23. Cost of the legal risk of mortgage loans in convertible currencies

As at 31 December 2020, the Group recognized in the financial statements the impact of the legal risk associated with the portfolio of mortgage loans in convertible currencies granted to households

With regard to the pending proceedings, as at 31 December 2020, the Capital Group decreased the gross carrying amount of mortgage loans by PLN 495 million (as at 31 December 2019 – PLN 141 million). For active contracts, the Group, reflecting the changed, estimated contractual cash flows, adjusted the gross carrying amount of mortgage loans in accordance with IFRS 9 by the expected impact of potential settlements and court disputes, reducing their value by PLN 6 122 million (as at 31 December 2019 – PLN 281 million).

For loan contracts for which a liability of the Group resulting in a future cash outflow arose, the Group created a provision for potential settlements and court disputes in the amount of PLN 351 million (as at 31 December 2019 – PLN 29 million) and for pending proceedings in the amount of PLN 75 million PLN.

Additional information on the portfolio of mortgage loans in convertible currencies was presented by the Group in the notes „Legal claims” and „Risk management of foreign currency mortgage loans for individuals”

The Group has identified a risk that the planned cash flows from the portfolio of foreign currency denominated and indexed mortgage loans may not be fully recoverable and / or that a liability will arise resulting in a future cash outflow. The Group reduces the gross carrying amount of mortgage loans denominated and indexed in foreign currencies and / or creates provisions for legal risk in accordance with the requirements of IFRS 9 Financial Instruments and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The cost of legal risk was estimated taking into account a number of assumptions that materially affect the amount disclosed in the financial statements of the Group.

The costs of legal risk of mortgage loans in convertible currencies were estimated using a statistical method that takes into account the impact of customer characteristics, as the sum of the products:

• the probability of certain court settlements and the amount of loss for various dispute resolution scenarios, taking into account the current and expected number of court cases in the horizon in which the Bank is exposed to such risk, and
• the likelihood of the client accepting the settlement and the amount of the settlement loss.

The Group also estimates the probability of negative decisions regarding the reported and potential claims. These probabilities differ for indexed and foreign currency-denominated mortgage loans, respectively. In assessing these probabilities, the Group uses the support of external law firms. In the opinion of the Group, the level of the estimated costs of legal risk is also influenced by such factors as: the duration of court proceedings (also estimated on the basis of relatively short statistics that do not meet the conditions for applying quantitative methods) and the growing costs necessary to start litigation and trial support.

The Group carried out an analysis of the model’s sensitivity to changes in key parameters: