount |
|---|---|---|---|---|---|---|
| Derivative financial instruments: | ||||||
| – outflows | (8 643) | (3 819) | (6 264) | (5 696) | (369) | (24 791) |
| – inflows | 8 915 | 3 848 | 7 379 | 5 687 | 838 | 26 667 |
| As at 31 December 2018 | Up to 1 month | 1 month to 3 months |
3 months to 1 year |
1 year to 5 year | over 5 years | Contractual amount |
| Derivative financial instruments: | ||||||
| – outflows | (8 014) | (2 683) | (4 183) | (3 396) | (1 158) | (19 434) |
| – inflows | 17 051 | 2 761 | 6 213 | 8 088 | 2 813 | 36 924 |
Current and non-current assets and liabilities
|
FINANCIAL ASSETS |
Current | Non-Current | Allowances for expected credit losses/ Impairment allowances |
Total carrying amount |
|---|---|---|---|---|
|
|
||||
| Cash and balances with Central Bank | 14 677 | – | – | 14 677 |
| Amounts due from banks | 4 067 | 26 | (1) | 4 092 |
| Hedging derivatives | 160 | 485 | – | 645 |
| Other derivative instruments | 1 190 | 1 605 | – | 2 795 |
| Securities | 6 845 | 73 753 | (25) | 80 573 |
| – held for trading | 1 112 | – | – | 1 112 |
| – not held for trading, mandatorily measured at fair value through profit or loss | 1 753 | 446 | – | 2 199 |
| – measured at fair value through other comprehensive income; | 3 567 | 60 245 | (5) | 63 807 |
| – measured at amortized cost | 413 | 13 062 | (20) | 13 455 |
| Loans and advances to customers | 56 731 | 181 925 | (7 222) | 231 434 |
| – not held for trading, mandatorily measured at fair value through profit or loss | 5 461 | 2 825 | – | 8 286 |
| – measured at fair value through other comprehensive income; | 1 | – | (1) | – |
| – measured at amortized cost | 51 269 | 179 100 | (7 221) | 223 148 |
| Other financial assets | 2 624 | 92 | (92) | 2 624 |
| Total financial assets | 86 294 | 257 886 | (7 340) | 336 840 |
| FINANCIAL LIABILITIES 31.12.2019 |
Current | Non- Current | Total carrying amount |
|---|---|---|---|
| Amounts due to banks | 2 255 | 630 | 2 885 |
| Hedging derivatives | 238 | 351 | 589 |
| Other derivative instruments | 1 272 | 1 652 | 2 924 |
| Amounts due to customers | 243 556 | 14 643 | 258 199 |
| Liabilities in respect of securities in issue | 4 166 | 26 982 | 31 148 |
| Subordinated liabilities | – | 2 730 | 2 730 |
| Other financial liabilities | 2 768 | 832 | 3 600 |
| Provisions for financial liabilities and guarantees granted | 226 | 43 | 269 |
| Total financial liabilities | 254 481 | 47 863 | 302 344 |
| FINANCIAL ASSETS 31.12.2018 |
Current | Non-Current | Allowances for expected credit losses/ Impairment allowances |
Total carrying amount |
|---|---|---|---|---|
| Cash and balances with Central Bank | 22 925 | – | – | 22 925 |
| Amounts due from banks | 7 650 | 12 | (1) | 7 661 |
| Hedging derivatives | 43 | 615 | – | 658 |
| Other derivative instruments | 700 | 1 207 | – | 1 907 |
| Securities | 11 106 | 53 044 | (36) | 64 114 |
| – held for trading | 235 | – | – | 235 |
| – not held for trading, mandatorily measured at fair value through profit or loss |
2 009 | 839 | – | 2 848 |
| – measured at fair value through other comprehensive income; | 7 946 | 44 622 | (10) | 52 558 |
| – measured at amortized cost | 916 | 7 583 | (26) | 8 473 |
| Loans and advances to customers | 43 785 | 179 331 | (8 204) | 214 912 |
| – not held for trading, mandatorily measured at fair value through profit or loss | 396 | 710 | – | 1 106 |
| – measured at amortized cost | 4 389 | 178 621 | (8 204) | 213 806 |
| Other financial assets | 2 498 | 424 | (97) | 2 825 |
| Total financial assets | 88 707 | 234 633 | (8 338) | 315 002 |
| FINANCIAL LIABILITIES 31.12.2018 |
Current | Non – Current | Total carrying amount |
|---|---|---|---|
| Amounts due to the Central Bank | 7 | – | 7 |
| Amounts due to banks | 1 901 | 100 | 2 001 |
| Hedging derivatives | 123 | 348 | 471 |
| Other derivative instruments | 1 333 | 1 322 | 2 655 |
| Amounts due to customers | 227 806 | 15 010 | 242 816 |
| Liabilities in respect of securities in issue | 6 472 | 22 155 | 28 627 |
| Subordinated liabilities | – | 2 731 | 2 731 |
| Other financial liabilities | 2 352 | 12 | 2 364 |
| Provisions for financial liabilities and guarantees granted | 177 | 50 | 227 |
| Total financial liabilities | 240 171 | 41 728 | 281 899 |