Liquidity risk

Liquidity risk reflects the possibility of incurring significant losses because 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 considering goals defined by the Management Board and the Capital, Assets and Liabilities Committee.

In 2021, the COVID-19 pandemic still had an impact on global financial markets, however the Bank did not observe any threat to its liquidity position due to the spread of COVID-19. The Group continued to be characterized by solid liquidity position.

In 2021, in consequences of the increase of the deposits from Customers at the faster pace than loans, the Group’s Loan-to-Deposit ratio decreased and was equalled to 86% at the end of December 2021 (comparing to level of 91% as of end of December 2020).

The liquid assets portfolio, that is portfolio of government debt securities, 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. At the end of 2021, the share of Polish government securities (including NBP Bills) in total securities portfolio amounted to 98% and allowed to reach the level of approx. PLN 17.6 billion (17% of total assets), whereas at the end of December 2020 was at the level of approx. PLN 18.4 billion (19% of total assets).

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 2021 total Clients’ deposits of the Group reached the level of PLN 91.4 billion. The deposit base constituted mainly funds of individuals Clients, of which the share in total Client’s deposits equalled to approx. 72.2% at the end of December 2021 (75.9% at the end of December 2020). The high share of funds from individuals had a positive impact on the Group’s liquidity and supported the compliance of the supervisory liquidity measures.

Concentration of the deposits base, based on the share of top 5 and top 20 depositors, at the end of 2021 amounted respectively to 3.6% and 6.5% (in December 2020 it was respectively 2.8% and 4.8%). The level of deposit concentration is regularly monitored and did not have any negative impact on the stability of the deposit base in 2021. 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, 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. In 2021, the source of medium-term funding remains also medium-term loans, subordinated debt, own bonds issue and bank’s securities.

During 2021, no new bonds and bank’s securities were issued within the Group, and no new loans were taken from financial institutions. The total balance sheet value of medium-term loans from financial institutions at the end of 2021 amounted to PLN 369.3 million (at the end of December 2020 it was PLN 518.8 million). The decrease of the total amount of the medium-term loans from financial institutions was connected with standard repayment in accordance with the schedule.

With the exception  of subordinated bonds, at  the end of December 2021 the total balance sheet value of bonds and bank’s securities issued by the Group (without subordinated bonds) amounted to PLN 39.6 million (PLN 558.6 million in nominal value in December 2020).  The issue of bonds initially planned on the Polish market in Q4, 2021, the liabilities under which could be classified as eligible liabilities within the meaning of the Act of 10 June 2016 on the Bank Guarantee Fund, deposit guarantee scheme and resolution, did not take place due to a gap in the Polish Bonds Act.  In the first half of 2022, the Bank plans to issue international senior non-preferred bonds as part of the Eurobond issue program (EMTN), approved by the Bank’s Supervisory Board on January 28, 2022. The total nominal value of issued and unredeemed bonds may not exceed amount of the EMTN program, i.e. EUR 3 billion at any time.

The Group manages FX liquidity using FX-denominated bilateral loans as well as Cross Currency Swap and FX Swap transactions. The importance of swaps has been decreasing as a consequence of the reduction of the FX mortgage loan portfolio and the hedge in foreign currency of the provisions for legal risk. The swaps portfolio is diversified in term of counterparties and maturity dates. For most counterparties, the Group has signed a Credit Support Annex to the master agreements. As a result, in case of unfavourable changes of FX rates (PLN depreciation), the Group is obliged to place deposits as a collateral with counterparties to secure the settlement of derivative instruments in the future, and in case of favourable 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 unfavourable 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 is tested daily based on liquid asset portfolio, Central Bank’s eligible collateral for standard monetary operation and two internally defined indicators: immediate liquidity and quarterly liquidity. The last two 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.

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 as well as presented in monthly and/or quarterly basis to the Bank’s Management Board and Supervisory Board.

The liquidity risk limits are revised at least once a year to take into account, inter alia, the change of the size of the consolidated own funds, current and expected balance sheet structure, historical limits’ consumption, as well as current market conditions and supervisory requirements. According to rules in place, all eventual excesses of internal liquidity risk limits are always reported, documented, and ratified at the proper competence level.

According to the Regulation of European Parliament and Council no 575/2013 on prudential requirements for credit institutions and investment firms (CRR), the Group is calculating the liquidity coverage requirement (LCR). The regulatory minimum of 100% for LCR valid in 2021 was compiled by the Group (as of the end of December 2021 the LCR reached the level of 150%). 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. In 2021, the Group complied also with supervisory measures imposed by KNF Resolution 386/2008 as well as regularly calculated net stable funding requirement (NSFR). Since 28^th June 2021 the NSFR as obligatory supervisory long term liquidity measure replaced M3 and M4 supervisory measures defined by the KNF. In each of the quarter, the NSFR was above the supervisory minimum of 100% (supervisory minimum valid since June 2021).

Current Liquidity indicators PLN million

The Group monitors liquidity based on internal liquidity measures, considering the impact of FX rates on the liquidity situation.

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 December 2021, liquidity gaps were maintained positive. The results of cumulative, behaviour liquidity gaps (normal conditions) are presented in tables below.

The Group has developed a liquidity risk management tool defining sensitivity analysis and stress scenarios (idiosyncratic, systemic and combination of both). For 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 considering 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 can 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.

As of December 2021, the results of the stress test analysis demonstrated that the most severe is run on Bank combined with rating downgrade scenario of which the survival period is 6 months, however still above the limit of 3 months.

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 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 2021 the Liquidity Contingency Plan was tested and revised to guarantee that it is operationally robust. The Plan also adapted revised warning thresholds for early warning indicators, considering scenarios and stress test results. The revised Plan was approved by the Supervisory Board in December 2021.