3.4.1 Credit Policy
mBank Group manages credit risk based on supervisory requirements and market best practices. Credit policy, established separately for retail banking and corporate banking, plays the key role in the credit risk management process. It includes i.a.:
3.4.2 Collateral accepted
Collateral accepted for granted credit products. The collateral policy is an important part of the credit policy. It provides that, in making a decision about granting a credit risk bearing product, the Bank strives to obtain collateral that would be adequate to the accepted risk. The quality of the proposed tangible collateral is assessed according to its liquidity and market value (or the mortgage lending value – in case of mBank Hipoteczny), and the quality of personal collateral is assessed according to the financial situation of the guarantor. Moreover, the impact of collateral on limitation of the impairment of the loan portfolio is a significant factor in the assessment of the collateral's quality. The quality of accepted collateral is correlated to the amount of the product bearing credit risk and the level of risk related to granting such a product. The collateral most frequently accepted by the Bank includes:
In the case of personal collateral (e.g. warranty, guarantee), the situation and reliability of the entity issuing such collateral is evaluated against the same standards as those applicable to the assessment of borrowers.
Tangible collaterals are evaluated in accordance with the internal rules of the Group. The value of fixed assets taken as collateral is determined on the basis of an estimate prepared by a certified expert. These estimates submitted to the Bank is verified by a team of specialists situated in the Risk Area, who verify the correctness of the market value assumptions and assess the liquidity of the collateral from the Bank’s point of view. The following factors are taken, among others, into account in the verification process:
a) for collateral on real estate:
b) for collateral on plant and machinery:
c) for collateral on inventories:
Collateral accepted for transactions in derivative instruments. The Bank manages the risk of derivative instruments. Credit exposures arising from concluded derivative transactions are managed as a part of clients’ general credit limits, taking into account potential impact of changes in market parameters on the value of the exposure. Existing master agreements with contractors obligate the Bank to monitor the value of exposure to the client on a daily basis and provide for additional collateral against the exposure to be contributed by the client if the exposure value increases or the limit is exceeded. In case of default, the master agreements provide for early settlement of the transaction with the client. mBank applies an Early Warning Process in order to monitor the usage of limits on derivatives and enables the Bank's quick reaction if client's open transaction nears the maximum limit.
Collateral on securities resulting from buy-sell-back transactions. The Bank accepts collateral in the form of securities in connection with the buy-sell-back transactions concluded. Depending on the agreement such collateral may be sold or repledged.
Collaterals accepted by the mBank Group subsidiaries. The mBank Group subsidiaries accept various forms of legal collateral of credit risk-bearing products. Their list depends on the specific nature of activities, type of offered products and transaction risk.
mBank Hipoteczny applies mortgage on the financed real estate as the basic collateral. Additional collateral may include bills of exchange or civil surety by the borrowing company’s owners, as well as pledge on shares in the borrower’s company. Loan insurance in an insurance company approved by the Bank may be accepted for a period necessary to effectively set up collateral.
mLeasing applies types of collateral that are most similar to those of mBank. It accepts both standard personal collateral – bill of exchange and civil surety, letters of comfort, guarantees and tangible collateral – ordinary and capped mortgage, registered liens, transfer of ownership of collateral, transfer of receivables and cession of receivables and rights to an insurance policy, and deposits. mLeasing also accepts declarations of voluntary submission for enforcement.
mFaktoring accepts only highly liquid collateral. Apart from own blank bills of exchange, these are mainly bill of exchange surety of the owners of the customer's company, cession of receivables from bank accounts (mainly those maintained by mBank), insurance of receivables, cession of rights from insurance policies in respect of receivables, concluded by customers. In the case of providing services to several companies belonging to one group, a customary form of collateral is a power of attorney to perform cross-settlement of agreements concluded with the particular companies.
Insurance companies, which secured their activities against credit risk, by implementing a policy of safe allocation of all resources and using comprehensive reinsurance, did not have any additional collateral for assets exposed to credit risk.
