Credit risk

Measurement of credit risk, for the purpose of the credit portfolio management, on the level of individual customers, on account of granted loans is done with the consideration of three parameters:

• Probability of Default (PD) of a customer or counterparty as regards their liability;
• amount of Exposure At Default (EAD) and
• the ratio of Loss Given Default (LGD) regarding the customer’s liability.
• The Group assesses the probability of default (PD) of individual counterparties, using internal rating models adapted to various categories of customers and transactions. Models were developed in-house or at the level of the BCP Group, or by external providers, and combine statistical analysis with assessment by a credit professional. The Group’s customers are divided into 15 rating classes, which for the purposes of this Report have been grouped into 6 main brackets. The Group’s Master Ratings Scale, presented below, also contains the scale of probabilities of non-compliance with the liabilities specified for a given class/rating group. Rating models are subject to regular reviews and – if necessary – to relevant modification. Modifications of models are confirmed by Validation Committee.

The Group regularly analyses and assesses rating results and their predictive power with respect to cases of default. The process of assigning client risk assessments is performed by Rating Department independently from credit decision process and transactions are supported by IT systems, obtaining and analyzing information from internal and external databases.

The Group’s internal rating scale

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Master scale	Description of rating
1-3	Highest quality
4-6	Good quality
7-9	Medium quality
10-12	Low quality
13-14	Watched
15	Default

• EAD – amount of exposure at default – concerns amounts which according to the Group’s predictions will be the Group’s receivables at the time of default against liabilities. Liabilities are understood by the Group to mean every amount disbursed plus further amounts, which may be disbursed until default, if such occurs.
• (iii) LGD – loss given default is what the Group expects will be its losses resulting from actual cases of default, with the consideration of internal and external costs of recovery and the discount effect.

Debt securities from Treasury and from the Central Bank are monitored on the basis of Polish rating. Whereas the economic and financial situation of issuers of municipal debt securities is monitored on a quarterly basis based on their finance reporting.

The Group maintains strict control over the limits of net open derivative positions both with respect to amounts and transaction maturities. Credit risk exposures resulting from derivatives are managed as part of total credit limits defined for individual customers calculated on the basis of verification of natural exposure and analysis of customer’s financial situation, and also as part of counterparties’ limits.

The Group offers Treasury products for FX risk or interest rate risk only for hedging purposes and under Treasury limits assigned to clients or secured by specific collateral (deposit).

Most of the Group’s agreements include the possibility of calling the client to replenish the margin deposit, (if the valuation of the client’s open position exceeds treasury limit, the so-called margin call); and if the client does not supplement the deposit, the Group has the right to close the position.

Credit risk-based off-balance sheet liabilities include guarantees, letters of credit as well as granted credit lines. The main purpose of these instruments is to enable the customer to use the funds granted by the Group in a specific way.

Guarantees and letters of credit of standby type (liability similar to guarantee) bears at least the same credit risk as loans (in the case of guarantees and stand-by letters of credit type when valid claim appears, the Group must make a payment).

Documentary and commercial letters of credit are a written, irrevocable and final obligation of the Group to accept payments based on compliant documents within the time limits specified in the letters of credit and are connected with a guarantee-like risk.

The available credit line balance is the non-utilised part of previously accepted amounts pertaining to credit liabilities, available for use in the form of loans, guarantees or letters of credit. Considering the credit risk of undertakings to grant credit, the Group is potentially exposed to a loss in an amount equal to the sum of non-utilised liabilities. However the probable loss amount is usually lower than the total value of non-utilised liabilities, because most of the undertakings to disburse credit depend on customers’ particular credit conditions.

The Group monitors the period remaining to maturity of off-balance liabilities because long-term liabilities usually involve a higher degree of credit risk than short-term liabilities.

The Group accepts collateral to mitigate its credit risk exposure; the main role of collateral is to minimize loss in the event of customers’ default in repayment of credit transactions in contractual amounts and on contractual dates by ensuring an alternative source of repayment of due and payable amounts.

Collateral is accepted in accordance with the credit policy principles defined for each customer segment. The key principle is that collateral for credit transaction should correspond to the credit risk incurred by the Group, taking into account the specific nature of the transaction (i.e. its type, amount, repayment period and the customer’s rating).

