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2018 Financial and Social Report

Market risk encompasses current and prospective impact on earnings or capital, arising from changes in the value of the Group’s portfolio due to adverse market movement. The framework of market risk management and its control are defined on a centralized basis with the use of the same concepts and metrics which are used in all the entities of the BCP Group.

The main measure used by the Group to evaluate market risks is the parametric VaR (Value at Risk) model – an expected loss that may arise on the portfolio over a specified period of time (holding period) with a required probability (confidence level) due to an adverse market movement. The market risk measurement is carried out  daily, both on an individual basis for each of the areas responsible for risk taking and risk management, and also in consolidated terms considering the effect of the diversification that exists between the particular portfolios.

In parallel to VaR calculations, in order to estimate the potential economic loss resulting from the extreme changes in the market risk factors, a number of stress tests are conducted for the portfolios that are subject to high market risk. In 2018 the results of stress test were regularly reported to the Capital, Assets and Liabilities Committee (CALCO). There were no excesses of the established limits detected. Additionally, in the process of interest rate risk management, the Group also uses interest income sensitivity measure and analyzes repricing gaps.

The impacts of interest change on Net Interest Income is asymmetrical and it is negative in case of decreasing interest rates. This is due to the Polish legal system and the fact that the interest rate of consumer loans and credit cards is limited (from January 2016 it cannot exceed twice Reference Rate of the National Bank of Poland increased by 7 percentage points). The strength of impact on net interest income in face of decrease of the interest rate depends, among other factors, on the percentage of the loan portfolio that is affected by the new maximum rate.

The impact on net interest income in the next 12 months after 31st December 2018 (based on annualized 4Q 2018 net interest income), in a scenario of immediate parallel yield curve decrease for position in Banking Book in Polish Zloty, is the following:

Sensitivity of NII for PLN interest rate change 31.12.2018 31.12.2017
parallel yield curve increase by 100 b.p. 3.4% 5.7%
parallel yield curve decrease by 100 b.p. -4.6% -7.0%

 

VaR ratios reflect total exposure to market risk in the Group. In 2018, open positions included just interest-rate instruments and FX risk instruments. The total market risk exposure in the Group was relatively low during 2018 and was on average equal to PLN 22.0 million compared to the end-of-year internal limit of PLN 210.6 million. In 2018, the total market risk exposure in the Group was kept within limits in place (no excesses were detected).

All eventual excesses of market risk limits are reported, documented and ratified at the proper competence level.

More information on market risk management can be found in chapter 8 of the Annual Consolidated Report of the Bank Millennium S.A. Capital Group for the 12-month period ending 31st December 2018.

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 funding needs arising from the Group’s obligations.

The process of the Group’s planning and budgeting covers the preparation of a 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.

In 2018, the Group’s Loan-to-Deposit ratio was kept well below 100%. This ratio decreased at the end of December 2018 and equalled 80% (comparing to level of 83% as of end of December 2017). The liquidity surplus was still invested in the portfolio of liquid assets (Cash, balance with NBP, NBP Bills and Polish Government bonds). The share of Polish government securities (including NBP Bills) in total securities portfolio amounted to 99%. 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). The portfolio of debt securities (especially available for sale, without trading activity), supplemented by the cash and exposures to the National Bank of Poland, is treated as the Group’s liquidity reserve, which will overcome crisis situations (see Table below).

Liquidity ratios 31.12.2018 31.12.2017
Loans/Deposits ratio (%) 80% 83%
Liquid assets portfolio (PLN million) (*) 22 836 18 735
Liquidity Coverage requirement, LCR (%) 212% 153%

 (*) Liquid Assets Portfolio: The sum of cash, exposure to Central Bank (the surplus above the required obligatory reserve) and Polish Government 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.

 

Consequently, the large, diversified and stable funding from retail, corporate and public sector Clients remains the main source of financing of the Group. The source of medium-term funding remains also medium-term loans, subordinated debt, own bonds issue and bank’s securities.

The Group manages its FX liquidity through the use of FX-denominated bilateral loans as well as subordinated debt, FX swaps and cross-currency interest rate swaps transactions. The swaps portfolio is diversified in term of counterparties and maturity dates. For the majority of counterparties the Bank has signed a Credit Support Annex to the master agreements.

The estimation of the Group’s liquidity risk is carried out both with the use of the ratios defined by the supervisory authorities and own indicators, for which exposure limits were also established. In 2018 both internal as well as supervisory liquidity measures  were kept well above the minimum limits in place, including the liquidity coverage requirement (LCR) calculated according to the Regulation of European Parlament and Council no 575/2013 on prudential requirements for credit insitutions and investment firms (CRR). The regulator 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 yearly increase of LCR was mainly connected with high share of funds from individuals. At the end of 2018 total Clients’ deposits of the Group reached the level of PLN 66.2 billion, of which the share of individuals equalled to approx. 72.1% (respectively PLN 57.3 billion and 70.4% at the end of December 2017).

Additionally, the Group employs an internal structural liquidity analysis based on cumulative liquidity gaps calculated on an actuarial basis (i.e. assuming a certain probability of cash flow occurrence). In 2018 all the liquidity gaps were maintained at  the levels significantly above the minimum limits.

Liquidity stress tests are performed at least quarterly, in order to understand the Group’s liquidity-risk profile and 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.