3.4.3 Rating system
The rating system is a key element of the credit risk management process in the corporate area. It consists of two main elements:
The rating produces relative credit risk measures, both as percentages (PD%, EL%) and on a conventional scale from 1.0 to 6.5 (PD-rating, EL-rating) for corporations (sales over PLN 30 million) and SMEs (sales below PLN 30 million). PD rating calculation is a strictly defined process, which comprises seven steps including: financial analysis of annual reports, financial analysis of interim figures, assessment of timeliness of presenting financial statements, analysis of qualitative risks, warning indicators, level of integration of the debtor’s group, and additional discretionary criteria. Credit rating based on expected loss (EL) is created by combining customer risk rating and transaction risk rating, which results from the value of exposure (EAD, Exposure at Default) and the character and coverage with collateral for transactions concluded with the client (LGD). LGD, described as % of EAD, is a function of possibly executed value of tangible and financial collateral and depends on the type and the value of the collateral, the type of transaction and the ratio of recovery from sources other than collateral.
The rating system generates the borrower’s probability of default directly in the form of a PD ratio, expressed as a percentage on a continuous scale. Rating classes are calculated on the basis of procedures of dividing percentage PD into groups based on geometric stepladder. In external reporting, the Bank maps the internal PD rating scale onto external ratings. The table below presents the mapping system.
|PD rating||1.0 - 1.2||1.4||1.6||1.8||2||2.2||2.4 - 2.6||2.8||3||3.2 - 3.4||3.6||3.8||4||4.2 - 4.6||4.8||5||5.2 - 5.4||5.6 - 5.8||No rating||6.1 - 6.5|
|S&P||AAA||AA+||AA. AA-||A+. A||A-||BBB+||BBB||BBB-||BB+||BB||BB-||B+||B+||B||B-||B-||CCC+||CCC down to CC-||n/a||C. D-I. D-II|
|Investment Grade||Non-Investment Grade||Default|
The following models comprised by the rating system are used in the retail banking area:
All mBank Group subsidiaries, whose operations are burdened with credit risk, before concluding an agreement and upon its performance, apply a monitoring process to estimate the risk using rating systems applied by the mBank Group. Rating systems that are used by the Group subsidiaries are due to the nature of their business; at the same time the factoring and leasing companies use the PD-rating of the customer, and the leasing company applies additionally credit rating (EL-rating). A rating based on supervisory measures (slotting approach) is applied in the case of mortgage loans and real estate leasing.
3.4.4 Monitoring and validation of models
All models of risk parameters applied in mBank and in the mBank Group subsidiaries, including, i.a., scoring models, PD models, LGD models and CCF models are subject to detailed and annual monitoring by modelling units and are validated by the mBank’s independent validation unit.
The monitoring includes tests to check discriminatory power of individual models or their components, stability over time, the materiality of individual deviations of empirical values from theoretical values and the impact on portfolio parameters. In case of identification of some mismatches, the modelling unit recalibrates the respective models.
Reports on the performed monitoring/backtests are presented to the model users and the independent validation unit.
Validation is an internal, complex process of independent and objective assessment of model operation, which, in case of the AIRB method, meets the supervisory guidelines set out in the CRR. The validation rules are set out in general in the “Model Management Policy” and described in details in other mBank’s internal regulations. The validation covers models directly and indirectly used in the assessment of capital adequacy under the AIRB approach and other models indicated in the Model Register maintained in mBank.
In case of AIRB models there is required an independence of validation unit in the organizational structures of the Bank or the Group’s Subsidiary (a separate department or subsidiary) in relation to the units involved in the model’s construction/maintenance, ie. the Model Owner and Users. The Validation Division of the Integrated Risk and Capital Management Department (Validation Unit) is responsible for the validation in mBank.
The scope of validation performed by the Validation Unit covers the assessment of:
Depending on the materiality and complexity of the model, the validation may be advanced (covers both quantitative and qualitative elements) or basic (mainly focused on the qualitative elements and possible quantitative analyses). The validation results are documented in the validation report containing, in particular, an assessment used for the purpose of approving the model, and recommendations, if any, about the irregularities found. The validation reports as well as post-validation recommendations are subject to approval by the Chief Risk Officer.
Validation tasks are performed in accordance with the annual validation plan, approved by the Chief Risk Officer.
