21. Hedge accounting
Risk management strategy
The Group applies hedge accounting to hedge its interest rate risk and foreign exchange risk. The hedging transactions are concluded to mitigate the risk of incurring losses as a result of unfavourable changes in foreign currency exchange rates and interest rates. Cash flows related to the transactions performed and the fair value of assets held are hedged.
2019
The interest rate risk covers in particular:
- the risk related to the assets and liabilities, and off-balance sheet items repricing (change in interest rates) frequency and dates mismatch (repricing date mismatch risk);
- the risk following from the change in the angle of the inclination and shape of the yield curve (yield curve risk);
- the risk resulting from an imperfect match between the reference rates used in respect of banking products and the changes in the market rates, or from imperfect transmission systems of changes in market interest rates on those products (base risk);
- risks resulting from options, including embedded options, e.g. restrictions on interests on loans (option risk).
The Group’s foreign exchange risk arises as a result of transactions performed under:
- core business activities;
- trading activities;
- contracts concluded by the Group which generate foreign exchange risk.
Foreign exchange risk arising from the Group’s activities is managed, where required, by specialized units as part of their own operations based on the data received on open currency positions.
A system of threshold values and limits attributed to particular interest and foreign exchange risks is in force at the Group, aimed at determining the maximum allowable risk level which ensures that the strategic tolerance limits are not exceeded.
Accounting policies
The Group decided to further apply the provisions of IAS 39 and did not apply IFRS 9 in respect of hedge accounting.
Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognized directly in other comprehensive income in respect of the portion constituting the effective portion of the hedge. The ineffective portion of a hedge is recognized in the income statement in the item “Net income from financial instruments designated at fair value through profit or loss” or “Foreign exchange gains (losses)”.
Amounts transferred directly to other comprehensive income are transferred to the income statement in the same period or periods in which the hedged planned transaction affects the income statement. Interest and foreign exchange gains/losses are presented in the income statement, in “Net interest income” and “Net foreign exchange gains (losses)”, respectively.
The effectiveness tests comprise the measurement of hedging transactions net of interest accrued and foreign exchange gains (losses) on the nominal value of the hedging transactions (in the case of CIRS transactions).
Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.
Changes in the fair value of a derivative hedging instrument designated as fair value hedge are recognized in “Net income from financial instruments designated at fair value”, net of the interest component. The interest component is presented in the same line item as interest income on the hedged item, i.e. in “Net interest income”. A change in the adjustment of the measurement of a hedged item at fair value is recognized in “Net income from financial instruments designated at fair value through profit or loss”.
The effectiveness tests comprise the measurement of hedging transactions net of accrued interest.
Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.
Types of hedging strategies applied by the Group
As at 31 December 2019, the Group had had active relationships as part of:
- 8 strategies for hedging cash flow volatility
- 3 strategies for hedging fair value volatility.
In 2019, the Group introduced two new hedging strategies for fair value hedges.
In 2018 the Group did not introduce any new hedging strategies.
The tables below summarize the types of strategies applied by the Group.
| TYPE OF HEDGING STRATEGY |
CASH FLOW HEDGES | |
|---|---|---|
| HEDGED RISK | foreign exchange risk and interest rate risk | interest rate risk |
| HEDGING INSTRUMENT |
transactions CIRS float – float transactions CIRS fixed – float |
transactions IRS fixed – float |
| HEDGED ITEM |
|
the portfolio of loans in PLN or foreign currencies indexed to a floating interest rate |
| SOURCES OF HEDGE INEFFECTIVENESS |
|
|
