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Liquidity Risk

The objective of liquidity risk management is to ensure and maintain the Group’s ability to meet both current, as well as future funding requirements taking into account costs of funding.

Liquidity risk reflects the possibility of incurring significant losses as a result of deteriorated financing conditions (financing risk) and/or of the sale of assets for less than their market value (market liquidity risk) to meet the needs for funding arising from the Group’s obligations.

There were no exposures to liquidity risk at a subsidiary level, because the Bank manages liquidity risk centrally.

The main source of financing is still deposits base, the large, diversified and stable funding from retail, corporate and public sectors. The deposit base is supplemented by the deposits from financial institutions and other money market operations. The source of medium-term funding remains also medium-term loans, subordinated debt and own bonds issue.

During 2014 the Bank continued to explore the possibility of raising additional funding from bond issue in order to diversify the source of funding. At the end of December 2014, the value of bonds placed in institutional investors increased to PLN 1 408 million from PLN 353 million at the end of December 2013. In March 2014, the Bank issued PLN 500 million of 3-year floating rate bonds. Another PLN 501 million of this portfolio are 3-month term bonds, issued partially as a replacement of deposits from financial institutions and as rollover of 3-months bonds issued already in 2Q and 3Q2014. The new issues had a positive impact on the Group’s liquidity.

Concentration of the deposits base, based on the share of top 5 and 20 depositors, at the end of 2014  was relatively  lower in comparison to the end of 2013, amounting respectively to 4,7 % and 9,8 % (in December 2013 it was respectively 5,8% and 10,7 %). The level of deposit concentration is regularly monitored and did not have any negative impact on the stability of the deposit base in 2014. In case of significant increase of the share of the largest depositors, the additional funds from the depositors are not treated as stable. Despite of that, in order to prevent deposit base fluctuations, the Group maintains the reserves of liquid assets in the form of securities portfolio.

In 2014, the Group maintained Loan-to-Deposit ratio below 100% (as of end of December 2014 the ratio was equal to approx. 92%). The liquidity surplus was still invested in the portfolio of liquid assets, especially in the securities with low specific risk (Polish Government Bonds, Treasury and NBP Bills) that are characterized with high liquidity. Those assets can be easily used as a collateral or sold without material loss on its value. The share of polish government securities (including NBP Bills) in total securities portfolio in Banking Book (qualified as assets available for sale) amounted to 99% at the end of December 2014 that is 15% of total assets. The portfolio is treated as the Group's liquidity reserve, which will overcome crisis situations.

Due to strong liquidity position, the Group has decided not to renew the agreement (Stand-by Facility) with BCP on  the unconditional and irrevocable off-balance sheet commitment which gave the Bank right for withdrawal of 200 million EUR. The agreement was valid until the end of January 2014.

The Group manages FX liquidity through the use of FX-denominated bilateral loans as well as subordinated debt, Cross Currency Swap and FX Swap transactions. The swaps portfolio is diversified in term of counterparties and maturity dates. For the majority of counterparties the Group has signed a Credit Support Annex to the master agreements. As a result, in case of unfavourable changes of FX rates (PLN depreciation), the Group is obliged to place deposits as a collateral with counterparties in order to secure the settlement of derivative instruments in the future, and in case of favourable FX rates changes (PLN appreciation) receives deposits as a collateral from the counterparties.

The Group assesses the possibility of unfavourable changes of FX rates (especially CHF and EUR, which causes increase of liquidity needs), analyses the impact on liquidity risk and reflects this risk in the liquidity plans.

Liquidity risk evaluation measures

The estimation of the Group’s liquidity risk is carried out with the use of the internal indicators, for which exposure limits were established.

The evolution of the Group’s liquidity position in short-term horizons (up to 3 months) is tested daily on the basis of two internally defined indicators: immediate liquidity and quarterly liquidity. Both such indicators measure the maximum borrowing requirement, which could arise on a particular day, taking into consideration the cash-flow projections for spot date and period of 3 months, respectively.

These figures are compared with the exposure limits in force and reported daily to the areas responsible for the management of the liquidity position. During 2014, all internal liquidity indicators were well above minimum limits. In 2Q 2014, the internal limits were revised.  Updating the limits took into account the size of the consolidated own funds, current and expected balance sheet structure, historical consumption limits, as well as current market conditions. The new limits are effective from 2nd June, 2014.