The credit policy defines the types, kinds and legal forms of collateral accepted in the Group as well as more detailed requirements that are to ensure the probability of selling collateral of respective types in the context of the Group’s recovery experiences.

The Group pays special attention to the correct determination of collateral value. It defined the rules for preparing and verifying collateral valuation and does its utmost to ensure that such valuations are objective, conservative and reflect the true value of the collateral. In order to ensure effective establishment of collateral, the Group has developed appropriate forms of collateral agreements, applications, powers-of-attorney and representations.

In the retail segment, accepted collateral consists mainly of residential real property (mortgage loans) and financial assets. In the corporate segment, are taken primarily all types of property (residential, commercial, land) as well as the assignment of receivables from contracts.

Temporary collateral is also accepted in the period before the final collateral is established. Additionally, the Group uses various forms of instruments supplementing the collateral, which facilitate enforcement or increase probability of effective repayment of debt from a specific collateral. Those instruments include: statement of submitting to enforcement in the form of a notarial deed, blank promissory note, power-of-attorney to a bank account, assignment of rights under an insurance agreement.

The Group monitors the collateral to ensure that it satisfies the terms of the agreement, i.e. that the final collateral of the transaction has been established in a legally effective manner or that the assigned insurance policies are renewed. The value of the collateral is also monitored during the term of the credit transaction.

In accordance with credit policy adopted in the Group it is also allowed to grant a transaction without collateral, but this takes place according to principles, which are different depending on the client’s segment. But in the case of the deterioration of the debtor’s economic and financial situation, in documents signed with the client the Group stipulates the possibility of taking additional collateral for the transaction.

The process of impairment identification and measurement with respect to loan exposures is regulated in the internal instruction introduced by a Management Note of the Bank’s Management Board Member. Moreover, the principles of receivables classification and estimation of impairment charges and provisions in the bank’s management system are laid down in the document „Management System at Bank Millennium S.A.” adopted by resolution of the Management Board and approved by the Supervisory Board.

Supervision over the process of estimating impairment charges and provisions is exercised at the Group by the Risk Department (DMR), which also has direct responsibility for individual analysis in the business portfolio at the Bank, as well as collective analysis. In addition to DMR the process also involves recovery and restructuring units. These are the Corporate Recovery Department – DNG (individual analysis for the recovery-restructuring portfolio for corporate customers) and the Retail Liabilities Collection Department – DDN (individual analysis of individually significant retail impairments, mainly mortgages). DMR is a unit not connected with the process of lending; it is supervised by the Management Board Member responsible for risk management. Similarly organised is the impairment process at Millennium Leasing.

The Management Board of the Bank plays an active part in the process of determining impairment charges and provisions. The results of credit portfolio valuation are submitted to the Management Board for acceptance in a monthly cycle with a detailed explanation of the most important changes with an impact on the overall level of impairment charges and provisions, in the period covered by the analysis. Methodological changes resulting from the validation process and methodological improvements are presented at the Validation Committee, and subsequently at the Risk Committee, which includes all the Management Board Members.

In monthly periods detailed reports are prepared presenting information about the Group’s retail portfolio in various cross-sections, including the level of impairment charges and provisions, their dynamics and structure. The recipients of these reports are Members of the Management Board supervising the activity of the Group in the area of finance, risk and management information.

The process of determining impairment charges and provisions in the Group is formalised and described in the above-mentioned regulation, which defines in detail the mode and principles of individual and collective analysis, including algorithms for calculating particular parameters.

The Audit Department assesses the correctness of estimating the impairment and provisions at least twice a year.

The methodology and assumptions adopted for determining credit impairments are regularly reviewed in order to reduce discrepancies between the estimated and actual losses. In order to assess the adequacy of the impairment determined both in individual analysis and collective analysis a historical verification (backtesting) is conducted from time to time (at least once a year), whose results will be taken into account in order to improve the quality of the process.

Credit exposures are selected for individual analysis on the basis of materiality criteria which ensure that case-by case analysis covers at least 55% of the Group’s business corporate portfolio and 80% of the portfolio managed by entities responsible for the recovery and restructuring of corporate receivables.

