Financial and
ESG report 2020

23. Derivatives – Hedge accounting

Starting from 1 January 2006 the Group established first formal hedging relationship against cash flow volatility. One should note that as from IFRS implementation, pursuant to IAS39 the effect of valuation of all derivatives not classified as and not being effective hedges is presented in result from financial instruments valued at fair value through the profit and loss account. The employment of such methodology resulted in the lack of coherence in the manner of presentation of financial instruments in the profit and loss account. Net interest income from derivative transactions, concluded in order to hedge cash flow in foreign currencies, from the economic point of view constitutes an interest margin component (allows to adjust interest income from FX loans to the cost of funding resulting from the zloty deposit portfolio). Implementation of formal hedge accounting permitted presentation of the transactions in the Profit and Loss Account in accordance with their economic meaning.

The Risk Strategy approved in the Group defines a general rules for hedging of market risk generated by its commercial activity. External transactions eligible for hedge accounting are pointed in the Strategy just after the natural economic hedge. The Group applied (as at 31.12.2020) Cash Flow Hedge relations to eliminate the variability of cash flows:

  • on FX denominated mortgage loans and financing them PLN deposits,
  • on PLN denominated financial assets,
  • from the portfolio of issued liabilities in PLN,
  • due to future income and interest costs denominated in foreign currencies,
  • on the portfolio of floating-rate foreign currency mortgage loans.

attributable to interest rate risk and currency risk in the time horizon limited to maturity of hedging instruments, presented in note (23b).

In addition, as a result of the merger with Euro Bank the Group applied a fair value hedge for a fixed interest rate debt instrument.

The underlying of hedged and hedging items are economically related in a way that they respond in a similar way to the hedged risk, their fair value will offset in response to the market interest and FX rates movements.

The Group performs the effectiveness tests on a monthly basis, calculates and compares the changes in fair value of hedged and hedging positions. Hedge effectiveness is tested using hypothetical derivative method, hedged items are presented as a hypothetical derivative, for which changes in the fair value are calculated and compared with changes in fair value of hedging instruments. Hedge ineffectiveness can arise from differences in repricing dates of hedged and hedging positions or from designation as hedging item the existing derivative instrument. The Group designates hedging instruments on their trade date and by this eliminates this source of ineffectiveness. Hedge ineffectiveness reported by the Group includes amortization of the fair value changes recognized as effective for derivatives classified on their  termination date as hedging.

Detailed information on cash flow hedge relations applied by the Group, items designated as hedged and hedging and presentation of the result (as at 31.12.2020) is shown in a table below:

Hedge of volatility of the cash
flows generated by PLN
denominated financial assets
Cash flow volatility hedge for the flows
generated by FX mortgage portfolio
and its underlying PLN liabilities
Description of hedge transactions The Group hedges the risk of the volatility of cash flows generated by PLN denominated financial assets. The volatility of cash flows results from interest rate risk. The Group hedges the risk of the volatility of cash flows generated by FX mortgages and by PLN liabilities financially underlying such loans. The volatility of cash flows results from the currency risk and interest rate risk.
Hedged items Cash flows resulting from PLN denominated financial assets. Cash flows resulting from the FX mortgage loan portfolio and PLN deposits together with issued debt PLN securities funding them.
Hedging instruments IRS transactions CIRS transactions
Presentation of the result on the hedged and hedging transactions Effective part of the valuation of hedging instruments is recognised in revaluation reserve; interest on both the hedged and the hedging instruments are recognised in net interest income.

Ineffective part of the valuation of hedging instruments is recognized in the income statement as a result on instruments measured at fair value through profit and loss.

Effective part of the valuation of hedging instruments is recognised in revaluation reserve; interest on both the hedged and the hedging instruments are recognised in net interest income; valuation of hedging and hedged instruments on FX differences is recognised in Result on exchange differences.

Ineffective part of the valuation of hedging instruments is recognized in the income statement as a result on instruments measured at fair value through profit and loss.

Hedge of the volatility of cash flows
generated by the portfolio of
issued PLN liabilities
Cash flow volatility hedge due to future
income and interest costs
denominated in foreign currencies
Description of hedge transactions The Group hedges the risk of fluctuations in cash flows generated by issued PLN liabilities. The volatility of cash flows results from interest rate risk. The Group hedges the risk of the volatility of cash flows generated by income and interest costs denominated in foreign currencies. The volatility of cash flows results from the currency risk.
Hedged items Cash flow resulting from the portfolio of issued zloty liabilities. Cash flows resulting from income and interest costs denominated in foreign currencies.
Hedging instruments IRS transactions FX position resulting from recognized future leasing liabilities.
Presentation of the result on the hedged and hedging transactions Effective part of the valuation of hedging instruments is recognised in revaluation reserve; interest on both the hedged and the hedging instruments are recognised in net interest income.

Ineffective part of the valuation of hedging instruments is recognized in the income statement as a result on instruments measured at fair value through profit and loss.

The effective part of the spot revaluation of hedging instruments is recognized in the revaluation reserve.

The ineffective part of the valuation of the hedging item is recognized in the income statement as a result on instruments measured at fair value through profit and loss.

Hedge of the volatility of cash flows generated by the portfolio of floating-rate foreign currency mortgage loans Fair value hedge of a fixed interest rate debt instrument
Description of hedge transactions The Group hedges the currency risk and interest rate risk of cash flows for a portion of the period – over the time horizon of hedging transactions – from floating-rate loans in a foreign currency by converting interest rate flows in foreign currency into zloty flows. The Group hedges part of the interest rate risk associated with the change in the fair value of a fixed-rate debt instrument recorded in other comprehensive income, resulting from fluctuations in market interest rate.
Hedged items Cash flow resulting from the portfolio foreign currency mortgage loans A portfolio of fixed coupon debt securities classified as financial assets measured at fair value through other comprehensive income denominated in PLN.
Hedging instruments FX Swap transactions IRS transactions
Presentation of the result on the hedged and hedging transactions Effective part of the valuation of hedging instruments is recognised in revaluation reserve; interest on hedging instruments (swap points settled) are recognised in the interest margin.

Ineffective part of the valuation of hedging instruments is recognized in the income statement as a result on instruments measured at fair value through profit and loss.

The result on the change in the fair value measurement of hedged items in the hedged risk is referred to the result on hedge accounting. The remaining part of the change in fair value measurement is recognized in other comprehensive income. Interest on debt securities is recognized in net interest income. The change in fair value measurement of derivative instruments being a hedge is presented in the result on hedge accounting, and interest on these instruments is recognized in the interest result.

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