All model calculations include certain simplifications and are therefore sensitive to those assumptions. A summary of the major methods and assumptions used when estimating the fair values of financial instruments not measured at fair value is presented below.
For certain categories of financial instruments, it has been assumed that their carrying amount approximately equals their fair values, which is due to the lack of expected material differences between their carrying amount and fair value resulting from the features of these categories (such as short term nature, high correlation with market parameters, the unique nature of the instrument).
This applies to the following groups of financial instruments:
- loans and advances to customers: a part of the housing loan portfolio (the “old” housing loan portfolio), loans with no specific repayment schedule, loans due as at the moment of valuation;
- amounts due to customers, liabilities with no specific repayment schedule, other specific products for which no active market exists;
- interbank deposits and placements with maturities of up to 7 days or bearing variable interest;
- variable interest loans or advances granted and received on the interbank market (with interest rate changes occurring every 3 months or less);
- cash and balances with the Central Bank and amounts due to the Central Bank;
- other financial assets and financial liabilities.
For non-impaired loans and advances to customers, the model based on estimating the present value of future cash flows by discounting cash flows using current interest rates is applied. The model takes into account the credit risk margin and adjusted maturities stemming from the loan agreements. The current level of margins was determined for transactions concluded in the last quarter ending on the balance sheet date involving instruments with a similar credit risk profile. The current margin for loans in PLN adjusted for the cost of foreign currency acquisition in basis-swap transactions was applied to loans in foreign currencies. Valuation excludes the risk of the effect of the proposed potential systemic solutions which could result in the Group incurring losses on the portfolio of mortgage loans in CHF. For impaired loans, it is assumed that the fair values are equal to carrying amounts.
For deposits and other amounts due to customers other than banks with fixed maturities, the fair value was estimated based on expected cash flows discounted using the current interest rates appropriate for individual deposit products. The fair value is calculated for each deposit and each of the liabilities, and then the fair values for the entire deposit portfolio are grouped by product type and by customer segment. For demand deposits, it is assumed that their fair value equals the carrying value.
The fair value of the Group’s subordinated liabilities was estimated based on the expected cash flows discounted based on the yield curve.
The fair value of a liability in respect of debt securities issued by PKO Bank Polski SA was estimated based on the expected cash flows discounted using the current interbank market rates.
The fair value of a liability in respect of securities issued by PKO Finance AB was estimated based on Bloomberg quotations.
The fair value of interbank placements and deposits was estimated based on expected cash flows discounted using the current interbank market rates.
Finance lease receivables were estimated based on the expected cash flows discounted using the internal rate of return for lease transactions of the same type concluded by the Group during the period directly preceding the end of the reporting period.