| The period in which cash flows are expected to occur and affect the financial results: January 2020 – October 2026 | The period in which cash flows are expected to occur and affect the financial results: January 2020 – August 2028 | |
| TYPE OF HEDGING STRATEGY | FAIR VALUE HEDGES |
|---|---|
| HEDGED RISK | interest rate risk |
| HEDGING INSTRUMENT | IRS fixed – float transactions |
| HEDGED ITEM | a component of the interest rate risk relating to a fixed interest rate loan or security in a foreign currency, which corresponds to the market IRS rate |
| SOURCES OF HEDGE INEFFECTIVENESS |
|
Financial information
| Hedging derivative 31.12.2019 |
Nominal amount of hedging derivatives |
Average margin weighted by the nominal/ average fixed interest rate weighted by the nominal |
Carrying amount (fair value) of hedging instruments | Ineffective portion of cash flow hedges recognized in the income statement /adjustments of fair value measurement of the hedged item |
Change in the fair value of a hedging instrument since designation |
Strategy number |
||
| Assets | Liabilities | |||||||
| CIRS CHF/PLN | float CHF | 1 250 | 0.0024% | 14 | 378 | 1 | (379) | 1, 7 |
| float PLN | 4 524 | 0.0000% | ||||||
| IRS PLN | PLN | 40 783 | 2.2972% | 239 | 8 | 2 | 63 | 2 |
| IRS CHF | CHF | 400 | -0.4425% | 8 | – | – | 2 | 3 |
| IRS EUR | EUR | 1 224 | -0.1699% | 15 | 2 | – | 6 | 3. 4 |
| CIRS CHF/USD | float CHF | 818 | 0.0000% | 189 | – | (2) | 124 | 5 |
| fixed USD | 875 | 2.4315% | ||||||
| CIRS CHF/EUR | float CHF | 2 567 | 0.0000% | 86 | 186 | (16) | (220) | 5 |
| fixed EUR | 2 301 | 0.2958% | ||||||
| CIRS EUR/PLN | float EUR | 100 | 0.0000% | 11 | – | – | 11 | 6 |
| float PLN | 437 | -0.0277% | ||||||
| CIRS PLN/EUR | float PLN | 2 964 | 0.0000% | 79 | 8 | (7) | 67 | 9 |
| fixed EUR | 699 | 0.6177% | ||||||
| Fair value hedges | ||||||||
| IRS EUR | EUR | 257 | -0.1874% | 1 | 6 | 4 | (1) | 8, 10 i 11 |
| IRS USD | USD | 134 | 1.5702% | 3 | 1 | (2) | 1 | 11 |
| TOTAL | 645 | 589 | (20) | (326) | ||||
| Hedging derivative 31.12.2018 |
Nominal amount of hedging derivatives |
Average margin weighted by the nominal/ average fixed interest rate weighted by the nominal |
Carrying amount (fair value) of hedging instruments |
Ineffective portion of cash flow hedges recognized in the income statement /adjustments of fair value measurement of the hedged item |
Change in the fair value of a hedging instrument since designation |
Strategy number |
||
| Assets | Liabilities | |||||||
| CIRS CHF/PLN | float CHF | 1 900 | -0.0948% | 78 | 428 | – | (363) | 1; 7 |
| float PLN | 6 902 | 0.0000% | ||||||
| IRS PLN | PLN | 11 575 | 2.4386% | 101 | – | (1) | 57 | 2 |
| IRS CHF | CHF | 400 | -0.4425% | 7 | – | – | 2 | 3 |
| IRS EUR | EUR | 524 | 0.2087% | 2 | 5 | – | (3) | 3; 4 |
| CIRS CHF/USD | float CHF | 818 | 0.0000% | 148 | – | 1 | 88 | 5 |
| fixed USD | 875 | 2.4315% | ||||||
| CIRS CHF/EUR | float CHF | 2 001 | 0.0000% | 240 | 37 | 3 | 284 | 5 |
| fixed EUR | 1 802 | 0.3504% | ||||||
| CIRS EUR/PLN | float EUR | 125 | 0.0000% | 7 | – | – | 6 | 6 |
| float PLN | 546 | -0.0092% | ||||||
| CIRS PLN/EUR | float PLN | 2 101 | 0.0000% | 75 | – | 7 | 76 | 9 |
| fixed EUR | 499 | 0.7690% | ||||||
| Fair value hedges | ||||||||
| IRS EUR | EUR | 103 | -0.3090% | – | 1 | 1 | – | 8 |
| TOTAL | 658 | 471 | (11) | (147) | ||||
| HEDGED ITEM 31.12.2019 |
CARRYING AMOUNT OF THE HEDGED ITEM |
ITEM IN THE STATEMENT OF FINANCIAL POSITION |
CHANGE IN THE FAIR VALUE THE HEDGED ITEM |
STRATEGY NO. |
|---|---|---|---|---|
| Cash flow hedges | ||||
| Loans in CHF | 1 025 | Loans and advances to customers | 391 | 1 |
| Negotiated deposits in PLN | 3 653 | Amounts due to customers | ||
| Loans in CHF | 3 385 | Loans and advances to customers | 96 | 5 |
| Financial liability in USD | 875 | Debt securities in issue | ||
| Financial liability in EUR | 2 301 | Debt securities in issue | ||
| Loans in CHF | 225 | Loans and advances to customers | 7 | 7 |
| Regular savings products in PLN | 872 | Amounts due to customers | ||
| Loans in CHF | 400 | Loans and advances to customers | (2) | 3 |
| Loans in PLN | 2 964 | Loans and advances to customers | (67) | 9 |
| Financial liability in EUR | 699 | Debt securities in issue | ||
| Loans in PLN | 40 783 | Loans and advances to customers | (58) | 2 |
| Loans in EUR | 100 | Loans and advances to customers | (10) | 6 |
| Negotiated deposits in PLN | 437 | Amounts due to customers | ||
| Loans in EUR | 1 224 | Loans and advances to customers | (7) | 3; 4 |
| Fair value hedges | ||||