Principal elements of the process of individual analysis:

(1) Identification of impairment triggers;

The Group defined impairment triggers for individual analysis and adjusted them to its operational profile. The catalogue of triggers incorporates in some more detail the triggers specified in IAS 39 and recommendation R, which pertain among others to:

• The economic and financial situation pointing to the Customer’s considerable financial problems,
• Breach of the contract, e.g. delay in payments of principal or interest exceeding 90 days,
• Stating the customer’s unreliability in communicating information about his economic and financial situation,
• Permanent lack of possibility of establishing contact with the customer in the case of violating the terms of the agreement,
• High probability of bankruptcy or a different type of reorganising the Customer’s enterprise/business.
• Declaring bankruptcy or opening a recovery plan with respect to the Customer.
• Granting by the Bank, for economic and legal reasons, resulting from the client’s financial problems, concessions in conditions of financing (restructuring)

The internal regulation contains a fine-tuning of the above-mentioned triggers by indicating specific cases and situations corresponding to them, in particular with respect to triggers resulting from the Customer’s considerable financial problems, violating the critical terms of the agreement and high probability of a bankruptcy or a different enterprise reorganisation. Additionally, the Bank has an extended monitoring process which identifies in monthly periods various types of early warning signals subject to additional assessment by credit analysts.

(2) Estimating future flows;

One element of the impairment calculation process is the estimation of the probability of cash flows contained in the timetable pertaining to the following items: principal, interest and other cash flows. The probability of realising cash flows contained in the timetable results from the conducted assessment of the customer’s economic and financial situation (indication of the sources of potential repayments) must be justified and assessed on the basis of current documentation and knowledge (broadly understood) of his situation with the inclusion of financial projections. This information is gathered by an analyst prior to the actual analysis in accordance with the guidelines specified in appropriate Group regulations.

If at least one of impairment triggers has been identified in the individual analysis then detailed analysis of forecasted cashflows should be performed in terms of all exposures. There are estimated expected future cash-flows from current activity of the Customer, from sources other than the current activity and recoveries received from established collaterals.

In the event of estimating the probability of cash flows for customers in the portfolio managed by restructuring-recovery departments analysts will take into account the individual nature of each transaction pointing among others to the following elements which may have an impact on the value of potential cash flows:

• Operational strategy with respect to the Customer adopted by the Group,
• Results of negotiations with the customer and his attitude, i.e. willingness to settle his arrears,
• Improvement/deterioration of his economic and financial situation,
• Possibility of settling liabilities from the borrower’s own funds, or perhaps the necessity to seize the collateral, e.g. through its selling.

The Group also uses the formal terms of setting and justifying the amount of probability and amount of the payment by the Bank of funds under the extended off-balance sheet credit exposure such as guarantees and letters of credit.

(3) Estimation of the fair value of collateral, specifying the expected date of sale and estimation of expected revenues from the sale after deduction of the costs of the recovery process;

If base impairment has occurred with respect to a given credit exposure, then one should estimate the cash flows from realising collateral including the dates of its realisation. The inclusion of cash flows from realising collateral must be preceded by an analysis of how realistically it can be sold and estimation of its fair value after recovery costs.

In order to ensure the fairness of the principles of establishing collateral recoveries the Group prepared guidelines for corporate segment with respect to the recommended parameters of the recovery rate and recovery period for selected collateral groups. Depending on the place of the exposure in the Bank’s structure (business portfolio, restructuring-recovery portfolio) and type of exposure (credit, leasing) separate principles have been specified for particular portfolio types: business, restructuring-recovery and leasing portfolio. The recommended recovery rates and period of collateral recovery are verified in annual periods.

If the total discounted value of the expected cash flows from the customer’s current activity, collateral recoveries and other documented sources is lower than the on-balance value of the credit exposure, then an impairment is recognised and a revaluation charge posted. If an impairment has been recognised with respect to at least one of the customer’s exposure in an individual analysis, then all the remaining exposures of the customer are estimated in the process of an individual analysis irrespective of the exposure level and are classified in the impaired portfolio (cross default).

Internal regulations define the principles of reversing impairment losses. In the case of a customer in an individual analysis after finding that the consequences of the triggers no longer occur and the exposures are being properly repaid in a defined period (which is different for corporate and retail customers), the Bank may decide that the trigger no longer exists/persists and reverse the loss.

Subject to collective analysis shall be the following receivables from the group of credit exposures:

• Individually insignificant exposures;
• Individually significant exposures for which there has not been recognised impairment as a result of an individual analysis.

