17. Derivative Hedging Instruments
The Group as at the end of 2016 uses the following types of hedge accounting:
- Hedges of volatility of the cash flows generated by the portfolio of floating FX mortgage loans;
- Hedge of volatility of the cash flows generated by the portfolio of PLN mortgage loans;
- Hedge of volatility of the cash flows generated by the portfolio of FX mortgage loans and the PLN deposits financing them;
Starting from 1 January 2006 the Group established first formal hedging relationship against cash flow volatility. One should note that as from IFRS implementation, pursuant to IAS 39 the effect of valuation of all derivatives not classified as and not being effective hedges is presented in result from financial instruments valued at fair value through the profit and loss account. The employment of such methodology resulted in the lack of coherence in the manner of presentation of financial instruments in the profit and loss account. Net interest income from derivative transactions concluded in order to hedge FX liquidity from the economic point of view constitutes an interest margin component (allows to adjust interest income from FX loans to the cost of funding resulting from the zloty deposit portfolio). Implementation of formal hedge accounting permitted presentation of the transactions in the Profit and Loss Account in accordance with their economic meaning.
At the end of each month the Group performs an assessment of effectiveness of the hedge used by analysing changes of fair value of the hedged instrument and the hedging instrument.
During the year 2016, there were following changes in the applied hedging relationships:
- expired hedging transactions that had been concluded in order to hedge the fair value of the portfolio of fixed-currency liabilities and portfolio of floating exchange rates receivables,
- a new relationship hedging the variability of cash flows generated by the portfolio of floating FX mortgage loans was established,
- during first quarter of 2016 a new relationship hedging the variability of cash flows from future revenues denominated in foreign currencies was established, which was completed in June 2016 in result of receiving cash flows from hedged item.
Finally as at 31.12.2016 the Group applied hedge accounting to the following relationship:
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| Hedge of the volatility of cash flows generated by the portfolio of floating FX mortgage loans | Hedge of volatility of the cash flows generated by the portfolio of PLN mortgage loans | |
|---|---|---|
| Description of hedge transactions | The Group hedges currency risk and interest rate risk of the cash flows -during the time horizon of the transaction – linked to floating FX loans exchanging interest cash flows in foreign currency into flows in PLN. | The Group hedges the risk of the volatility of cash flows generated by PLN mortgages. The volatility of cash flows results from interest rate risk. |
| Hedged items | Cash flows resulting from portfolio of floating FX mortgage loans. | Cash flows resulting from the PLN mortgage loan portfolio |
| Hedging instruments | FX SWAP transactions | IRS transactions |
| Presentation of the result on the hedged and hedging transactions | Effective part of the valuation of hedging instruments is recognised in revaluation reserve;
interest on hedging instruments (settled swap points) are recognised in net interest income. |
Effective part of the valuation of hedging instruments is recognised in revaluation reserve;
interest on both the hedged and the hedging instruments are recognised in net interest income. |
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| Cash flow volatility hedge for the flows generated by FX mortgage portfolio and its underlying PLN liabilities | |
|---|---|
| Description of hedge transactions | The Group hedges the risk of the volatility of cash flows generated by FX mortgages and by PLN liabilities financially underlying such loans. The volatility of cash flows results from the currency risk and interest rate risk. |
| Hedged items | Cash flows resulting from the FX mortgage loan portfolio and PLN deposits together with issued debt PLN securities funding them. |
| Hedging instruments | CIRS transactions |
| Presentation of the result on the hedged and hedging transactions | Effective part of the valuation of hedging instruments is recognised in revaluation reserve;
interest on both the hedged and the hedging instruments are recognised in net interest income; valuation of hedging and hedged instruments on FX differences is recognised in result on financial instruments valued at fair value through profit and loss and foreign exchange result. |
17a. Hedge accounting
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| As at 31.12.2016 | Par value of instruments with future maturity | Fair values | |||||
|---|---|---|---|---|---|---|---|
| below 3 months | from 3 months to 1 year | from 1 year to 5 years | above 5 years | Total | Assets | Liabilities | |
| 1. Derivative instruments constituting cash flow hedges related to interest rate and/or exchange rate | |||||||
| CIRS contracts | 7 041 681 | 7 961 146 | 18 450 775 | 950 158 | (1 139 740) | 391 | 1 140 131 |
| IRS contracts | 340 000 | 700 000 | 782 000 | 0 | 6 063 | 7 070 | 1 007 |
| FXS contracts | 816 390 | 1 241 180 | 0 | 0 | 1 957 | 10 473 | 8 516 |
| 2. Total hedging derivatives | 8 198 071 | 9 902 326 | 19 232 775 | 950 158 | (1 131 720) | 17 934 | 1 149 654 |
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| As at 31.12.2015 | Par value of instruments with future maturity | Fair values | |||||
|---|---|---|---|---|---|---|---|
| below 3 months | from 3 months to 1 year | from 1 year to 5 years | above 5 years | Total | Assets | Liabilities | |
| 1. Fair value hedging derivatives connected with interest rate risk | |||||||
| Kontrakty CIRS | 0 | 0 | 992 439 | 0 | (140 909) | 0 | 140 909 |
| 2. Instrumenty pochodne stanowiące zabezpieczenie przepływów pieniężnych związane ze stopą procentową i/lub kursem walutowym | |||||||
| CIRS contracts | 6 837 099 | 11 547 021 | 11 761 589 | 3 537 254 | (1 930 002) | 60 538 | 1 990 540 |
| IRS contracts | 200 000 | 1 275 000 | 650 000 | 0 | 9 691 | 10 295 | 604 |
| Forward contracts | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 3. Total hedging derivatives | 7 037 099 | 12 822 021 | 13 404 028 | 3 537 254 | (2 061 220) | 70 833 | 2 132 053 |
Adjustment to fair value of hedged items due to hedged risk for active hedging relationships, for the year 2015 amounted to PLN 794 thousand, of which PLN 5,782 thousand related to hedged assets, and PLN 4,988 thousand related to hedged liabilities.
17b. Hedge accounting – cash flow hedge
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| Hedge relationship | Maximum period in which cash flows with hedged value are expected to occur |
|---|---|
| Hedge of volatility of the cash flows generated by the portfolio of PLN mortgage loans | 04.10.2018 |
| Hedge of volatility of the cash flows generated by the portfolio of FX mortgage loans and the PLN deposits financing them | 07.01.2025 |
| Hedge of the volatility of cash flows generated by the portfolio of floating FX mortgage loans | 20.12.2017 |
Ineffective part of valuation of hedging instrument recognised in Profit and loss account for 2016 amounted to PLN – 18,402 thousand (respectively in 2015 amounted to PLN – 4,343 thousand).