All the models used for the purpose of calculating capital requirements for credit risk under the AIRB method were validated.
IRB Method Change Policy
The Bank implemented the IRB Method Change Policy approved by the Management Board. The Policy contains internal rules for the change management within the IRB approach, based on the supervisory guidelines and taking into account the organizational specifics of the Bank. The Policy specifies the stages of the change management process, defines roles and responsibilities, describes in details the rules of classification of changes as well as the rules and responsibilities related to the need to meet documentary requirements connected with the maintenance of statistical method change register.
3.4.5 Method of calculating the portfolio provision (IBNI – Incurred But Not Identified Losses) for loans and advances to corporates and retail, based on the rating systems
The portfolio provision is formed on the credit portfolio of customers not classified to the default category. The amount of provisions is an estimate of incurred losses resulting from arisen economic events which haven’t been identified by the Bank at the provisions calculation date.
The Bank applies uniform default definition in all areas of the credit risk management, i.a. for the purpose of calculating impairment charges, provisions (after necessary adjustments aimed at elimination of differences between IAS 39 and CRR) and capital requirement. The definition of unsatisfied credit obligation (default) is based on the definition of unsatisfied credit obligation included in the CRR.
188.8.131.52 Corporate portfolio
The probability of disclosure of a loss is modelled by logistic regression based on financial indicators and qualitative data. The model is calibrated on the Bank’s internal data, comprising a several years’ period of observation of the corporate portfolio. On the basis of the monitoring period existing in the Bank, it was estimated that 6-8 months (depending on the size of the company) is the average period between the loss event occurrence and the possibility of its identification by the Bank (loss identification period ‘LIP’). Therefore, the Bank performs calculations on the basis of 6-8-month horizon for probability of default obtained via scaling the original 12-month PD-rating coming from the corporate PD model. The value of incurred loss is assumed at the level of the expected value of exposure in case of default (EAD) multiplied by LGD, calculated by corporate LGD/EAD model and multiplied by PD.
In the opinion of the Management Board, the profile of the corporate rating system as a model sensitive to changes in economic cycle (Point-in-Time) as well as recognition of interim financial data and warning indicators as rating assessment drivers should ensure adequate reflection of the amounts of the calculated portfolio provision to the changing market environment.
184.108.40.206 Retail portfolio
For the purpose of measuring the impairment in the retail area, the Bank applies credit risk parameters corresponding with those derived from the AIRB methodology (advanced internal ratings based approach for calculating capital requirement for credit risk), after necessary adjustments aimed at elimination of differences between AIRB and IAS 39.
The recognition of default status is based on all credit data of the individual person and includes all the customer’s amounts due to the Bank.
In case of LGD model the Bank applies conditional approach to recognition of collateral effects, i.e. defined by probability (dependent on specifics of work out process) of collateral realization. In addition, recognized partial recoveries as well as broader range of recoveries coming from natural cures are included.
12-month loss identification period (LIP) based on retail current internal data concerning bank’s processes and abilities to detect the loss situations is applied in the retail area.
220.127.116.11 Measurement of impairment of corporate portfolio
The Bank measures impairment of loan exposures in accordance with the International Accounting Standards 39. The intranet application IMPAIRMENT-KORPO is a tool used to calculate impairment losses for impaired exposures granted to corporate customers and banks. The classification of customers to default portfolio and calculation of impairment write-off is as follows:
a) identifying impairment indicator on individual basis (loss events) and if they exist, classifying a customer to a default category;
b) assessing estimated future cash flows (repayments) both from collateral and from repayments by a customer;
c) calculating impairment losses taking into account the future amount of estimated discounted cash flows using the effective interest rate;
d) booking of impairment losses.
Loss events were divided into definite (‘hard’) loss events of which occurrence requires the client to be classified into the default category, and indefinite (‘soft’) loss events of which occurrence may imply that there is a need to classify the client into the default category. In the case of indefinite loss events, credit analyst assesses additionally whether the event impacted adversely the obligor's creditworthiness. Indefinite loss events have been introduced in order to signal situations that may potentially increase the credit risk of the debtor, which may result in the loss of the debtor's ability to repay loan the Bank.
