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Annual
Report 2022

46.9. Fair value of financial assets and liabilities

[Financial notes are presented in PLN thousand]

Financial instruments that are measured at fair value in the consolidated statement of financial position of the Group

The measurement of fair value of Over-the-counter (‘OTC’) derivatives and instruments with limited liquidity (i.e. for which no market quotations are available), is made on the basis of other instruments quotations on active markets by replication thereof using a number of valuation techniques, including the estimation of present value of future cash flows (mark-to- model).

As of 31 December 2022 and 31 December 2021, the Group classified the financial assets and liabilities measured at fair value into the following hierarchy of three categories based on the following hierarchy:

  • Level 1: mark-to-market, applies to securities quoted on active markets,
  • Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to illiquid government, municipal, corporate and central bank debt securities, linear and non-linear derivative instruments of interest rate markets (including forward transactions on debt securities), equity, commodity and foreign currency exchange markets, except for those cases that meet the criteria of Level 3,
  • Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, applicable to loans and advances, corporate and municipal debt securities and for linear and non-linear derivative instruments of interest rate, equity, commodity and foreign currency exchange markets for which unobservable parameters (e.g. credit risk factors) are recognized as significant.

The measurement at fair value is performed directly by an organizational unit within Risk Management Division, independent of front-office units. The methodology of fair value measurement, including the changes of its parameterization, is subject to approval of Assets and Liabilities Committee (ALCO). The adequacy of measurement methods is subject to on-going analysis and periodical reviews in the framework of model risk management. The same Risk Management Division unit performs the assessment of adequacy and significance of risk factors and assignment of valuation models to appropriate method class, according to established hierarchy of classification

Assets and liabilities measured at fair value in breakdown by fair value hierarchy levels

31.12.2022 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
Assets: 7 465 923 21 519 315 5 410 349 34 395 587
Financial assets held for trading 722 442 110 276 96 739 929 457
Derivative financial instruments, including: 15 088 624 292 15 088 916
Banks 2 889 685 292 2 889 977
Customers 12 198 939 12 198 939
Hedging instruments, including: 279 589 279 589
Banks 118 577 118 577
Customers 161 012 161 012
Securities measured at fair value through other comprehensive income 6 743 481 6 040 826 4 688 512 17 472 819
Securities measured at fair value through profit or loss 187 189 187 189
Loans and advances to customers measured at fair value through other comprehensive income 253 697 253 697
Loans and advances to customers measured at fair value through profit or loss 183 920 183 920
Liabilities: 874 591 18 697 902 19 572 493
Financial liabilities held for trading 874 591 874 591
Derivative financial instruments, including: 15 521 489 15 521 489
Banks 3 703 464 3 703 464
Customers 11 818 025 11 818 025
Hedging instruments, including: 3 176 413 3 176 413
Banks 125 949 125 949
Customers 3 050 464 3 050 464
31.12.2021 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
Assets: 8 538 322 17 905 364 5 859 840 32 303 526
Financial assets held for trading 225 288 229 541 94 433 549 262
Derivative financial instruments, including: 7 922 679 5 860 7 928 539
Banks 1 559 398 5 860 1 565 258
Customers 6 363 281 6 363 281
Hedging instruments, including: 78 216 78 216
Banks 63 402 63 402
Customers 14 814 14 814
Securities measured at fair value through other comprehensive income 8 313 034 9 674 928 5 181 843 23 169 805
Securities measured at fair value through profit or loss 171 496 171 496
Loans and advances to customers measured at fair value through other comprehensive income 245 829 245 829
Loans and advances to customers measured at fair value through profit or loss 160 379 160 379
Liabilities: 639 733 10 191 075 10 830 808
Financial liabilities held for trading 639 733 639 733
Derivative financial instruments, including: 7 969 343 7 969 343
Banks 1 251 678 1 251 678
Customers 6 717 665 6 717 665
Hedging instruments, including: 2 221 732 2 221 732
Banks 836 833 836 833
Customers 1 384 899 1 384 899

Change in fair value of financial assets measured at fair value according to Level 3 by the Group