The former group includes exposures for which as a result of a collective analysis impairment triggers have been defined and for which there has been created a revaluation charge/ provision (the so-called collective impairment), as well as exposures for which no impairment triggers have been identified with respect to an individual exposure, but there has been created a group charge for an incurred but not reported loss (IBNR). The latter group includes exposures for which there have not been identified impairment triggers as a result of an individual analysis and, moreover, exposures for which there have been identified impairment triggers, but there has not been created an individual revaluation charge/ provision due to full coverage of the exposure with the discounted value of the expected cash flows from collateral or other documented sources. For this group an IBNR charge is created.

The Group has defined among others the following catalogue of impairment triggers used in collective analysis for individually insignificant exposures:

• Delay in the repayment of principal or interest in excess of 90 days,
• Exposure restructuring
• Inclusion of receivables in the recovery process,
• The Customer’s having a product earlier written off.

In its impairment estimation process the Group employs for many years the cross–default rule, which consists in a transfer to the impairment portfolio of the value of all exposures to the customer (irrespective of the segment) for whom there has been detected the occurrence of at least one of the impairment triggers with respect to at least one receivable.

For the purposes of collective analysis the Group has defined homogenous portfolios consisting of exposures with a similar credit risk profile. These portfolios have been created on the basis of segmentation into business lines, types of credit products, number of days of default, type of collateral (leasing), etc. The division into homogenous portfolios is verified from time to time for their uniformity.

The calculation of impairment charges and provisions by the collective method employs model parameters determined on the basis of historical observations of credit losses for particular homogenous portfolios. The Group employs the following parameters:

• PI (probability of being impaired),
• LIP (loss identification period),
• LGI (loss given impairment),
• PU (probability of utilization), which is the ratio/probability of implementing an off-balance sheet commitment,
• PW – probability of submitting an application by the beneficiary of the guarantee

The parameters employed in collective analysis are determined cyclically, based on historical statistical data and – in case of PI parameter – forecasted values of impaired rate. The period of observing historical data is defined in the Group’s internal regulations, taking into account the tendency to adjusting impairment charges to the market and internal situation of the Group with a simultaneous observance of the statistical correctness of the calculated parameters.

The PI parameter is calculated as a weighted average of historical and projected impaired rates, whereby the projected rates are calculated based on the relationship between historical data and macroeconomic variable.

The Loss Identification Period (LIP) is determined to each homogeneous portfolio by statistical analysis of historical events for the time that the Group took between the event that lead to the default and the moment the Group recognized the impairment.

The Loss Identification Period (LIP) in the retail and corporate segment is verified at least once a year based on data obtained from customers who have a problem with timely repayment.

Since October 2014, for mortgage exposures the Bank uses new LGI model, which is an adaptation of LGD model developed for the capital calculation, based on the IRB approach. Similar model was adapted for other retail exposures (including Microbusiness) in September 2015. The models are based on a discounted cash flow analysis. In case of corporate exposures the Bank uses simplified LGI model based on comparison of balances.

The LGI models use a deep and statistically driven segmentation based on: product type, amount of exposure, LTV, currency, restructuring flag, etc. In addition, all models differentiate LGI depending on the number of months from impaired date.

The PU parameter denoting the ratio of using an off-balance exposure during LIP months before going impaired, is calculated for credit cards, revolving loans and overdraft limits (separately for retail and corporate customers). In case of guarantees the PU is the probability of guarantee realisation in the event of submitting by beneficiary of the guarantee, an application for guarantee payment.

The PW parameter is the probability of submitting an application by the beneficiary of the guarantee

The period of observing historical data for PU and PW determination covers the last 36 months from the balance sheet day. Data samples coming from the observation period are assigned appropriate weights so that the most recent observations receive higher weights than the oldest one

Internal regulations provide a detailed definition of the principle of reversing impairment losses determined by the collective method. In principle, reversing a loss and elimination of a revaluation charge is possible in the case of cessation of the impairment triggers, including the repayment of arrears or exclusion from the recovery portfolio (reclassification to the Non-Impaired category) or in the case of selling receivables. Reclassification to the Non-Impaired category in the case of exposures subject to restructuring is possible only when the customer has successfully passed the „quarantine” period, during which he will not show delay in the repayment of principal or interest above 30 days. The quarantine period only starts counting after any eventual grace period that may be granted on the restructuring.

