67. Currency risk management
2018
Currency risk management
Currency risk is the risk of incurring losses due to unfavourable fluctuations in the exchange rate. The risk is generated by maintaining open currency positions in various foreign currencies.
To reduce the potential losses resulting from exchange rate fluctuations to an acceptable level by properly shaping the currency structure of balance sheet and off-balance sheet items.
The Group uses the following measures of the currency risk: value-at-risk (VaR) and stress tests.
Control over currency risk consists in determining currency risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to currency risk.
The following measures are monitored by the Group on a regular basis:
- the level of currency risk measures,
- utilization of the strategic limit of tolerance to currency risk,
- utilization of internal limits and thresholds of currency risk.
Reports on currency risk are prepared on a daily, weekly, monthly and quarterly basis.
The main tools for currency risk management used by the Group are:
- currency risk management procedures,
- currency risk limits and thresholds,
- defining allowable types of foreign currency transactions and the exchange rates used in such transactions.
The Group has set limits and thresholds for currency risk for among other things: currency positions, Value at Risk calculated for a 10-day time horizon and daily loss from transactions on the currency market.
Financial information
Sensitivity measures
The Bank’s VaR and a stress-test analysis of the Bank’s exposure to currency risk, cumulatively for all currencies, are presented in the table below:
| Sensitivity measure | 31.12.2018 | 31.12.2017 |
|---|---|---|
| VaR for a 10-day time horizon at the confidence level of 99% (in PLN million)1 | 4 | 3 |
| Change in CUR/PLN by 20% (in PLN million) (stress-test)2 | 256 | 48 |
1 Taking into account the nature of the operation of the other Group companies which generate material currency risk and the specific characteristics of the market in which they operate, the Group does not determine the consolidated VaR sensitivity measure. Such companies use their own risk measures to manage their interest rate risk. KREDOBANK SA applies the 10-day VaR which amounted to PLN 0,2 million as at 31 December 2018 and to PLN 0,1 million as at 31 December 2017.
2 The table presents the value of the most adverse stress-test scenario: PLN appreciation by 20% and PLN depreciation by 20%.
Foreign currency position
The Group’s foreign currency positions are presented in the table below:
| Foreign Curency Position | 31.12.2018 | 31.12.2017 |
|---|---|---|
| EUR | (127) | (157) |
| USD | (49) | (28) |
| CHF | (34) | 8 |
| GBP | 57 | 11 |
| Other (Global, Net) | 38 | 61 |
Currency positions (in addition to volatility of foreign exchange rates) are a key factor determining the level of currency risk to which the Group is exposed. The foreign currency positions is determined by all foreign currency transactions concluded, both in the statement of financial position and off-balance sheet transactions. The Group’s exposure to currency risk is low.
Currency structure of financial assets and liabilities
| Currency structure 31.12.2018 |
Foreign currencies translated into PLN | |||||
|---|---|---|---|---|---|---|
| PLN | CHF | EUR | USD | Other | Total | |
| Cash and balances with the Central Bank | 21 663 | 68 | 726 | 166 | 302 | 22 925 |
| Amounts due from banks | 1 664 | 7 | 2 870 | 2 208 | 912 | 7 661 |
| – measured at amortized cost | 1 664 | 7 | 2 870 | 2 208 | 912 | 7 661 |
| Hedging derivatives | 649 | 7 | 2 | – | – | 658 |
| Other derivative instruments | 1 715 | – | 144 | 48 | – | 1 907 |
| Securities | 62 796 | – | 684 | 561 | 73 | 64 114 |
| – held for trading | 230 | – | 5 | – | – | 235 |