2022 FINANCIAL ASSETS HELD FOR TRADING DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME DERIVATIVE FINANCIAL INSTRUMENTS (LIABILITIES)
Opening balance 94 433 5 860 245 829 160 379 171 496 5 181 843
Increases, including: 1 110 681 849 165 052 56 009 1 536 071
Reclassification from other levels 13 962 849 1 117 713
Transactions made in 2022 52 772
Acquisition/Granting 1 093 759 151 248 233 859
Settlement/Redemption
Gains on financial instruments 2 960 13 804 3 237 15 693 184 499
recognized in the income statement 2 960 13 804 3 237 15 693 181 521
recognized in revaluation reserves 2 978
Decreases, including: (1 108 375) (6 417) (157 184) (32 468) (2 029 402)
Reclassification to other level (64 970) (1 455) (940 106)
Settlement/Redemption (13 000) (3 044) (150 974) (471 874)
Sale/Repayment (1 030 348) (301 526)
Losses on financial instruments (57) (1 918) (6 210) (32 468) (315 896)
recognized in the income statement (57) (1 918) (32 468) (65 036)
recognized in revaluation reserves (6 210) (250 860)
Closing balance 96 739 292 253 697 183 920 187 189 4 688 512
Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: (371) (557) (7 128) 3 101 (269 081)
Income statement: (371) (557) 817 3 101 26 144
net interest income 13 2 295 2 439 19 142
net allowances for expected credit losses (1 478) 7 002
result on financial assets and liabilities held for trading (384) (557) 662
Other comprehensive income (7 945) (295 225)
2021 FINANCIAL ASSETS HELD FOR TRADING DERIVATIVE FINANCIAL INSTRUMENTS (ASSETS) LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME LOANS AND ADVANCES TO CUSTOMERS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME DERIVATIVE FINANCIAL INSTRUMENTS (LIABILITIES)
Opening balance 43 532 1 712 1 475 055 187 001 160 486 10 490 998
Increases, including: 5 940 649 11 973 96 431 764 11 010 4 046 238 4 390
Increase due to acquisition of part of Idea Bank S.A. activity 4 453 85 309 4 390
Reclassification from other levels 32 977 788 236
Transactions made in 2021 52 830 764
Acquisition/Granting 5 904 973 3 050 445
Settlement/Redemption
Gains on financial instruments 2 699 7 520 43 601 11 010 122 248
recognized in the income statement 2 649 7 520 43 601 11 010 119 579
recognized in revaluation reserves 50 2 669
Decreases, including: (5 889 748) (7 825) (1 325 657) (27 386) (9 355 393) 4 390
Reclassification to other level (209) (298 662) 3 696
Settlement/Redemption (21 729) (7 825) (1 099 062) (23 634) (4 357 890) 694
Sale/Repayment (5 856 240) (203 000) (4 654 666)
Losses on financial instruments (11 570) (23 595) (3 752) (44 175)
recognized in the income statement (3 752) (125)
recognized in revaluation reserves (11 570) (23 595) (44 050)
Closing balance 94 433 5 860 245 829 160 379 171 496 5 181 843
Unrealized income from financial instruments held in portfolio at the end of the period, recognized in: (11 304) 2 102 (5 376) (3 782) (233 588)
Income statement: (11 304) 2 102 4 (3 782) 10 990
net interest income 486 1 494 273 14 456
net allowances for expected credit losses (1 490) (3 466)
result on financial assets and liabilities held for trading (11 790) 2 102 (4 055)
Other comprehensive income (5 380) (244 578)

Transfers of instruments between fair value hierarchy levels are based on changes in availability of active market quotations at the end of the reporting periods.

In the period from 1 January to 31 December 2022 the following transfers of financial instruments between the levels of the fair value hierarchy were made:

  • from Level 3 to Level 2: corporate bonds which were valued based on information on the prices of comparable financial instruments, corporate and municipal bonds with immaterial impact of the estimated credit parameters on the valuation and capital market derivative instruments for which impact of the unobservable factor (correlation) on the valuation was immaterial,
  • from Level 2 to Level 3: municipal and corporate bonds, for which impact of estimated credit parameters was material, government bonds with material impact of estimated spread to benchmark bond and capital market derivative instruments with material impact of the estimated factor (correlation) on the valuation.