The above does not pertain to the Corporate Recovery restructuring portfolio, for which there have been defined separate conditions of transfer to the Non-Impaired category.

For leasing transactions the quarantine period is equal to the period of staying in the restructuring portfolio, plus an additionally defined period. Within its duration delays in repayments must not exceed 30 days.

The results of models employed in collective analysis are subject to periodical historical verification. The parameters and models are also covered by the process of models management governed by the document „Principles of Managing Credit Risk Models”, which specifies, among others, the principles of creating, approving, monitoring and validation, and historical verification of models. The validation of models and parameters and historical verification of revaluation charges/ provisions determined by the collective method is conducted at least once a year.

If as a result of the validation and analysis of cyclicity of credit models and historical verification of revaluation charges and provisions the Bank comes to the conclusion that the parameters employed as of a given balance sheet day deviate from the actual trend of the data being the basis for their determination, then the Bank may adjust the period of observing historical data to the current economic conditions.

In the 3Q 2016 the Group performed the process of monitoring of impairment collective model (including backtesting of IBNR provisions). In a consequence in 4 Q 2016 appropriate model improvements  had been taken resulting in increase of provisions (for the under provisioned portfolios) and decrease of provisions (for over provisioned portfolios). After improvements, the overall level of collective IBNR provisions  is more adequate  compared to the utilization.

In 2016 in Bank there was a sale of PLN 315 million of on-balance sheet Impaired receivables and off balance sheet portfolio (receivables written off against provisions) amounted to PLN 110 million, with higher than average coverage ratio. The balance sale included corporate portfolio (PLN 187 million) and retail portfolio (PLN 128 million).

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PLN ‘000	Maximum exposure
	31.12.2016	31.12.2015
Exposures exposed to credit risk connected with balance sheet assets	66 239 148	63 331 938
Loans and advances to banks	1 267 811	2 348 754
Loans and advances to customers:	47 020 043	46 369 381
Loans to private individuals:	33 241 628	32 905 953
– Credit cards	670 429	645 325
– Cash loans and other loans to private individuals	5 079 163	4 577 232
– Mortgage loans	27 492 036	27 683 396
Loans to companies	13 459 310	13 043 835
Loans to public entities	319 105	419 593
Trading debt securities	314 476	408 572
Derivatives and adjustment due to fair value hedge	267 922	429 229
Financial assets valued at fair value	0	0
Investment debt securities	17 092 257	13 647 734
Receivables from securities bought with sell-back clause	90 520	0
Other financial assets	186 119	128 268
Credit risk connected with off-balance sheet items	8 097 700	7 823 370
Financial guarantees	1 083 691	1 110 450
Credit commitments and other commitments connected with loans	7 014 009	6 712 920

The table above presents the structure of the Group’s exposures to credit risk as at 31^st December 2016 and 31^st December 2015, not taking into account risk-mitigating instruments. As regards balance-sheet assets, the exposures presented above are based on net amounts presented in the balance sheet.

Loans past due below 90 days are not considered as impaired exposures, unless other impairment triggers are identified. The gross amount of loans past due but without impairment, divided between customer segments, is as follows:

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Gross exposure in ‘000 PLN	31.12.2016
	Loans and advances to customers			Loans and advances to banks	Total
	Companies	Mortgages	Other retail
Delay 5-30 days(*)	400 559	519 228	192 467	0	1 112 254
Delay 31-60 days	60 149	115 019	53 822	0	228 990
Delay 61-90 days	10 022	38 841	21 300	0	70 163
Delay above 90 days(**)	6 281	7 049	1 642	0	14 972
Total	477 011	680 137	269 231	0	1 426 379

(*) – loans overdue not more than 4 days are treated as technical delay and are not shown in this category

(**) – receivables past due over 90 days, but not included in the impaired portfolio, displaying impairment triggers but not demonstrating impairment due to estimated cash flows or below the minimum threshold

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Gross exposure in ‘000 PLN	31.12.2015
	Loans and advances to customers			Loans and advances to banks	Total
	Companies	Mortgages	Other retail
Delay 5-30 days(*)	538 451	434 325	179 875	0	1 152 651
Delay 31-60 days	75 705	86 599	50 196	0	212 500
Delay 61-90 days	13 227	25 686	21 632	0	60 545
Delay above 90 days(**)	8 094	1 389	1 568	0	11 051
Total	635 477	547 999	253 271	0	1 436 747