The list of definite loss events:
1. The number of days from which any exposure being the obligor's credit obligation becomes overdue is above 90 days and the overdue amount exceeds PLN 3,000.
2. The Bank has sold exposures with a significant economic loss related to the change of the debtor creditworthiness.
3. The Bank performed enforced restructuring of the exposure, which resulted in the change of the loan/transaction service schedule due to the lack of possibility of the obligor to meet his obligations under loan/transaction agreement, as initially stipulated, which resulted in:
a) reduction of financial obligations by remitting part of these obligations, or
b) postponing the repayment of the substantial part of the principal, interest or (if it refers to) commission; provided that the lack of approval for restructuring would cause more than 90 calendar days delay in repayment of substantial part of the obligation.
4. Filing by the Bank, the parent or subsidiary entity of the Bank a bankruptcy motion against debtor or filing similar motion in respect of credit obligations of the debtor towards the Bank, the parent or subsidiary entity of the Bank.
5. Bankruptcy of debtor or acquiring by him a similar legal protection resulting in his evasion of or delay in repayment of credit obligations towards the Bank, the parent or subsidiary entity of the Bank.
6. Termination of part or whole credit agreement by the Bank and the beginning of restructuring/collection procedures.
7. Client’s fraud.
The list of required conditions for indefinite loss events is prepared separately for each following entity type:
a) governments and central banks,
c) corporations, including specialised lending,
d) local government units,
f) pension fund managing companies, investment fund managing companies.
Defining separately the conditions for indefinite loss events for particular types of entities aimed at reflecting specificity of particular types of entities in identification of loss events.
In order to assess if the impairment loss has occurred, identification of credit exposures with premises for impairment is carried out. Subsequently the comparison of the gross balance sheet credit exposure with the value of estimated future cash flows discounted at the original effective interest rate is carried out, which leads to the conclusion whether the impairment loss has occurred. If the discounted value of future cash flow is higher than the gross balance sheet value, the impairment charge is not recognised.
In case of specific situation, when the future cash flows are clearly dependent on individual events with binary character of occurrence, the Bank estimates the probability of such events as the basis for calculating the impairment charge.
18.104.22.168 Measurement of impairment of retail portfolio
In the Bank’s retail division losses for impaired exposures are calculated, similarly to the corporate division, with the usage of the IMPAIRMENT application. Retail exposures are considered impaired when the natural person with the given product obligation is in default status in accordance with the AIRB methodology (after necessary adjustments aimed at elimination of differences between AIRB and IAS 39), i.e.:
a) the total sum of overdue exposures for all products exceeds PLN 500 and the eldest delay is more than 90 days,
b) one of the contracts has been identified as fraudulent,
c) one of the contracts is restructured,
d) the Bank applies for instigating enforcement proceedings, bankruptcy proceedings or reorganisation proceedings (resulting in a potential discontinuation of or delay in payments) against the debtor,
e) the debtor intends to challenge his credit obligation in court.
The estimate of provision for impaired contracts is made based on the LGD model for default customers. On the basis of historical data, the model estimates the future discounted recovery being contingent upon the type of contract, collateral level and the period of customers’ default.
The table below shows the percentage of the Group’s balance sheet and off-balance sheet items relating to loans and advances, guarantees and other financial facilities to individuals, corporate entities an public sector and the coverage of the exposure with impairment provision for each of the Bank’s internal rating categories (the description of rating model is included in Note 3.4.3).
|Exposure (%)||Provision coverage (%)||Exposure (%)||Provision coverage (%)|
*) ”Other” applies to subsidiaries which do not use similar systems as mBank S.A.prev next
33.52% of the loans and advances portfolio for balance sheet and off-balance sheet exposures is categorized in the top two grades of the internal rating system (37.40% as of 31 December 2013).
The nominal increase in the exposure by 14% at the end of 2014 compared to the end of 2013 had a significant impact on the sub-portfolios 3 and 4 and resulted in the change of distribution of share of exposures for these categories. The share of provision coverage for sub-portfolios 7 and 8 was accumulated in sub-portfolio 7 at the end of 2014.
