9. Interest income and expenses
Accounting policies
Interest income and expenses comprise interest, including premiums and discounts in respect of financial instruments measured at amortized cost and instruments measured at fair value. Interest income includes interest income on hedging derivatives. Interest income and expenses also include fees and commissions received and paid, which are deferred using the effective interest rate and which are taken into account in the measurement of the financial instrument.
Interest income and expense is recognized on an accruals basis using the effective interest rate which discounts the estimated future cash flows throughout the life of the financial asset or financial liability to the gross amount in respect of assets and to amortized cost in respect of financial liabilities, with the following exception:
2018
- purchased or originated assets impaired due to credit risk (POCI). Interest income on POCI assets is calculated on the net carrying amount using the effective interest rate adjusted by credit risk recognized over the life of the asset;
- financial assets which were not POCI assets, impaired due to credit risk, which then became credit impaired financial assets. Interest income on POCI assets is calculated on the net carrying amount using the original effective interest rate from the moment of recognizing premises for impairment of the asset.
Calculation of the effective interest rate includes all commissions paid and received by parties to an agreement, transaction costs and all other premiums and discounts constituting an integral part of the effective interest rate.
The effect of the fair value measurement of financial assets acquired as part of business combinations between subsidiaries is also recognized in interest income.
Interest and expenses resulting from sales of insurance products linked to loans and advances
Due to the fact that the Group offers insurance products along with loans, advances and lease products and there is no possibility of purchasing an insurance product from the Group that is identical as to the legal form, conditions and economic content without purchasing a loan, an advance or a lease product, the payments received by the Group for the insurance products sold are treated as an integral part of the remuneration for the financial instruments offered.
Remuneration received and receivable by the Group for offering insurance products for the products directly associated with the financial instruments is settled using the effective interest rate method and recognized in interest income and in the part corresponding to the performance of the agency service, if the insurer is a Group company, it is accounted for using the straight line method during the term of the insurance product and is recognized as commission income.
Remuneration is divided into the commission portion and the interest portion based on the proportion of the fair value of the financial instrument and the fair value of the intermediation service to the sum of these two values, in accordance with the relative fair value model comprising a range of different parameters, including the average effective interest rate on the financial instrument, the average contractual and economic (actual) lending or lease period, the average insurance premium amount, the term of the insurance policy, the independent insurance agent’s commission.
Measurement of the fair value of a financial instrument is based on the income-based approach, involving the conversion of future cash flows to their present value using a discount rate consisting of a risk-free rate determined in relation to the average yield on 5-year and 10-year bonds in the past year, the risk premium determined in relation to the annual costs of credit risk and exceeding the credit risk premium, which reflects all other factors that the market participants would take into account in the fair value measurement under the current circumstances.
On the other hand, the fair value of the insurance intermediation service is measured in accordance with the market approach, which is based on prices and other information generated by identical or comparable market transactions.
Costs directly related to the sale of insurance products are settled in a similar manner to the settlement of revenues, i.e. as part of the amortized cost of a financial instrument or on a one-off basis.
The Group makes periodical estimations of the remuneration amount that will be recoverable in the future due to the early termination of the insurance contract based on historical data on premiums collected and refunds made. The provision for future refunds is allocated to the financial instrument and insurance service in accordance with the relative fair value model.
The Group verifies the correctness of the parameters used in the relative fair value model and the ratio of the provision for refunds each time it learns about significant changes in this respect, not less frequently, however, than once a year.
Financial information
| Interest income on: | 2018 |
2017 |
|||
|---|---|---|---|---|---|
| Interest income on financial instruments measured at amortized cost | Interest income on instruments measured at fair value through OCI | Income similar to interest income on instruments at fair value through profit or loss | Total | ||
| loans to and other receivables from banks | 92 | – | – | 92 | 136 |
| hedging derivatives | – | – | 355 | 355 | 322 |
| debt securities1 | 202 | 1 135 | 74 | 1 411 | 1 278 |
| loans and advances to customers1 | 9 692 | – | 44 | 9 736 | 9 183 |
| Total | 9 986 | 1 135 | 473 | 11 594 | 10 919 |
| of which: interest income on impaired financial instruments | 294 | 13 | – | 307 | 270 |
1 The result on the non-significant modification of PLN (17) million is recognized in ‘debt secutities’ and ‘loans and advances to customers’.
| Interest expense on: | 2018 | 2017 | |||
|---|---|---|---|---|---|
| Interest expense on financial instruments measured at amortized cost | Interest expense on instruments measured at fair value through OCI | Costs similar to interest expense on instruments at fair value through profit or loss | Total | ||
| amounts due to banks (excluding loans and advances recelved) | (36) | – | – | (36) | (22) |
| loans and advances received | (27) | – | – | (27) | (138) |
| amounts due to customers (excluding loans and advances) | (1 532) | – | – | (1 532) | (1 599) |
| debt securities: | (5) | (53) | (18) | (76) | (90) |
| debt securities issued | (486) | – | – | (486) | (398) |
| subordinated liabilities | (84) | – | – | (84) | (66) |
| Total | (2 170) | (53) | (18) | (2 241) | (2 313) |
| Interest income by segment: | 2018 | |||
|---|---|---|---|---|
| Retail segment | Corporate and investment segment |
Transfer centre and other |
Total | |
| loans to and other receivables from banks | – | 92 | – | 92 |
| hedging derivatives | – | – | 355 | 355 |
| debt securities | 15 | 1 380 | 16 | 1 411 |
| loans and advances to customers | 7 821 | 1 915 | – | 9 736 |
| Total | 7 836 | 3 387 | 371 | 11 594 |