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2018 Financial and Social Report

Credit risk mitigation

Table EU CRC – Qualitative disclosure requirements related to CRM techniques (art. 453.a,e)

Information in that chapter is disclosed according to the requirements of Table EU CRC – Qualitative disclosure requirements related to CRM techniques (EBA/GL/2016/11).

 

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).

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.

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.

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.

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)

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, Esaliens 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 (conditional)
Zastaw rejestrowy na zabezpieczenie przyszłe i Przewłaszczenie (warunkowo)
Fleet consisting of cars Registered pledge and ownership
transfer (conditional)
Independent specialized hardware and machinery Registered pledge and ownership
transfer (conditional)
Ownership transfer
Production lines Registered pledge and ownership
transfer (conditional)
Ownership transfer
Collection of fixed assets including specialized
equipment and machinery
Registered pledge and ownership
transfer (conditional)
Airplanes, helicopters, boat/ship Registered pledge and ownership
transfer (conditional)
Inventory Registered pledge and ownership
transfer (conditional)
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-toincome 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 not as for portfolios under IRB roll-out plan, own estimates of the above parameters will be 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).

Exposures
unsecured –
Carrying
amount
Exposures to
be secured
Exposures
secured by
collateral
Exposures
secured by
financial
guarantees
Exposures
secured by
credit
derivatives
1 Total loans 36 742 890 24 051 625 23 707 760 343 865 0
2 Total debt securities 22 849 820 0 0 0 0
3 Total exposures 59 592 710 24 051 625 23 707 760 343 865 0
4 Of which defaulted 771 595 379 973 340 968 39 005 0

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

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