22.214.171.124 Repossessed collateral
The Group classifies repossessed collaterals as assets repossessed for debt and measures them in accordance with the adopted accounting policies described in paragraph 2.25. Repossessed collaterals classified as assets held for sale will be put up for sale on an appropriate market and sold at the soonest possible date. The process of selling collaterals repossessed by the Bank is arranged in line with the policies and procedures specified by the units managing the collection process for individual types of repossessed collaterals.
The policy of the companies of the Group is to sell repossessed assets or - in the case of leases - lease them out again to another customer. Cases in which the repossessed collateral is used for own needs are rare – such a step must be economically justified and reflect the Group companies’ urgent need, and must at each time be approved by their Management Boards. In 2014 and 2013, the Group did not have any repossessed collaterals that were difficult to sell. As at 31 December 2014, value of repossessed collaterals was PLN 8 192 thousand (31 December 2013: PLN 8 192 thousand) included mainly real estate which constitute collaterals for mortgage loans and leasing assets. The value of repossessed collaterals was included in the item ‘inventories’ under Note 27.
3.4.6 mBank Group Forbearance Policy
The mBank Group's forbearance policy is a set of activities relating to negotiation and restructuration of terms of loan agreements which is defined by internal regulations.
The Group offers forbearance to assist customers, who are temporarily in financial distress and are unable to meet their original contractual repayment terms, through agreements with less restrictive terms of repayment, without which financial difficulties would prevent satisfactory repayment under the original terms and conditions of the contract. These agreements may be initiated by the customer or the Group entities and include debt restructuring, new repayments schedule, capital repayments deferrals with interest repayments kept.
The type of concession offered should be appropriate to the nature and the expected duration of the customer’s financial distress. Clear demonstration from the customer of both willingness and ability to repay is necessary to conclude agreement. Before any concession is granted, an assessment of customer’s ability to repay is undertaken to ensure suitability of the offer.
The Group renegotiates loan agreements with customers in financial difficulties to maximise possibility of receivables repayment and minimise the risk of default (situation when client fails to fulfil his contractual obligation).
Exposures with modified terms and conditions under forbearance policy (hereinafter - forborne exposures) are subject to regulatory and internal reporting.
The Group maintains open communication with clients in order to detect any financial difficulties as early as possible and to know the reasons of such difficulties. In case of retail customers with temporary financial difficulties forbearance solutions focus on temporary reductions of contractual payments in form of capital repayments suspension with only interest repayments kept.
For customers under long term financial distress extension of contractual repayment schedule may be offered which can include instalments reduction. In case of debt refinancing, as a rule, client is reclassified into the default category.
For the corporate clients in financial distress, as part of the business support process, the Group offers concessions, starting from participating in debt standstills and finishing on debt restructuring agreements. Debt restructuring agreements may improve Group’s security by replacing open financing (overdraft) with factoring or invoice discount and they can waive or ease covenants (additional conditions included in the primary agreement), if it represents optimal strategy for client’s business continuity.
The following list does not exhaust all possible actions that are subject to forbearance, but it includes the most common which are:
Forbearance activities have been an integral part of Group’s risk management for many years. Forbearance portfolios are subject to regular review and reporting to Risk Area Management. The effectiveness of undertaken actions, regularity of restructured products’ service in respect of types of products and clients’ segment are subject to assessment. The risk analysis of retail forbearance portfolio is based on portfolio approach and corporate portfolio analysis is focused on individual approach.
In corporate banking, the concession granting process is accompanied by impairment test. Recognition of impairment results in client being taken over by the specialised unit dedicated to restructuring. All loans granted to clients being served by restructuring unit have the forbearance status. Clients without impairment, who received the concession, are subject to close monitoring by all units involved in the loan granting process. Those clients are placed on the Watch List (WL) and therefore their financial situation is subject to close monitoring and they are under constant review to establish whether any of impairment indicators had materialised.
The Group does not use dedicated models to determine level of IBNI provision and impairment provision for forbearance portfolio.
