Credit risk mitigation

The main criterion considered in Bank when making a decision to provide financing on specific terms is the evaluation whether the client has capacity to service and repay the financing on a timely basis without a need to realize the collateral. Collateral is accepted to reduce credit risk incurred by the Group if the client fails to make the payments in contractual amounts and on contractual dates. Accordingly, the requirements for accepted collateral should correspond to the credit risk incurred by the Group in connection with the specific client, while taking into account the specific features of each individual financing transaction. Additionally, in the case of loans to finance real property (in particular retail mortgage loans), establishing collateral on the property is a mandatory element of the credit product.

The Group's collateral policy defines the principles governing the types, kinds and legal forms of collateral, the rules for valuating collateral and the requirements to be satisfied when collateral is accepted, the rules of measuring and monitoring collateral.

The list of collateral types accepted by the Group is long and includes financial security, mortgage, material collateral, guarantees, sureties and receivables. The accepted collateral types have been described in detail and the Group has also defined the terms relating to features of individual asset types on which they can be accepted as collateral. The Group has also defined a list of acceptable legal forms of collateral. taking into account the risk associated with the probability that the collateral might be lost, in particular upon bankruptcy of or enforced debt collection against the client.

The Group has defined the rules for measuring the value of assets accepted as collateral.

For financial collateral, its value is determined on the basis of current market valuation of the asset, less relevant haircuts, including price volatility haircuts.

Mortgage collateral is measured on the basis of valuations prepared by expert appraisers verified by the Group’s specialized units. As the value of collateral of retail loans is monitored during their service, the collateral amount is revaluated using the statistical method based on real property price indices.

For physical collateral, valuation depends on the type, unit value of the asset and age of the asset; the valuation is performed most frequently on the basis of the estimated market price determined by the Group’s specialized units.

In each case, the units performing the valuations/verifying the valuations are separate from sales units.

Depending on the type and kind of collateral items, the Bank monitors them in order to:

  • ensure that the contractual terms of collateral are satisfied. which includes confirmation of legal certainty,
  • update the value of collateral,
  • verify that the collateral exists (local visits).

The Group uses as well a range of supplementary collateral to facilitate enforcement or increase probability of achieving repayment from a given collateral type.

Use of credit risk mitigation techniques

The Group does not make use of on- and off-balance sheet netting (CRR 453.a).

Policies and processes for collateral valuation and management +

In the collateral management area, the Group applies the approach, in which collateral is used to ensure that the Group receives the repayment of principal, interest, commissions and fees if the client fails to make the payments in contractual amounts and on contractual dates. However the main source for the repayment of receivables is always the borrower’s income including the funded project. Collateral should correspond to the credit risk incurred by the Bank, while taking into account the specific features of each individual credit transaction.

Legal collateral is applicable until all the amounts due to the Group under the collateralized credit transaction are repaid. The validity date or maturity date of collateral should not be earlier than the date of total repayment of the secured credit transaction.

Real estate collateral (revaluation) +

In respect to the valuation of loan collateral in the largest credit portfolio, i.e. residential retail loans, the loan application review process must include in each case a valuation of the real estate securing the loan performed by an expert appraiser.

The Group monitors collateral in order to:

  • update the base value of the collateral,
  • ensure that the chosen contractual terms of collateral are satisfied,
  • verify that the collateral exists (local visits).

The base value of mortgage collateral may be updated using one of the following forms:

  • assessment of the value of the real estate, understood as the Group’s estimation of the current value of the real estate collateralizing the credit transaction, based on the methodologies used by the Bank or on an analysis of the real estate market analysis on the date of the assessment.
  • valuation by an expert appraiser.

Update of the base value of financial collateral +

In the case of financial collateral classified as „participation units in mutual funds sold by Bank Group entities and managed by Millennium TFI” and „WSE-listed shares”, their base value is updated daily.

Update of the base value of material collateral +

The base value of material collateral should be updated, when based on a local vision, a material amortization of collateral, collateral deficiency or lack of collateral will be reported. The value of material collateral is assessed once a 12 months.

The table below presents the types, kinds and legal forms of collateral accepted by the Bank. The collateral acceptance process is regulated by special procedures. Other collateral types may be accepted if they meet certain specified requirements. (CRR 453.c)

Types and kinds of collateral used by the Group
Type Kind Legal form
Financial Term deposit in the Bank

in PLN/foreign currency with a 100% principal guarantee

Ownership transfer
Superduet Deposit

in PLN/foreign currency with a 100% principal guarantee in the deposit part

For a deposit:

– Ownership transfer

For participation units in mutual funds:

Registered pledge (ultimately) and Ordinary pledge            (as temporary collateral)