| – not held for trading, mandatorily measured at fair value through profit or loss | 2 448 | – | 188 | 212 | – | 2 848 |
| – at fair value through OCI | 52 113 | – | 63 | 309 | 73 | 52 558 |
| – measured at amortized cost | 8 005 | – | 428 | 40 | – | 8 473 |
| Loans and advances to customers | 172 374 | 23 211 | 16 043 | 2 112 | 1 172 | 214 912 |
| – not held for trading, mandatorily measured at fair value through profit or loss | 1 106 | – | – | – | – | 1 106 |
| – measured at amortized cost | 171 268 | 23 211 | 16 043 | 2 112 | 1 172 | 213 806 |
| Other financial assets | 2 729 | – | 66 | 14 | 16 | 2 825 |
| Total financial assets | 263 590 | 23 293 | 36 512 | 7 207 | 2 475 | 315 002 |
| Amounts due to the Central Bank | 7 | – | – | – | – | 7 |
| Amounts due to banks | 1 129 | 7 | 588 | 263 | 14 | 2 001 |
| – measured at amortized cost | 1 129 | 7 | 588 | 263 | 14 | 2 001 |
| Hedging derivatives | 464 | – | 7 | – | – | 471 |
| Other derivative instruments | 2 458 | – | 163 | 33 | 1 | 2 655 |
| Amounts due to customers | 215 720 | 1 919 | 15 127 | 7 262 | 2 788 | 242 816 |
| – measured at amortized cost | 215 720 | 1 919 | 15 127 | 7 262 | 2 788 | 242 816 |
| Liabilities in respect of insurance activities | 1 292 | – | – | – | – | 1 292 |
| Debt securities in issue | 8 644 | 1 527 | 14 603 | 3 812 | 41 | 28 627 |
| – measured at amortized cost | 8 644 | 1 527 | 14 603 | 3 812 | 41 | 28 627 |
| Subordinated liabilities | 2 731 | – | – | – | – | 2 731 |
| Other financial liabilities | 1 906 | 13 | 337 | 65 | 43 | 2 364 |
| Provisions for financial liabilities and guarantees granted | 169 | 2 | 54 | 1 | 1 | 227 |
| Total financial liabilities | 234 520 | 3 468 | 30 879 | 11 436 | 2 888 | 283 191 |
| Financing and guarantee liabilities granted | 50 798 | 150 | 5 804 | 2 601 | 459 | 59 812 |
| Currency structure 31.12.2017 |
Foreign currencies translated into PLN | |||||
|---|---|---|---|---|---|---|
| PLN | CHF | EUR | USD | Others | Total | |
| Cash and balances with the Central Bank | 16 491 | 78 | 733 | 191 | 317 | 17 810 |
| Amounts due from banks | 1 020 | 16 | 2 282 | 957 | 958 | 5 233 |
| Hedging derivatives | 886 | – | 1 | – | – | 887 |
| Other derivative instruments | 1 556 | 2 | 116 | 37 | – | 1 711 |
| Securities | 51 457 | 893 | 1 008 | 557 | 160 | 54 075 |
| – held for trading | 292 | 137 | 2 | – | 431 | |
| – financial instruments designated at fair value through profit or loss upon initial recognition | 6 920 | 893 | 274 | – | 70 | 8 157 |
| – available-for-sale investment securities | 42 582 | – | 595 | 408 | 90 | 43 675 |
| – investment securities held to maturity | 1 663 | – | 2 | 147 | – | 1 812 |
| Loans and advances to customers – at amortised cost | 166 395 | 23 914 | 12 842 | 1 537 | 940 | 205 628 |
| Other financial assets | 2 242 | – | 99 | 21 | 15 | 2 377 |
| Total financial assets | 240 047 | 24 903 | 17 081 | 3 300 | 2 390 | 287 721 |
| Amounts due to the Central Bank | 6 | – | – | – | – | 6 |
| Amounts due to banks | 817 | 1 104 | 2 488 | 90 | 59 | 4 558 |
| Hedging derivatives | 172 | 3 | 29 | – | – | 204 |
| Other derivative instruments | 2 321 | (1) | 156 | 60 | – | 2 536 |
| Amounts due to customers | 192 457 | 1 872 | 16 005 | 7 583 | 3 000 | 220 917 |
| Liabilities in respect of insurance activities | 882 | – | – | – | – | 882 |
| Debt securities in issue | 6 905 | 1 427 | 12 070 | 3 530 | – | 23 932 |
| – measured at amortized cost | 6 905 | 1 427 | 12 070 | 3 530 | – | 23 932 |
| Subordinated liabilities | 1 720 | – | – | – | – | 1 720 |
| Other financial liabilities | 3 599 | 1 | 396 | 99 | 34 | 4 129 |
| Provisions for financial liabilities and guarantees granted | 63 | 1 | 20 | 2 | – | 86 |
| Total financial liabilities | 208 942 | 4 407 | 31 164 | 11 364 | 3 093 | 258 970 |
| Financing and guarantee liabilities granted | 47 475 | 157 | 4 386 | 1 922 | 671 | 54 611 |