| Security in EUR | 74 | Securities measured at fair value through other | – | 10; 11 |
| Papier wartościowy w USD | 134 | (1) | 11 | |
| Kredyty w EUR | 183 | Kredyty i pożyczki udzielone klientom | 1 | 8 |
| TOTAL | 350 | |||
| HEDGED ITEM 31.12.2018 |
CARRYING AMOUNT OF THE HEDGED ITEM |
ITEM IN THE STATEMENT OF FINANCIAL POSITION |
CHANGE IN THE FAIR VALUE THE HEDGED ITEM |
STRATEGY NO. |
|---|---|---|---|---|
| Cash flow hedges | ||||
| Loans in CHF | 1 675 | Loans and advances to customers | 435 | 1 |
| Negotiated deposits in PLN | 6 030 | Amounts due to customers | ||
| Loans in CHF | 2 818 | Loans and advances to customers | (312) | 5 |
| Financial liability in USD | 875 | Debt securities in issue | ||
| Financial liability in EUR | 1 802 | Debt securities in issue | ||
| Loans in CHF | 225 | Loans and advances to customers | (15) | 7 |
| Regular savings products in PLN | 872 | Amounts due to customers | ||
| Loans in CHF | 400 | Loans and advances to customers | (2) | 3 |
| Loans in PLN | 2 101 | Loans and advances to customers | (69) | 9 |
| Financial liability in EUR | 499 | Debt securities in issue | ||
| Loans in PLN | 11 575 | Loans and advances to customers | (55) | 2 |
| Loans in EUR | 125 | Loans and advances to customers | (6) | 6 |
| Negotiated deposits in PLN | 545 | Amounts due to customers | ||
| Loans in EUR | 524 | Loans and advances to customers | 3 | 3; 4 |
| Fair value hedges | ||||
| Loans in EUR | 103 | Kredyty i pożyczki udzielone klientom | – | 8 |
| TOTAL | (21) | |||
In 2019 and 2018 the Group did not use the hedging strategies referred to in IFRS 7 23C, i.e. strategies where both the hedging instrument and the hedged item change frequently (i.e. when the entity uses a dynamic process where both the exposure and the hedging instruments used to manage it do not remain unchanged over a longer period).
In 2019 and 2018 the Group did not identify a situation which is referred to in IFRS 7 23F, i.e. planned transactions for which hedge accounting had been used in the previous period but which are no longer expected to occur.
In 2019 and 2018 the Group did not use credit derivative instruments to manage its credit risk and did not designate a financial instrument (or its part) as measured at fair value through profit or loss, which would be linked to this instrument.
Financial information
| CARRYING AMOUNT OF DERIVATIVE HEDGING INSTRUMENTS | 31.12.2019 | 31.12.2018 | ||
|---|---|---|---|---|
| Assets | Liabilities | Assets | Liabilities | |
| Cash flow hedges | 641 | 582 | 658 | 470 |
| – interest rate risk IRS | 262 | 10 | 110 | 5 |
| – foreign exchange risk and interest rate risk – CIRS | 379 | 572 | 548 | 465 |
| Fair value hedges | 4 | 7 | – | 1 |
| – interest rate risk IRS | 4 | 7 | – | 1 |
| Total | 645 | 589 | 658 | 471 |
| CHANGE IN OTHER COMPREHENSIVE INCOME RELATING TO CASH FLOW HEDGES AND AN INEFFECTIVE PORTION OF CASH FLOW HEDGES | 2019 | 2018 |
|---|---|---|
| Other comprehensive income at the beginning of the period, gross | 28 | (142) |
| Gains/losses recognized in other comprehensive income during the period | 187 | (62) |
| Amounts transferred from other comprehensive income to the income statement, of which: |
72 | 232 |
| – interest income | (324) | (355) |
| – net foreign exchange gains/(losses) | 396 | 587 |
| Accumulated other comprehensive income at the end of the period, gross | 287 | 28 |
| Tax effect | 55 | (6) |
| Accumulated other comprehensive income at the end of the period, net | 232 | 22 |
| Impact on other comprehensive income during the period, gross | 259 | 170 |
| Tax effect | (49) | (32) |
| Impact on other comprehensive income during the period, net | 210 | 138 |
| Ineffective portion of cash flow hedges recognized in the income statements, including in: | 20 | 11 |
| Net foreign exchange gains /(losses) | (22) | 12 |
| Gain/(loss) on financial instruments measured at fair value | 2 | (1) |
| HEDGES OF INTEREST RATE RISK | 31.12.2019 | 31.12.2018 |
|---|---|---|
| Fair value measurement of the hedging derivative instrument – IRS | (3) | 1 |
| Fair value adjustment of the hedged instrument attributable to the hedged risk | 5 | 1 |
| Securities | 1 | – |
| Loans and advances to customers | 4 | 1 |
Calculation of estimates
| ESTIMATED CHANGE IN VALUATION FOLLOWING A PARALLEL SHIFT IN YIELD CURVES: | 31.12.2019 | 31.12.2019 | ||
| +50 bp scenario | -50 bp scenario | +50 bp scenario | -50 bp scenario | |
| IRS | (190) | 191 | (146) | 148 |
| CIRS | (167) | 170 | (200) | 204 |
| Total | (357) | 361 | (346) | 352 |