29. Hedge accounting

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PKO Annual
Report Online
2020

Risk management strategy

The Group applies hedge accounting to hedge its interest rate risk and foreign exchange risk. The hedging transactions are concluded to mitigate the risk of incurring losses as a result of unfavourable changes in foreign currency exchange rates and interest rates. Cash flows related to the transactions performed and the fair value of assets held are hedged.

The interest rate risk covers in particular:

  • the risk related to the repricing (change in interest rates) frequency and dates mismatch of the assets and liabilities, and of off-balance sheet items (repricing date mismatch risk);
  • the risk following from the change in the angle of inclination and shape of the yield curve (yield curve risk);
  • the risk resulting from an imperfect match between the reference rates used in respect of banking products and the changes in the market rates, or from imperfect transmission systems of changes in market interest rates on those products (base risk);
  • risks resulting from options, including embedded options, e.g. restrictions on interests on loans (option risk).

The Group’s foreign exchange risk arises as a result of transactions performed under:

  • core business activities;
  • trading activities;
  • contracts concluded by the Group which generate foreign exchange risk.

Foreign exchange risk arising from the Group’s activities is managed, where required, by specialized units as part of their own operations based on the data received on open currency positions.

A system of threshold values and limits attributed to particular interest and foreign exchange risks is in force at the Group, aimed at determining the maximum allowable risk level which ensures that the strategic tolerance limits are not exceeded.

Accounting policies

The Group decided to further apply the provisions of IAS 39 and did not apply IFRS 9 in respect of hedge accounting.

Cash flow hedges

Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognized directly in other comprehensive income in respect of the portion constituting the effective portion of the hedge. The ineffective portion of a hedge is recognized in the income statement in the item “Gains/(losses) on financial transactions” or “Foreign exchange gains (losses)”.

Amounts transferred directly to other comprehensive income are transferred to the income statement in the same period or periods in which the hedged planned transaction affects the income statement. Interest and foreign exchange gains/losses are presented in the income statement, in “Net interest income” and “Net foreign exchange gains (losses)”, respectively.

The effectiveness tests comprise the measurement of hedging transactions net of interest accrued and foreign exchange gains (losses) on the nominal value of the hedging transactions (in the case of CIRS transactions).

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.

Fair value hedges

Changes in the fair value of a derivative hedging instrument designated as fair value hedge are recognized in “Gains/(losses) on financial transactions”, net of the interest component. The interest component is presented in the same line item as interest income on the hedged item, i.e. in “Net interest income”.

A change in the fair value adjustment to the hedged item is recognized in “Gains/(losses) on financial transactions”.

The part of the fair value adjustment which is not hedged is recognized:

  • for a hedged item which is a financial asset or a financial liability classified as measured at fair value through profit or loss – as income or costs, as appropriate, in gains/(losses) on financial transactions;
  • for a hedged item which is a financial asset measured at fair value through other comprehensive income – in other comprehensive income, where the change in the fair value of financial instruments measured at fair value through other comprehensive is presented.

The effectiveness tests comprise the measurement of hedging transactions net of accrued interest.

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.

Types of hedging strategies applied by the Group

As at 31 December 2020, the Group had had active relationships as part of:

  • 6 strategies for hedging cash flow volatility
  • 4 strategies for hedging fair value volatility.

In 2020 the Group introduced new hedging strategies:

    • “Hedging fair value volatility of fixed-interest-rate securities in PLN, measured at fair value through other comprehensive income, resulting from the interest rate risk, using IRS transactions”;
    • “Hedging cash flow volatility of floating interest rate convertible currency loans arising from interest rate and foreign exchange risk, as well as hedging cash flow volatility of financial liabilities in convertible currencies arising from foreign exchange risk, using CIRS transactions.”

In 2020, the Group closed two relationships under the hedging strategy “Hedging cash flow volatility of floating interest rate convertible currency loans arising from interest rate and foreign exchange risk, as well as hedging cash flow volatility of fixed interest financial liabilities in convertible currencies arising from foreign exchange risk, using CIRS transactions”, due to having no such hedged items. The total effect of discontinuing to apply hedge accounting as part of these relationships on other comprehensive income amounted to PLN 33 million, and net interest income increased by the same amount.

In 2020, the Group closed, as a result of invalidation, a relationship under the hedging strategy “Hedging the fluctuations in the fair value of fixed-interest-rate securities in PLN, measured at fair value through other comprehensive income, resulting from the interest rate risk, using IRS transactions”; the effect of discontinuation of hedge accounting as part of the said relationship on the profit or loss amounted to PLN (-7.7) million.