The liquidity risk management process is regulated in the internal policy that is a subject of the Bank’s Management Board approval

The Group has also emergency procedures for situations of increased liquidity risk – the Liquidity Contingency Plan. 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 tested and revised at least once a year.

More information on liquidity risk management can be found in chapter 8 of the Annual Consolidated Report of the Bank Millennium S.A. Capital Group for the 12-month period ending 31st December 2018.

Operational risk management is based on the processes structure implemented in the Group and overlapping the traditional organizational structure. Current management of the specific processes, including the management of the profile of process operational risk, is entrusted to Process Owners, who report to all other units participating in the risk management process and are supported by these units.

In order to manage the fraud risk, the Group has in its structure a special organizational unit to develop, implement and monitor the Group’s policy for management of this risk in cooperation with other organizational units of the Group and in accordance with its internal regulations. The Fraud Risk Management Bureau is a center of competence for the fraud prevention process.

Lack of legal compliance of internal regulations and the ensuing risk of legal or regulatory sanctions, material losses or reputation risk is one of the areas threatening the banking activity. By monitoring compliance with both internal and external regulations, Bank Millennium considers it to be particularly important:

  • Preventing money laundering and financing of terrorism;
  • Ensuring consistency of Bank Millennium’s internal normative acts with generally binding laws as well as recommendations issued by supervisory authorities,
  • Counteracting and managing conflicts of interest,
  • Observance of ethical principles,
  • Restricting personal transactions and protecting confidential information related to Bank Millennium, financial instruments issued by the Bank as well as information connected with purchase/sale of such instruments.
  • Monitoring and ensuring compliance of the investment products covered by MiFID II.

Bank Millennium undertakes appropriate actions for the purpose of ongoing and continuous tracking of changes occurring in generally binding legal regulations as well as recommendations and guidance given by supervisory authorities, both national as well as of the European Union.

In order to ensure compliance of the Bank’s operation with the generally applicable laws, the Compliance Department undertakes a number of activities such as: informing about changes in law, periodically reviewing all internal normative acts binding at the Bank in terms of compliance with applicable laws and standards, analysing new products and services, measuring compliance risk in processes operating at the Bank, issuing opinions, participating in key implementation projects, or staff training.

The scope of actions undertaken by the Group may generate a conflict of interest between these actions and the interests of Customers. The Group’s main principle is to take all reasonable steps to identify a conflict of interest between the Group and its Customers, as well as between individual Customers, and also to establish rules ensuring that such conflicts have no adverse impact on Customers’ interests.

The Bank Millennium Group undertakes also appropriate actions to ensure conduct concerning personal transactions, which is compliant with standards and laws. These actions and measures are meant to, according to the circumstances, to restrict or prevent performance of personal transactions by Relevant Persons in situations, which may cause a conflict of interest or be involved with access to confidential information or to data about Customers’ transactions. Shares of Bank Millennium are admitted to public trading on the Warsaw Stock Exchange. Such status requires special attention and observance of the obligation to maintain highest standards for transparency of financial markets. The policy of Bank Millennium Group is  to maintain strict control as regards protection of the flow of Confidential Information (including in accordance with the requirements of Regulation No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on abuses on the Market Abuse Regulation MAR). The Bank prohibits the use and disclosure of Confidential Information in any form. Purchasing and selling the Bank’s shares, derivative rights concerning the Bank’s shares or any other financial instruments thereto related is forbidden during closed periods.

The Anti-Money Laundering and Counter Terrorism Financing Programme (AML/CTF), applied by Bank Millennium, is a comprehensive system of identification of threats related to money laundering crimes.

Actions launched under this programme include in particular:

  • application of financial security measures to Customers, depending on the degree of risk and based on „Know your Client” or KYC principle – the key concept of the program,
  • transaction registration and reporting,
  • identification of suspected transactions,
  • cooperation with the General Inspector of Financial Information.

Bank Millennium adjusts its reports to the analysis of suspected transactions on the on-going basis, taking into account up-to-date patterns (sectors, cash-flow routes, Customer behaviour)  for effective identification and reporting of transactions suspected of money laundering.

Our internal procedures, organisational solutions and employee training programmes ensure efficient operation of the Programme.

Bank Millennium with view to protecting Customers who invest their funds in investment products with varied degree of risk strictly monitors compliance of these products, their offering and handling process with relevant internal regulations, laws and external guidelines – on the domestic and European Union level.

A specific compliance monitoring program also covers consumer loans and insurance products addressed to consumers.

The Bank has mechanisms and internal regulations allowing for anonymous reporting of violations of law and internal regulations and ethical standards (so-called whistleblowing) to the Chairman of the Management Board and in the case of  notification concerning a Member of the Management Board – to the Supervisory Board. The Bank will verify each application, ensuring that the reporting person will be protected by acts of repressive, discriminatory and unfair nature.

By 25 May 2018 the Bank aligned its activity in all key areas with GDPR. The Bank’s approach is based on an assessment of risk involved with processing of personal data and its impact on the rights and freedoms of data subjects. In the project the Bank adjusted its internal data processing processes and also built new information processes, which it made available to data subjects. For this purpose the Bank implemented processes for handling enquiries and requests resulting directly from the rights of data subjects introduced by GDPR and was working on transparency of presented information about processed data.