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. Both the financing requirements and any liquidity surplus of subsidiaries are managed by transactions with the Bank, unless specific market transactions are previously decided and agreed. The Treasury Department is responsible for the day-to-day management of the Group’s liquidity position in accordance with the adopted rules and procedures taking into account goals defined by the Management Board and the Capital, Assets and Liabilities Committee.
Consequently, the large, diversified and stable funding from retail, corporate and public sector Clients remains the main source of financing of the Group. At the end of 2016 total Clients’ deposits of the Group reached the level of PLN 55.9 billion. The growth of the deposits were driven mostly by funds of individuals, of which the share in total Client’s deposits grow to approx. 71.0% at the end of December 2016 from 67.4% at the end of December 2015. The increasing share of funds from individuals had a positive impact on the Group’s liquidity and supported the compliance of the supervisory measures.
Concentration of the deposits base, based on the share of top 5 and 20 depositors, at the end of 2016 amounted respectively to 4.1 % and 7.2 % (in December 2015 it was respectively 3.7 % and 7.4 %). The level of deposit concentration is regularly monitored and did not have any negative impact on the stability of the deposit base in 2016. 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.
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 2016 the Bank continued to explore the possibility of raising additional funding from loans from financial institutions, bond issues and bank’s securities in order to diversify the source of funding. In February 2016, a 5-year loan from the EBRD in the amount of EUR 50.0 million was disbursed (signed in December 2015). The total balance sheet value of medium-term loans from financial institutions at the end of 2016 amounted to PLN 898 million (at the end of December 2015 it was PLN 830 million). In 2016 the Bank issued PLN 118 million of 3-year bank’s securities whereas Millennium Leasing issued 5 series of 2-year bonds in nominal amount of PLN 124 million. At the end of December 2016 the total nominal value of bonds and bank’s securities issued by the Group (placed in both institutional and individual investors) amounted to PLN 1 316 million (PLN 1 139 million in nominal value in December 2015).
In 2016 the increase of the deposits from Customers at the faster pace than loans, allowed Group to maintain Loan-to-Deposit ratio well below 100%. This ratio, including own issues sold to individuals and sell-buy back transactions with customers, decreased at the end of December 2016 and was equal to 84% (comparing to level of 88% as of end of December 2015). The Group continue the policy of investing the liquidity surplus in the portfolio of liquid assets, especially in the debt securities with low specific risk (Polish Government Bonds, Treasury and NBP Bills) of which the share in total debt securities amounted to 99% at the end of December 2016. During 2016 this portfolio grew by 23% from PLN 14.0 billion at the end of December 2015 (21% of total assets) to approx. PLN 17.3 billion at the end of December 2016 (25% of total assets). Those assets are characterized with high liquidity and can be easily used as a collateral or sold without material loss on its value. The portfolio, supplemented by the cash and exposures to the National Bank of Poland, is treated as the Group’s liquidity reserve, which can overcome crisis situations.
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. In none of signed ISDA Schedules and Credit Support Annex (both international and domestic) there exists a relationship between level of the Bank’s ratings and parameters of collateral. The potential downgrade of any of the ratings will not have impact on method of calculation and collateral exchange.
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.