In 2020, the Group closed, as a result of failing to pass the prospective test of sufficient nominal amount, a relationship under the hedging strategy “Hedging cash flow volatility of floating interest loans in EUR, resulting from the risk of fluctuations in interest rates, using IRS transactions”. The effect of the discontinuation of hedge accounting as part of the said relationship on the profit or loss amounted to PLN 0.6 million.

In 2020, the Group terminated, as a result of the derecognition of the hedged item, the hedging relationships under the hedging strategies:

  • Hedging the volatility of cash flows of floating rate CHF loans, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of term deposits negotiated in PLN, resulting from the risk of changes in interest rates, using CIRS transactions;
  • Hedging the volatility of cash flows of loans in convertible currencies with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of a financial liability in a convertible currency with a fixed interest rate, resulting from currency risk, using CIRS transactions;
  • Hedging the volatility of cash flows of loans in convertible currencies with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging of the volatility of cash flows of a financial liability in a convertible currency with a fixed interest rate, resulting from currency risk, using transactions: CIRS;
  • Hedging the volatility of cash flows of convertible currency loans with a variable interest rate, resulting from the risk of changes in interest rates and currency risk, and hedging the volatility of cash flows of financial liabilities in a convertible currency, resulting from the currency risk, with the use of CIRS transactions.

The total impact of the discontinuation of hedge accounting under the above-mentioned the relationship to other comprehensive income amounted to minus PLN 213 million, with the simultaneous increase in the net interest income and foreign exchange gains/ (losses) by this amount.

No changes were made to other hedging strategies in 2020.

In 2019, the Group introduced two new hedging strategies for fair value hedges.

The tables below summarize the types of strategies applied by the Group.

Type of hedging strategy Cash flow hedges (Strategy no: 1,2,3,4,5,6,7,9,13)
Hedged risk foreign exchange risk and interest rate risk interest rate risk
Hedging instrument transactions CIRS float – float

transactions CIRS fixed – float

IRS fixed – float transactions
Hedged item
  • the portfolio of floating interest loans in foreign currencies and
  • the portfolio of current negotiated term deposits, including their future renewals. In designating the hedged item, the Bank used the IAS39 AG 99C in the version adopted by the European Union, or
  • fixed interest rate financial liability denominated in foreign currency or
  • the portfolio of floating interest rate regular savings products in PLN, or
  • financial liabilities in foreign currencies
Sources of hedge ineffectiveness
  • margin on the hedging instrument
  • differences in discount on the hedged item and the hedging instrument
  • CVA/DVA adjustment of the hedging instrument
The period in which cash flows are expected to occur and affect the financial results: January 2021 – October 2026 The period in which cash flows are expected to occur and affect the financial results: January 2021 – May 2030

 

Type of hedging strategy Fair value hedges (Strategy no: 8,10,11,12)
Hedged risk interest rate risk
Hedging instrument IRS fixed – float transactions
Hedged item a component of the interest rate risk relating to a fixed interest rate loan or security in a foreign currency or in PLN, which corresponds to the market IRS rate
Sources of hedge ineffectiveness
  • change in market parameters between the moment of determining the terms and conditions relating to the hedged item and the moment of concluding the hedge
  • CVA/DVA adjustment of the hedging instrument
  • difference between the present value of the floating leg of IRS and the present value of the nominal value of a security

HEDGED ITEM 31.12.2020 CARRYING AMOUNT OF THE HEDGED ITEM ITEM IN THE STATEMENT OF FINANCIAL POSITION CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM STRATEGY NO.
Cash flow hedges
Loans in CHF 525 Loans and advances to customers 280  1
Negotiated deposits in PLN 1 939 Amounts due to customers
Loans in CHF 400 Loans and advances to customers (2) 3
Loans in PLN 2 963 Loans and advances to customers (287) 9
Financial liability in EUR 699 Debt securities in issue
Loans in PLN 66 008 Loans and advances to customers (399) 2
Loans in EUR 75 Loans and advances to customers 15  6
Negotiated deposits in PLN 328 Amounts due to customers
Loans in EUR 1 228 Loans and advances to customers (9) 3; 4
Fair value hedges
Security in EUR 30 Securities measured at amortized cost 1 10
Security in EUR 102 Securities measured at fair value through other comprehensive income 1 11
Security in USD 158 Securities measured at fair value through other comprehensive income 5 11
Loans in EUR 174 Loans and advances to customers 1  8
Security in PLN 535 Securities measured at fair value through other comprehensive income 17 12
Total (377)