Sensitivity analysis

The impact of estimated parameters on measurement of financial instruments for which the Bank applies fair value valuation according to Level 3 as at 31 December 2022 is as follows:

FINANCIAL ASSET/LIABILITY FAIR VALUE AS AT 31.12.2022 VALUATION TECHNIQUE UNOBSERVABLE FACTOR ALTERNATIVE FACTOR RANGE (WEIGHTED AVERAGE ) IMPACT ON FAIR VALUE AS AT 31.12.2022
POSITIVE SCENARIO NEGATIVE SCENARIO
Corporate and municipal debt securities 4 474 326 Discounted cash flow Credit spread 1.52%-2.62% 94 198 (94 198)
Derivatives 292 Black Scholes Model Variability 2.7%-4.1% 108 (91)
Loans and advances measured at fair value through profit or loss 183 920 Discounted cash flow Credit spread 1.45%-2.55% 4 820 (4 544)
Loans and advances measured at fair value through other comprehensive income 253 452 Discounted cash flow Credit spread 2.84%-3.94% 3 806 (3 743)
FINANCIAL ASSET/LIABILITY FAIR VALUE AS AT 31.12.2022 PARAMETR SCENARIO IMPACT ON FAIR VALUE AS AT 31.12.2022
POSITIVE SCENARIO NEGATIVE SCENARIO
Equity instruments mandatorily measured at fair value through profit or loss 187 189 Conversion discount +10% / -10% 5 257 (19 770)
Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income 269 551 Discount rate +1% / -1% 31 916 (25 585)

The impact of estimated parameters on measurement of financial instruments for which the Bank applies fair value valuation according to Level 3 as at 31 December 2021 is as follows:

FINANCIAL ASSET/LIABILITY FAIR VALUE AS AT 31.12.2021 VALUATION TECHNIQUE UNOBSERVABLE FACTOR ALTERNATIVE FACTOR RANGE (WEIGHTED AVERAGE ) IMPACT ON FAIR VALUE AS AT 31.12.2021
POSITIVE SCENARIO NEGATIVE SCENARIO
Corporate and municipal debt securities 4 872 851 Discounted cash flow Credit spread 0.55%-1.45% 241 334 (258 585)
Government bonds 27 481 Discounted cash flow Spread to benchmarking bond 0.07%-0.69% 1 467 (1 467)
Derivatives 5 860 Black Scholes Model Variability 3.2%-4.8% 1 177 (972)
Loans and advances measured at fair value through profit or loss 160 379 Discounted cash flow Credit spread 0.73%-1.66% 2 332 (2 279)
Loans and advances measured at fair value through other comprehensive income 245 829 Discounted cash flow Credit spread 4.15%-5.07% 2 219 (2 188)
FINANCIAL ASSET FAIR VALUE AS AT 31.12.2021 PARAMETR SCENARIO IMPACT ON FAIR VALUE AS AT 31.12.2021
POSITIVE SCENARIO NEGATIVE SCENARIO
Equity instruments mandatorily measured at fair value through profit or loss 171 496 Conversion discount +10% / -10% 9 504 (19 050)
Equity instrument in entity providing credit information designated for measurement at fair value through other comprehensive income 323 277 Discount rate +1% / -1% 56 123 (41 436)

Financial instruments that are not measured at fair value in the consolidated statement of financial position of the Group

The Group also holds financial instruments which are not presented at fair value in the financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

As of 31 December 2022 and 31 December 2021, the Group classified the financial assets and liabilities not measured at fair value in the consolidated statement of financial position into the following three categories based on the valuation level:

  • Level 1: mark-to-market, applies to government securities quoted on the liquid market and cash,
  • Level 2: mark-to-model valuation with model parameterization, based on quotations from active markets for given type of instrument, applies to interbank deposits, own issues, illiquid government, municipal, corporate and central bank debt securities,
  • Level 3: mark-to-model valuation with partial model parameterization, based on estimated risk factors, is applicable to corporate and municipal debt securities and loans and deposits for which the applied credit risk factor (an unobservable parameter) is recognized significant.

In case of certain groups of financial assets, recognized at the amount to be received with impairment considered, the fair value was assumed to be equal to carrying amount. The above applies in particular to cash and other financial assets and liabilities.