(*) – loans overdue not more than 4 days are treated as technical delay and are not shown in this category

(**) – receivables past due over 90 days, but not included in the impaired portfolio, displaying impairment triggers but not demonstrating impairment due to estimated cash flows or below the minimum threshold

The gross amount of impaired loans and advances broken down into customer segments is as follows:

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Gross exposure in ‘000 PLN	31.12.2016
	Loans and advances to customers			Loans and advances to banks	Total
	Companies	Mortgages	Other retail
By type of analysis
Case by case analysis	588 896	245 632	4 032	0	838 560
Collective analysis	211 955	440 755	688 187	0	1 340 897
Total	800 851	686 387	692 219	0	2 179 457

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Gross exposure in ‘000 PLN	31.12.2015
	Loans and advances to customers			Loans and advances to banks	Total
	Companies	Mortgages	Other retail
By type of analysis
Case by case analysis	769 882	168 096	2 612	0	940 590
Collective analysis	241 669	426 418	595 519	0	1 263 606
Total	1 011 551	594 514	598 131	0	2 204 196

The quantification of the value of the portfolio subjected to case-by-case analysis as well as of the value of created charges, split between impaired receivables and the IBNR portfolio (and respectively charges) is presented in financial notes.

The tables below present the structure of the impaired portfolio subjected to case-by-case analysis.

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Loans and advances to customers – by currency	31.12.2016			31.12.2015
	Amount in ‘000 PLN	Share %	Coverage by impairment write-offs	Amount in ‘000 PLN	Share %	Coverage by impairment write-offs
PLN	610 098	72.8%	54.3%	781 531	83.1%	67.1%
CHF	179 254	21.4%	19.2%	117 209	12.5%	23.4%
EUR	48 927	5.8%	33.9%	41 579	4.4%	23.4%
USD	281	0.0%	44.1%	271	0.0%	49.8%
Total (Case by Case impaired)	838 560	100.0%	45.6%	940 590	100.0%	59.7%

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Loans and advances to customers – by coverage ratio	31.12.2016		31.12.2015
	Amount in ‘000 PLN	Share %	Amount in ‘000 PLN	Share %
Up to 20%	286 243	34.1%	217 469	23.1%
20% – 40%	162 813	19.4%	113 816	12.1%
40% – 60%	95 344	11.4%	98 851	10.5%
60% – 80%	94 493	11.3%	156 429	16.6%
Above 80%	199 667	23.8%	354 025	37.7%
Total (Case by Case impaired)	838 560	100.0%	940 590	100.0%

At the end of 2016, the financial impact from the established collaterals securing the Group’s receivables with impairment recognised under individual analysis (Case by Case) amounted to PLN 323^[1] million (in 31/12/2015: PLN 236 million). It is the amount, by which the level of required provisions assigned to relevant portfolio would be higher if flows from collaterals were not to be considered in individual analysis.

[1] This amount in terms of leasing exposure additionally contains as of 2015 collaterals, that reduced amount of provisions not only for customers with 0% probability of cash flows but also higher probability (at the end of 2016 it equalled to PLN 47 million). Excluding this value for purposes of comparison with 2015, the effect of collateral established in at the end of 2016 would amount to PLN 276 million.

The restructuring of receivables is done by dedicated units (separately for corporate and retail receivables).

The restructuring of both corporate and retail receivables allows the Group to take effective action towards the customers, the purpose of which is to minimize losses and mitigate, as quickly as possible, any risks to which the Group is exposed in connection with client transactions giving rise to the Group’s off-balance sheet receivables or liabilities.

The restructuring process applies to the receivables which, based on the principles in place in the Group, are transferred to restructuring and recovery portfolios and includes setting new terms of transactions which are acceptable for the Group (including in particular the terms of their repayment and their collateral and possibly obtaining additional collateral).

Recovery of retail receivables is a fully centralised process implemented in two stages:

1. warning process – conducted by Direct Banking Department,
2. restructuring and execution proceedings – implemented by Retail Liabilities Collection Department.