HEDGED ITEM 31.12.2019 CARRYING AMOUNT OF THE HEDGED ITEM ITEM IN THE STATEMENT OF FINANCIAL POSITION CHANGE IN THE FAIR VALUE OF THE HEDGED ITEM STRATEGY NO.
Cash flow hedges
Loans in CHF 1 025 Loans and advances to customers 391 1
Negotiated deposits in PLN 3 653 Amounts due to customers
Loans in CHF 3 385 Loans and advances to customers 96 5
Financial liability in USD 875 Debt securities in issue
Financial liability in EUR 2 301 Debt securities in issue
Loans in CHF 225 Loans and advances to customers 7 7
Regular savings products in PLN 872 Amounts due to customers
Loans in CHF 400 Loans and advances to customers (2) 3
Loans in PLN 2 964 Loans and advances to customers (67) 9
Financial liability in EUR 699 Debt securities in issue
Loans in PLN 40 783 Loans and advances to customers (58) 2
Loans in EUR 100 Loans and advances to customers (10) 6
Negotiated deposits in PLN 437 Amounts due to customers
Loans in EUR 1 224 Loans and advances to customers (7) 3;4
Fair value hedges
Security in EUR 30 Securities measured at amortized cost 10
Security in EUR 44 Securities measured at fair value through other comprehensive income 11
Security in USD 134 Securities measured at fair value through other comprehensive income (1) 11
Loans in EUR 183 Loans and advances to customers 1 8
Total 350

Hedging derivative 31.12.2020

Nominal amount of hedging derivatives

Nominal-weighted average margin / Nominal-weighted average fixed interest rate Carrying amount (fair value of hedging instruments) Ineffective portion of cash flow hedges recognized in the income statements / Fair value adjustment to the hedged item Change in the fair value of hedging instruments since designation Strategy no.
Assets Liabilities
Cash flow hedges
CIRS CHF/PLN float CHF 525 -0,0108% 293 (1) (277) 1; 7
float PLN 1 939 0,0000%
IRS PLN fixed –float PLN 66 008 1,7924% 598 8 3 406  2
IRS CHF fixed –float CHF 400 -0,4425% 6 1  3
IRS EUR fixed –float EUR 1 228 -0,1479% 22 6 8  3; 4
CIRS EUR/PLN float EUR 75 0,0000% 17 (1) (14) 6
float PLN 328 -0,0500%
CIRS PLN/EUR float PLN 2 963 0,0000%  332 21 3 290  9
fixed EUR 699 0,6177%
Fair value hedges
IRS EUR fixed –float EUR 306 -0,2837% 13 13 (8) 8; 10; 11
IRS USD fixed –float USD 158 -0,3465% 2 17 (1) 11
IRS PLN fixed –float PLN 535 1,3735% 20 17 (17) 12
Total 958 378 51 389

Hedging derivative 31.12.2019

Nominal amount of hedging derivatives

Nominal-weighted average margin / Nominal-weighted average fixed interest rat Carrying amount (fair value of hedging instruments) Ineffective portion of cash flow hedges recognized in the income statements / Fair value adjustment to the hedged item Change in the fair value of hedging instruments since designation Strategy no.
Assets Liabilities
Cash flow hedges
CIRS CHF/PLN float CHF 1 250 0,0024% 14 378 1 (379) 1;7
float PLN 4 524 0,0000%
IRS PLN fixed –float PLN 40 783 2,2972% 239 8 2 63 2
IRS CHF fixed –float CHF 400 -0,4425% 8 2 3
IRS EUR fixed –float EUR 1 224 -0,1699% 15 2 6 3;4
CIRS CHF/USD float CHF 818 0,0000% 189 (2) 124 5
fixed USD 875 2,4315%
CIRS CHF/EUR float CHF 2 567 0,0000% 86 186 (16) (220) 5
fixed EUR 2 301 0,2958%
CIRS EUR/PLN float EUR 100 0,0000% 11 11 6
float PLN 437 -0,0277%
CIRS PLN/EUR float PLN 2 964 0,0000% 79 8 (7) 67 9
fixed EUR 699 0,6177%
Fair value hedges
IRS EUR fixed –float EUR 257 -0,1874% 1 6 4 (1) 8;10;11
IRS USD fixed–float USD 134 1,5702% 3 1 (2) 1 11
Total 645 589 (20) (326)