Current Liquidity indicators

 Immediate liquidity ratio*Quarterly liquidity ratio*Liquid assets for coverage of sources of financing volatility**
Exposure 6.008 5.468 9.268
Minimum limit -768 -3.072 2.000

 Immediate liquidity ratio*Quarterly liquidity ratio*Liquid assets for coverage of sources of financing volatility**
Exposure 4.943 3.154 7.611
Minimum limit -753 -3.012 2.000

* - Immediate and Quarterly Liquidity Indicator: The sum of cash flows in spot date or during the next 3 months respecitively, Nostro Balance (the algebraic sum for all currencies reduced by obligatory reserve) and Highly Liquid Assets.
** - Liquid Assets Portfolio: The sum of Polish goverenment debt securities, NBP-Bills and due from banks (up to 1 month).

The Group monitors liquidity on the basis of internal liquidity measures, taking into account in particular the impact of FX rates on the liquidity situation.

Additionally the Group employs an internal structural liquidity analysis based on cumulative liquidity gaps calculated on a real basis (i.e. assuming the probability of cash flow occurrence). The safe level adopted by the Group for the ratio of liquidity shortfall for each time bucket below 5 years corresponds to 25% of Total Assets.

In 2014 liquidity gaps in both normal and under stress scenarios were maintained at levels significantly above the safe limits.

The Group has developed a liquidity risk management tool defining stress scenarios under which liquidity gaps are calculated on a real basis assuming a conservative approach to the assessment of probability of cash flow occurrence (among others taking into account a reduction of deposits, delays of loans repayment, deteriorated liquidity of the secondary securities market, the highest cost of funding - the assumption of the worst observed margins on deposits in the Bank, parallel shift of the yield curve and PLN depreciation).

Adjusted Liquidity Gap (m PLN)up to 6M6M to 12M1Y to 2Y2Y to 3Y3Y to 5Yover 5Y
Adjusted balance assets 22.083 4.076 6.262 4.952 6.475 27.870
Adjusted balance liabilities 11.194 3.104 4.976 3.947 6.090 37.082
Balance-Sheet Gap 10.889 971 1.285 1.005 385 -9.213
Cumulative Balance-Sheet Gap 10.889 11.860 13.145 14.150 14.535 5.322
Adjusted off-balance assets 173 140 230 168 260 126
Adjusted off-balance liabilities -906 -101 -172 -111 -175 -106
Off-Balance Sheet Gap -733 39 58 58 85 20
Total Gap 10.156 1.010 1.344 1.062 470 -9.193
Total Cumulative Gap 10.156 11.166 12.510 13.572 14.043 4.850

Adjusted Liquidity Gap (m PLN)up to 6M6M to 12M1Y to 2Y2Y to 3Y3Y to 5Yover 5Y
Adjusted balance assets 17.928 3.661 5.507 4.885 6.963 32.274
Adjusted balance liabilities 11.292 1.396 1.469 891 1.913 49.932
Balance-Sheet Gap 6.635 2.265 4.037 3.994 5.050 -17.658
Cumulative Balance-Sheet Gap 6.635 8.900 12.938 16.932 21.982 4.324
Adjusted off-balance assets 207 140 251 183 306 206
Adjusted off-balance liabilities -914 -126 -161 -131 -202 -149
Off-Balance Sheet Gap -707 15 90 51 104 57
Total Gap 5.929 2.280 4.127 4.045 5.154 -17.601
Total Cumulative Gap 5.929 8.208 12.336 16.381 21.535 3.934

Stress tests are performed at least quarterly, to determine the Group’s liquidity-risk profile, to ensure that the Group is in a position to fulfil its obligations in the event of a liquidity crisis and to update the liquidity contingency plan and management decisions.

The results of the stress test analysis demonstrated that the liquidity indicators will be maintained above the established limits.

The Group has emergency procedures for situations of increased liquidity risk – the Liquidity Contingency Plan (contingency plan in case the Group’s financial liquidity deteriorates).  The Liquidity Contingency Plan establishes the concepts, priorities, responsibilities and specific measures to be taken in the event of a liquidity crisis. The Liquidity Contingency Plan is revised at least twice a year. In 2014, the Group introduced the obligation of testing procedure for Liquidity Contingency Plan at least once a year. The test should guarantee that the Plan is operationally robust.