Process performed by Direct Banking Department involves, direct, telephone contacts with Customers and obtaining repayment of receivables due to the Group.  In case of failure to receive repayment or in case the Customer applies for debt restructuring, the case is taken over by the Retail Liabilities Collection Department and involves any and all restructuring and execution activities.

Recovery process is supported by specialised IT system covering the entire Customer portfolio, fully automated at the stage of portfolio monitoring and supporting actions undertaken in later restructuring and recovery phases. The behavioural scoring model constitutes an integral component of the system, used at the warning stage. The system is used for retail liabilities collection process applicable to all retail Customer segments.

The scoring model is based on internal calculations including, inter alia, Customer’s business segment type of credit risk based product (applicable, primarily, to mortgage products) and history of cooperation with the Customer relative to previous restructuring and execution activities. Late receivables from retail customers are sent to the IT system automatically no later than 4 days after the date of the receivable becoming due and payable.

The restructuring and recovery process applicable to corporate receivables (i.e. balance and off-balance receivables due from corporate and SME customers) is centralized and performed by the Corporate Recovery Department. Recovery of corporate receivables aims to maximize the recovery amounts and to mitigate risk incurred by the Group in the shortest possible periods of time by carrying out the accepted restructuring and recovery strategies towards:

• the customer,
• corporate receivables,
• collateral ensuring their repayment.

The actions performed as part of those strategies include, among others: setting the terms and conditions of Customer financing, terms and conditions of restructuring corporate receivables (also within court restructuring proceedings), including the terms on which they will be repaid and secured, obtaining valuable and liquid collateral, achieving amicable repayment, recovery of due and payable receivables (also by court executive officer), also from collateral, actions performed within debtors’ bankruptcy proceedings, conducting required legal actions.

Corporate Recovery Department manages the corporate receivable restructuring and recovery process by using IT applications supporting the decision-making process and monitoring. They provide instantaneous information on receivables, collateral, approach used and key actions and dates.

The table below presents the loan portfolio with recognised impairment managed by the Group’s organisational units responsible for loan restructuring.

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Gross exposure in ‘000 PLN	31.12.2016	31.12.2015
Loans and advances to private individuals	657 806	601 521
Loans and advances to companies	258 899	339 437
Total	916 705	940 958

The table below presents the Group’s main categories of credit exposure broken down into components, according to category of customers.

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31.12.2016	Financial intermediation	Industry and constructions	Wholesale and retail business	Transport and communication	Public sector	Mortgage loans	Consumer loans*	Other sectors	Total
Loans and advances to banks	1 267 811	0	0	0	0	0	0	0	1 267 811
Loans and advances to customers	144 745	4 881 381	3 706 759	2 293 059	308 447	27 815 712	6 268 505	2 966 348	48 384 956
Trading securities	8	85	10	0	314 466	0	0	17	314 586
Derivatives and adjustment due to fair value hedge	225 598	4 744	183	188	0	0	0	37 209	267 922
Investment securities	122 131	7 140	0	151	17 013 033	0	0	33	17 142 488
Receivables from securities bought with sell-back clause	90 520	0	0	0	0	0	0	0	90 520
Total	1 850 813	4 893 350	3 706 952	2 293 398	17 635 946	27 815 712	6 268 505	3 003 607	67 468 283

*Including: credit cards, cash loans, current accounts overdrafts

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31.12.2015	Financial intermediation	Industry and constructions	Wholesale and retail business	Transport and communication	Public sector	Mortgage loans	Consumer loans*	Other sectors	Total
Loans and advances to banks	2 348 763	0	0	0	0	0	0	0	2 348 763
Loans and advances to customers	73 583	4 857 564	3 900 771	2 137 820	394 854	27 954 629	5 660 547	2 850 541	47 830 309
Trading securities	14	77	1 474	0	408 572	0	0	117	410 254
Derivatives and adjustment due to fair value hedge	395 565	19 791	2 725	0	0	0	0	11 148	429 229
Investment securities	226 397	0	0	145	13 647 788	0	0	1 410	13 875 740
Receivables from securities bought with sell-back clause	0	0	0	0	0	0	0	0	0
Total	3 044 322	4 877 432	3 904 970	2 137 965	14 451 214	27 954 629	5 660 547	2 863 216	64 894 295

*Including: credit cards, cash loans, current accounts overdrafts