Prestige Investment Program

in PLN/foreign currency

Transfer of receivables.
Guarantee policy Transfer of receivables
Megazysk insurance agreement Transfer of receivables
Term deposit in another bank

in PLN/foreign currency with a 100% principal guarantee

Transfer of receivables
Registered pledge (ultimately) and Ordinary pledge            (as temporary collateral)
Participation units in mutual funds, being in sale by entities belonging to the Group, managed by Millennium TFI, ING TFI, Investors, Legg Mason TFI Registered pledge (ultimately) and Ordinary pledge                (as temporary collateral)
Ordinary pledge
WSE-listed shares

included in WIG 20 stock index, deposited in Millennium Brokerage House

Ownership transfer
Registered pledge (ultimately) and Ordinary pledge                (as temporary collateral)
Ordinary pledge
Treasury bills

deposited in the Bank

Ownership transfer
Registered pledge (ultimately) and Ordinary pledge                 (as temporary collateral)
Ordinary pledge
Dematerialized State Treasury bonds admitted to organized trading, deposited in the Bank or in Millennium Brokerage House Ownership transfer
Registered pledge (ultimately) and Ordinary pledge               (as temporary collateral)
Ordinary pledge
Dematerialized State Treasury bonds not admitted to organized trading, deposited in the Bank or in Millennium Brokerage House Registered pledge (ultimately) and Ordinary pledge (as temporary collateral)
Ordinary pledge
Mortgage Residential properties

(used by an owner to inhabitancy or to rent excluding business activity:

residential flats, housing buildings, grounds with a purpose of building of the above immovable)

Mortgage

 

and

Registered pledge and Ownership transfer (conditionally) – if collateral is established on parts of real property [e.g. devices, specialized equipment, machinery, production lines permanently connected to land or to a building which, if dismantled, will compromise the building’s structure or materially reduce the value of collateral being dismantled (e.g. utilities, elevators)]

Commercial real estate

(offices, storage space, stores, service facilities, hotels, with a purpose of sale or rent in the course of business activity, residential flats, housing buildings one- or multi families

grounds with a purpose of building of the above immovable

other grounds)

Material Vehicles, including cars, construction equipment built on car chassis, other vehicles (e.g. semi-trailers and trailers and truck tractors) Registered pledge and ownership transfer (temporary)
Registered pledge for future collateral and ownership transfer (temporary)
Fleet consisting of cars Registered pledge and ownership transfer (temporary)
Independent specialized hardware and machinery Registered pledge and ownership transfer (temporary)
Ownership transfer
Production lines Registered pledge and ownership transfer (temporary)
Ownership transfer
Collection of fixed assets including specialized equipment and machinery Registered pledge and ownership transfer (temporary)
Airplanes, helicopters, boat/ship Registered pledge and ownership transfer (temporary)
Inventory Registered pledge and ownership transfer (temporary)
Receivables Receivables under contracts pertaining to the client’s business activity and lease. Assignment of contractual receivables
Receivables from permanent cooperation with specified business partners Assignment of receivables from permanent cooperation with specified business partners
Guarantees and sureties Bank guarantee Bank guarantee
Surety Surety under Civil Law
Promissory note surety

 

 

The Group does not use any guarantees and credit derivatives as risk protection instruments in the capital requirement calculation process. (CRR 453.d)

The Group notices concentration related to credit risk mitigation with respect to collaterals for loans in the form of a mortgage. The main risk factor associated with this protection are:

  • an increase in the exchange rate of CHF / PLN,
  • a decrease in the value of mortgage.

Both of these factors contribute to increase of average LTV ratio (the ratio of loan to value of collateral) and the resulting increase in the value of loans, where the value of the LTV is greater than 100% and a deterioration of capital adequacy.

The first risk factor increases the DTI ratio (the ratio of debt-to-income for a customer) and it leads also to deterioration of liquidity.

The Group identifies, measures, monitors and controls continuously above risk factors. Conservative liquidity strategy is used, which provides for the maintenance of liquid assets buffer for unexpected changes in exchange rates. Capital plan provides for the maintenance of capital adequacy at a satisfactory level in the coming years. Both plans Liquidity and Capital account for stress tests assuming a significant appreciation of the exchange rate of CHF / PLN. The level of non-performing loans is regularly monitored and in case of potential problems with debt repayment customer is contacted in order to apply the right solution, suitable to his financial capability. The quality of loans secured by real estate remains at a high level. (CRR 453.e)

Group does use own estimates of LGD or conversion factors for exposures under the current IRB approval, and as for portfolios under IRB roll-out plan, own estimates of the above parameters will be not used. Therefore information defined in CRR art. 453.f are not presented.

Group does not use guarantees or credit derivatives as credit risk mitigation instruments by calculation of risk-weighted exposure amounts (CRR art. 453.g).

Group does not use Advanced Measurement Approaches to operational risk. (CRR art. 454).

Group does not use Internal Market Risk Models (CRR art. 455).

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