The Group ceases to recognise the product as forborne if all of the following conditions are met:
Due to the adaptation of the reporting requirements of the EBA in 2014 (ITS on Supervisory reporting on forbearance and non-performing exposures under article 99(4) of Regulation (EU) No. 575/2013), the recognition of forbearance was changed. Group’s IT systems were adapted to clearly mark assets being subject to concession. Therefore, data currently available in the Group’s systems and used for reporting purposes are not comparable with previous years’ data.
Changes in the carrying value of the forborne exposure
|As at 31.12.2013||1 995 592||1 526 073||588 260||1 407 332|
|Outputs||(148 406)||(124 487)||(51 335)||(97 071)|
|New forbearance||605 363||261 236||92 086||513 278|
|Changes on existing loans||(170 831)||86 182||116 796||(287 627)|
|As at 31.12.2014||2 281 718||1 749 003||745 806||1 535 912|
Forbearance portfolio as at 31 December 2014
Gross carrying Of which Provisions
Loans and advances to banks
Loans and advances to customers, including:
2 281 717
1 749 003
1 535 911
Loans to individuals:
- Current accounts
- Term loans, including:
housing and mortgage loans
Loans to corporate clients:
1 812 477
1 562 414
1 137 417
corporate & institutional enterprises
medium & small enterprises
1 047 030
Loans and advances to public sector
Total balance sheet data
2 281 718
1 749 003
1 535 912
Forborne exposures by type of concession as at 31 December 2014
Forborne, not impaired exposures by period of overdue as 31 December 2014
Gross carrying Of which Provisions
Not past due
Past due less than 30 days
Past due 31 - 90 days
Past due over 90 days
Forborne, impaired exposures by period of overdue as at 31 December 2014
Gross carrying Of which Provisions
Not past due
Past due less than 30 days
Past due 31 - 90 days
Past due over 90 days
1 048 059
1 048 059
1 781 240
1 529 083
1 037 233
Forborne exposures by the industry as at 31 December 2014
Of which defaulted
Scientific and technical activities
Electronics and household equipment
Power, power and heating distribution
Hotels and restaurants
Information and communication
Fuels and chemicals
Real estate management
Textiles and clothing
Transport and logistics
2 281 718
1 749 003
1 535 912
3.4.7 Counterparty risk that arises from derivatives transactions
The credit exposure from derivatives transactions is calculated as the sum of the replacement cost for each transaction (which is its current net present value - NPV) and its estimated future potential
exposure (Add-on). Moreover bank uses credit mitigation techniques such as netting and collateralization. Therefore netting is taken into account if there are close-out netting agreements in place, whereas CSA agreements are required to collateralize the exposure. CSAs allow for variation margin to be called if current valuation of the portfolio exceeds the predefined level (threshold). Therefore credit exposure of the derivatives portfolio is adjusted appropriately based on whether the collateral is paid or received and in accordance with the binding agreements.
Credit exposure control is performed through an integrated system and in real time. In particular the level of the allocated credit exposure limit usage is monitored and checked intraday. Credit exposure limits are subject to limit decomposition into different products and maturities.
The decomposition of the credit exposure of the derivatives portfolio based on the counterparty type is as follows:
The decomposition of the credit exposure of the derivatives portfolio based on the internal rating (PDR) as at 31 December 2014 is as follows:
Total credit exposure with counterparties without PDR equals to PLN 107.34 million, whereas total credit exposure of the counterparties with PDR at the level of 3 or better accounts for 85% of the total credit exposure of the derivatives portfolio.
The PD rating scale compliant with scale presented in chapter 3.4.3 Rating system.
Total counterparty risk exposures of the derivatives portfolio decomposed into current NPV and add-on has been depicted below:
Collateral already included in total NPV according to CSA approach in table above.
In order to reflect the credit risk embedded in derivative instruments the Group uses correction to fair value that takes into account the element of credit risk of the counterparty. Write off due to credit risk of contractor is based on expected loss until maturity of the contract and is calculated on customer level. The value of this correction is included in income statement in net trading income.
The table below presents the percentage of derivatives and correction to fair value of credit risk of the counterparty which constitute the component of financial assets in the total carrying value for each of the Group’s internal rating categories (the description of the rating model has been described under Note 3.4.3).
Fair value %
Provision coverage (%)
|Fair value %||Provision coverage (%)|