Financial information

CARRYING AMOUNT OF HEDGING INSTRUMENTS 31.12.2020 31.12.2019
Assets Liabilities Assets Liabilities
Cash flow hedges 958 324 641 582

interest rate risk IRS

626 14 262 10

foreign exchange risk and interest rate risk – CIRS

332 310 379 572
Fair value hedges 54 4 7

interest rate risk IRS

54 4 7
Total 958 378 645 589

Cash flow hedges

CHANGE IN OTHER COMPREHENSIVE INCOME RELATING TO CASH FLOW HEDGES AND AN INEFFECTIVE PORTION OF CASH FLOW HEDGES 2020 2019
Accumulated other comprehensive income at the beginning of the period, net 232 22
Impact on other comprehensive income during the period, gross 174 259

Gains/losses recognized in other comprehensive income during the period

911 187

Amounts transferred from other comprehensive income to the income statement, of which:

(737) 72

interest income

(780) (324)

net foreign exchange gains/(losses)

43 396
Tax effect (51) (49)
Accumulated other comprehensive income at the end of the period, net 355 232
Ineffective portion of cash flow hedges recognized in the income statements, including in: 4 (20)

Foreign exchange gains/ (losses)

1 (22)

Gain/(loss) on financial instruments measured at fair value

3 2

Fair value hedges

HEDGES OF INTEREST RATE RISK 31.12.2020 31.12.2019
Fair value measurement of the hedging derivative instrument – IRS (54) (3)

IRS fixed – float

(54) (3)
Fair value adjustment of the hedged instrument attributable to the hedged risk 46 2

Securities

5 1

Loans and advances to customers

4 4

FVOCI securities – fair value adjustment recognized in OCI

37 (3)

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY
(in original currencies)
31.12.2020
up to 1 month 1 to 3 months 3 months
to 1 year
1 to 5
years
over 5
years
Total
Hedge type: Cash flow hedges
Risk hedged: interest rate risk 
IRS PLN fixed – float       2 150       1 520     12 728     49 315          295      66 008
IRS EUR  fixed – float            –            –          500          723              4         1 227
IRS CHF  fixed – float            –            –          400            –            –           400
Risk hedged: foreign exchange and interest rate risks 
CIRS float CHF/float PLN

float CHF

           –              –            500            25            –              525

float PLN

           –              –         1 842            97            –          1 939
CIRS float EUR/float PLN

float EUR

           –            75            –            –            –              75

float PLN

           –          328            –            –            –            328
CIRS float PLN/fixed EUR

float PLN

           –            –          434       2 530            –        2 964

fixed EUR

           –            –          100          599            –           699
Hedge type: Fair value hedges
Risk hedged: interest rate risk 
IRS USD fixed – float            –            –            –          158            –            158
IRS EUR fixed – float            –            –            82          188            36           306
IRS PLN fixed – float            –            –            –            –          535            535

 

NOMINAL VALUE OF HEDGING INSTRUMENTS BY MATURITY
(in original currencies)
31.12.2019
up to 1 month 1 to 3 months 3 months
to 1 year
1 to 5 years over 5 years Total
Hedge type: Cash flow hedges
Risk hedged: interest rate risk 
IRS PLN fixed – float 500 4 700 25 492 10 031 60 40 783
IRS EUR  fixed – float 700 524 1 224
IRS CHF  fixed – float 400 400
Risk hedged: foreign exchange and interest rate risks 
CIRS float CHF/float PLN

float CHF

50 425 750 25 1 250

float PLN

169 1 456 2 811 88 4 524
CIRS fixed USD/float CHF

fixed USD

875 875

float CHF

817 817
CIRS float EUR/float PLN

float EUR

25 75 100

float PLN

108 329 437
CIRS float PLN/fixed EUR

float PLN

2 964 2 964

fixed EUR

699 699
CIRS fixed EUR/float CHF

fixed EUR

2 301 2 301

float CHF

2 567 2 567
Hedge type: Fair value hedges
Risk hedged: interest rate risk
IRS USD fixed – float 134 134
IRS EUR fixed – float 209 48 257

Calculation of estimates

ESTIMATED CHANGE IN VALUATION OF DERIVATIVE HEDGING INSTRUMENTS FOLLOWING A PARALLEL SHIFT IN YIELD CURVES: 31.12.2020 31.12.2019
scenario
+50bp
scenario
-50bp
scenario
+50bp
scenario
-50bp
IRS (531) 537 (190) 191
CIRS (119) 121 (167) 170
Total (650) 658 (357) 361

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