In the case of loans for which no quoted market values are available, the fair values presented are generally estimated using valuation techniques taking into consideration the assumption, that at the moment when the loan is granted its fair value is equal to its carrying amount. Fair value of non-impaired loans is equal to the sum of future expected cash flows, discounted at the balance sheet date, less expected credit loss. The discount rate is defined as the appropriate market risk-free rate plus the liquidity risk margin and current sales margin for the given loan products group. The margin is computed on loans granted broken down by loan product groups and maturity.

For the purpose of the fair value of foreign currency loans estimation, the margin on PLN loans adjusted by the cross- currency basis swap quotes and FX-Swap is used. The fair value of impaired loans is defined as equal to the sum of expected recoveries, discounted with the use of effective interest rate, since the average expected recovery values take the element of credit risk fully into consideration. In case of loans without repayment schedule (loans in current account, overdrafts and credit cards), the fair value was assumed as equal to the carrying amount.

Since no quoted market prices are available for deposits, their fair values have been generally estimated using valuation techniques with the assumption that the fair value of a deposit at the moment of its receipt is equal to its carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows, discounted at the relevant balance sheet date. The cash flow discount rate is defined as the relevant market risk-free rate, increased by the sales margin. The margin is computed on deposits acquired during last three months broken down by deposit product groups and maturity. In case of short term deposits (current deposits, overnights, saving accounts), the fair value was assumed as equal to the carrying amount.

The fair value of deposits and loans, apart from mortgage loans denominated in PLN and CHF for which prepayment model is used, is calculated based on contractual cash flows.

The mark-to-model valuation of own issue debt instruments is based on the method of discounting the future cash flows. Variable cash flows are estimated based upon rates adopted for specific markets (depending upon issue specifications). Both the fixed and implied cash flows are discounted using interbank money market rates.

Assets and liabilities not measured at fair value in the financial statement in breakdown by fair value hierarchy levels

31.12.2022 CARRYING AMOUNT FAIR VALUE OF WHICH:
LEVEL 1 LEVEL 2 LEVEL 3
Assets
Cash and due from Central Bank 13 436 334 13 388 622 4 316 728 9 071 786 108
Loans and advance to banks 4 678 613 4 677 978 1 860 129 2 817 849
Loans and advances to customers measured at amortised cost 158 283 373 159 314 361 1 337 427 157 976 934
Debt securities measured at amortised cost 62 655 238 57 691 500 25 676 904 29 210 619 2 803 977
Other assets 1 951 807 1 951 807 1 951 807
Total Assets 241 005 365 237 024 268 29 993 632 41 479 961 165 550 675
Liabilities
Amounts due to Central Bank
Amounts due to other banks 8 594 396 8 627 193 1 417 321 7 209 872
Amounts due to customers 210 747 090 210 551 859 210 551 859
Debt securities issued 10 337 485 10 315 091 10 315 091
Subordinated liabilities 2 789 132 2 788 412 2 788 412
Other liabilities 4 894 444 4 894 444 4 894 444
Total Liabilities 237 362 547 237 176 999 14 520 824 222 656 175
31.12.2021 CARRYING AMOUNT FAIR VALUE OF WHICH:
LEVEL 1 LEVEL 2 LEVEL 3
Assets
Cash and due from Central Bank 4 696 620 4 696 695 3 699 683 997 012
Loans and advance to banks 3 328 087 3 334 784 1 476 248 1 858 536
Loans and advances to customers measured at amortised cost 158 822 548 157 567 855 969 694 156 598 161
Debt securities measured at amortised cost 44 276 101 41 828 431 22 436 197 2 700 086 16 692 148
Other assets 1 086 984 1 086 984 1 086 984
Total Assets 212 210 340 208 514 749 26 135 880 6 143 040 176 235 829
Liabilities
Amounts due to Central Bank
Amounts due to other banks 8 575 469 8 591 675 3 110 410 5 481 265
Amounts due to customers 195 161 943 194 824 190 194 824 190
Debt securities issued 5 355 355 5 350 726 5 350 726
Subordinated liabilities 2 761 474 2 747 964 2 747 964
Other liabilities 3 105 291 3 105 291 3 105 291
Total Liabilities 214 959 532 214 619 846 11 209 100 203 410 746

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