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2018 Financial and Social Report

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 2018 total Clients’ deposits of the Group reached the level of PLN 66.2 billion. The deposit base constituted mainly funds of individuals Clients, of which the share in total Client’s deposits equaled to approx. 72.1% at the end of December 2018 (70.4% at the end of December 2017). The high share of funds from individuals had a positive impact on the Group’s liquidity and supported the compliance and further grow of the supervisory liquidity measures.

Concentration of the deposits base, based on the share of top 5 and 20 depositors, at the end of 2018 amounted respectively to 3.2 % and 6.5 % (in December 2017 it was respectively 3.9 % and 7.0 % The level of deposit concentration is regularly monitored and did not have any negative impact on the stability of the deposit base in 2018. 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, own bonds issue and bank’s securities.

During 2018 the Group continued to explore the possibility of rising additional funding from loans from financial institutions, bond issues and bank’s securities in order to diversify the source of funding with particular attention to the cost of obtaining these funds.  The total balance sheet value of medium-term loans from financial institutions at the end of 2018 amounted to PLN  1 227.5 million (at the end of December 2017 it was PLN  961.4 million). In 2018, the Bank decided for prepayment of outstanding amount of the loan granted in December 2010 by the European Investment Bank, in original amount of EUR 100 million. The total of EUR 80.2 million within the loan in question was repaid in the end of May 2018 (EUR 11.4 million) and in June 2018 (EUR 68.8 million). Early repayment was decided in the context of new mid-term funding opportunities at Bank Millennium Group level and possible cost reduction in the area. In 2018, the Group entered into two new senior unsecured loan agreements, that is PLN 300 million with the European Bank for Reconstruction and Development (EBRD) and EUR 100 million with the European Investment Bank (EIB), in both of which the Bank is a Guarantor, while the Borrower is Millennium Leasing, the Bank’s wholly-owned subsidiary. The proceeds from the EIB loan will be used by Millennium Leasing for the financing of leasing contracts with SME clients, while former loan is to be utilized within the scope of EBRD’s PolGEFF program (Polish Green Economy Financing Facility). Both loans will be repaid in instalments, with final maturities in August 2023 (EBRD) and December 2025 (EIB).

Additionally, in 2018 the Bank issued bank’s securities in PLN with a total nominal value of PLN 187.2 million and one series of bank’s securities in USD with a nominal value of USD 2.11 million. Bank’s securities issued under the third issue program with a nominal value not exceeding PLN 1.5 billion or the equivalent in USD, CHF or EUR have a maturity of up to 3 years. In 2018 the Bank redeemed PLN 330 million of senior unsecured bonds whereas Millennium Leasing issued 2-year bonds in nominal amount of PLN 104.7 million. At the end of December 2018 the total balance sheet value of bonds and bank’s securities issued by the Group  (without subordinated bonds) amounted to PLN 809.7 million (PLN 1  156.5 million in nominal value in December 2017).

In 2018 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 decreased at the end of December 2018 and was equal to 80% (comparing to level of 83% as of end of December 2017). The Group continues 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 2018. During 2018 this portfolio grew by 18% from PLN 19.2 billion at the end of December 2017 (27% of total assets) to approx. PLN 22.7 billion at the end of December 2018 (28% of total assets). Those assets are characterized with high liquidity and can be easily used as 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 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 unfavorable 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 favorable 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 unfavorable 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.

The estimation of the Group’s liquidity risk is carried out with the use of both measures defined by the supervisory authorities and internally, for which exposure limits were established.

The evolution of the Group’s liquidity position in short-term horizons (up to 3 months) is tested daily on the basis of two internally defined indicators: immediate liquidity and quarterly liquidity. Both such indicators measure the maximum borrowing requirement, which could arise on a particular day, taking into consideration the cash-flow projections for spot date and period of 3 months, respectively. Additionally, the liquid asset portfolio is calculated on the daily basis.

These figures are compared with the exposure limits in force and reported daily to the areas responsible for the management and control of the liquidity risk in the Group. During 2018, all internal liquidity indicators were well above minimum limits. The liquidity risk limits are revised at least once a year in order to take into account, inter alia, the change of the size of the consolidated own funds, current and expected balance sheet structure, historical consumption limits, as well as current market conditions and supervisory requirements. The current limits in place have been valid since 1st November 2017 and will be replaced by revised limits on 1st January 2019.

Current Liquidity indicators PLN million
Immediate liquidity ratio (m PLN)* Quarterly liquidity ratio (m PLN)* Liquid assets Portfolio (m PLN) LCR (%)
Indicator 20 228 20 228 22 836 212%
Minimum limit 934 (2 336) 10 000 100%
Immediate liquidity ratio (m PLN)* Quarterly liquidity ratio (m PLN)* Liquid assets Portfolio (m PLN)** LCR (%)
Indicator 16 412 16 412 18 735 153%
Minimum limit 934 (2 336) 10 000 80%

(*) Immediate and Quarterly Liquidity Indicator: The sum of cash flows in spot date or during the next 3 months respecitively, Nostro Balance (the algebraic sum for all currencies reduced by obligatory reserve) and Highly Liquid Assets.

(**) Liquid Assets Portfolio: The sum of cash, exposure to Central Bank (the surplus above the required obligatory reserve) and Polish Goverenment debt securities, NBP-Bills and due from banks with maturity up to 1 month. The debt securities portfolio is reduced by securities encumbered for non liquidity purposes.

The Group monitors liquidity on the basis of internal liquidity measures, taking into account in particular the impact of FX rates on the liquidity situation.

According to the Regulation of European Parlament and Council no 575/2013 on prudential requirements for credit insitutions and investment firms (CRR), the Group is calculating the liquidity coverage requirement (LCR). The regulatory minimum of 100% for LCR valid in 2018 was complied by the Group (as of the end of December 2018 the LCR reached the level of 212%). The increase in LCR in 2018 was mainly caused by increase in retail funding followed by a decrease in funding from corporates and financial clients. This has a positive effect on LCR due to more favourable risk weights for retail clients deposits. The measure is calculated daily and has been reported on the monthly basis to NBP since March 2014. Internally, the LCR is estimated daily and reported to the areas responsible for the management and control of the liquidity risk in the Group.

Additionally the Group employs an internal structural liquidity analysis based on cumulative, behaviour liquidity gaps calculated on a real basis (i.e. assuming the probability of cash flow occurrence). The safe level adopted by the Group for the ratio of liquidity shortfall is established for each time bucket below 5 years.

In 2018 liquidity gaps were maintained at levels significantly above the safe limits. The results of cumulative, behaviour liquidity gaps  (normal conditions) are presented in tables below.

Adjusted Liquidity Gap (PLN million) up to 6M 6M to 12M 1Y to 2Y 2Y to 3Y 3Y to 5Y over 5Y
Adjusted balance assets 30 398 5 728 7 932 7 389 8 953 29 089
Adjusted balance liabilities 10 423 3 001 6 122 4 417 6 671 54 803
Balance-Sheet Gap 19 974 2 727 1 810 2 972 2 283 (25 714)
Cumulative Balance-Sheet Gap 19 974 22 701 24 511 27 482 29 765 4 051
Adjusted off-balance assets 77 64 410 53 33 4
Adjusted off-balance liabilities (1 294) (83) (114) (61) (39) (10)
Off-Balance Sheet Gap (1 217) (20) 296 (9) (6) (6)
Total Gap 18 757 2 707 2 106 2 963 2 277 (25 720)
Total Cumulative Gap 18 757 21 465 23 571 26 534 28 811 3 090
Adjusted Liquidity Gap (PLN million) up to 6M 6M to 12M 1Y to 2Y 2Y to 3Y 3Y to 5Y over 5Y
Adjusted balance assets 26 147 5 348 8 070 7 288 7 721 25 608
Adjusted balance liabilities 12 383 3 252 6 192 5 048 5 976 44 700
Balance-Sheet Gap 13 764 2 096 1 878 2 240 1 745 (19 092)
Cumulative Balance-Sheet Gap 13 764 15 860 17 738 19 978 21 723 2 631
Adjusted off-balance assets 114 56 110 319 40 10
Adjusted off-balance liabilities (1 115) (76) (163) (80) (53) (21)
Off-Balance Sheet Gap (1 001) (20) (53) 239 (13) (11)
Total Gap 12 763 2 076 1 825 2 479 1 732 (19 103)
Total Cumulative Gap 12 763 14 839 16 664 19 143 20 875 1 772

The Group has developed a liquidity risk management tool defining sensitivity analysis and stress scenarios (internal, external and combination of both). For the purpose of stress tests, liquidity gaps are calculated on a real basis assuming a conservative approach to the assessment of probability of cash flow occurrence among others taking into account a reduction of deposits, delays of loans repayment, deteriorated liquidity of the secondary securities market, the highest cost of funding – the assumption of the worst observed margins on deposits in the Bank, parallel shift of the yield curve and PLN depreciation.

Stress tests are performed at least quarterly, to determine the Group’s liquidity-risk profile, to ensure that the Group is in a position to fulfil its obligations in the event of a liquidity crisis and to update the liquidity contingency plan and management decisions. Additionally, stress test results are used for setting thresholds for early warning signals, which aim is to identify upcoming liquidity problems and to indicate to the Management Board the eventual necessity of launching Liquidity Contingency Plan.

The results of the stress test analysis demonstrated that the liquidity indicators will be maintained above the established limits.

The information regarding the liquidity risk management, including the utilization of the established limits for internal and supervisory measures, is reported monthly to the Capital, Assets and Liabilities Committee and quarterly to the Management Board and Supervisory Board.

The process of the Group’s planning and budgeting covers the preparation of the Liquidity Plan in order to make sure that the growth of business will be supported by an appropriate liquidity financing structure and supervisory requirements in terms of quantitative liquidity measures will be met.

The Group has also emergency procedures for situations of increased liquidity risk – the Liquidity Contingency Plan (contingency plan in case the Group’s financial liquidity deteriorates).  The Liquidity Contingency Plan establishes the concepts, priorities, responsibilities and specific measures to be taken in the event of a liquidity crisis. The Liquidity Contingency Plan is revised at least once a year. In 2018 the Liquidity Contingency Plan was tested and revised in order to guarantee that it is operationally robust. The Plan also adapted revised warning thresholds for early warning indicators, taking into account scenarios and stress test results. The revised Plan was approved by the Supervisory Board in December 2018.