3.10. Liquidity risk

mBank S.A.

The objective of liquidity risk management is to ensure and maintain the Bank’s ability to fulfil both current and future commitments. The Bank achieves this objective by diversifying stable funding sources in terms of client group (from whom acquires deposits), product and currency groups, and at the same time, optimizes its balance sheet in terms of profitability. Long-term activities of mBank in this scope are carried out taking into account conditions on funding capacity and business profitability. 

In 2014, the liquidity situation was monitored and kept at a level adequate to the Bank's needs by adjusting the deposit base and securing additional funding sources depending on the development of lending activity and other funding needs. 

In order to ensure that the liquidity risk management process is effective, the Management Board of the Bank lies down an adequate organizational structure and delegates powers to dedicated units and Committees. The existing process covers the liquidity risk management area at both the strategic and operational level, and the liquidity risk measurement and control area.

As part of liquidity risk management, a range of risk measures are being analysed. The basic measure reflecting the Bank's liquidity situation is the mismatch account of future cash flows, and the mismatch gap related with it. It covers all the assets, liabilities and off-balance sheet items of the Bank in all the currencies and time-bands set by the Bank. In 2014, the Bank held liquidity surplus, adequate to Bank’s business activity and current market situation, in the form of a portfolio of liquid treasury and money market securities that may be pledged or sold at any time without any considerable loss in value. In accordance with KNF Resolution No. 386/2008 on establishing liquidity measures binding on banks, the Bank calculates the supervisory liquidity measures. In 2014, the supervisory limits on short-term and long-term liquidity measures were not exceeded. Moreover, in line with the Resolution, the Bank conducts an in-depth analysis of long-term liquidity and sets internal limits (management action triggers) on involvement in long-term assets. Relevant analysis of the stability and structure of the funding sources, including the core and concentration level of term deposits and current accounts are performed. Additionally, the Bank analyses the variability of the balance sheet and off-balance sheet items, in particular the open credit line facilities and current account and overdrafts limits utilisation.

The ongoing analysis covers not only liquidity under normal conditions, but also on the assumption of a potential liquidity loss. In order to determine the Bank's resistance to major unfavourable events, the Bank conducts scenario analyses covering extreme assumptions on the operation of financial markets and behavioural events relative to the Bank's clients. The Bank has also adequate procedures in case
mBank is threatened with financial liquidity loss.

For the purpose of current monitoring of liquidity, the Bank establishes values of realistic, cumulated gap of cash flows misfit. The gap is calculated on the basis of contractual cash flows (Note 3.10.1). Cash flows in portfolios of non-banking customers’ deposits, overdrafts and term loans are mainly amended. In the calculation of the liquidity measures the Bank takes into account the possibilities of raising the funds by selling or pledging the debt securities from Bank’s Liquidity Reserves.

 
Value of realistic, cumulative gap of cash flows misfit (in PLN million)
31.12.2014 31.12.2013
up to 3 working days 6 837 7 073
up to 7 calendar days 6 837 7 073
up to 15 calendar days 7 424 6 973
up to 1 month 11 169 7 426
up to 2 months 12 697 7 935
up to 3 months 13 320 7 113
up to 4 months 13 731 7 203
up to 5 months 13 897 7 320
up to 6 months 14 247 7 166
up to 7 months 13 860 6 655
up to 8 months 14 080 6 804
up to 9 months 13 962 6 784
up to 10 months 11 083 6 873
up to 11 months 10 938 6 885
up to 12 months 11 180 6 964
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The above values should be interpreted as liquidity surplus in relevant time buckets. Noticed increase of values as of the end of 2014 resulted mainly from dynamics of non-banking term deposits and current
accounts increases (PLN 11.1bn – with fixed exchange rate as of 31 December 2014 used in calculations) exceeding dynamics of loans portfolio development (PLN 7.2bn – with fixed exchange rate as of 31 December 2014 used in calculations).

Additional factor, that positively influenced liquidity was own bonds issue in the amount of EUR 1bn (PLN 4.26bn) and subordinated bonds issue in amount of PLN 750m accompanied by reduction of debts towards main shareholder, Commerzbank A.G., in amount of CHF 850m and simultaneously taking into account, in cash flow mismatch cumulated gap, debt from Commerzbank, remained to be repaid in 2015 in amount of CHF 850m.

In 2014 Bank’s liquidity remained at a safe level which was reflected in surplus of liquid assets over short-term liabilities according to ANL terms and supervisory liquidity measures. Recorded minimum ANL gap level was mainly associated with a sudden outflow of funds deposited by financial customer.

ANL gap mismatch in terms up to 1 month and up to 1 year within 2014 and supervisory liquidity measures M1, M2 and LCR presented in the following table:

 
Measures* 2014
31.12.2014 Mean Maksimum Minimum
ANL 1M 11 169 7 104 13 052 1 142
ANL 1Y 11 180 8 183 13 389 3 939
M1 12 302 9 039 15 006 4 993
M2 1.52 1.36 1.70 1.16
LCR** 149% 134% 149% 114%
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(*) - ANL measures and M1 are in PLN m, whereas M2 is relative measure expressed as decimal fraction,
(**) – LCR statistics concerning period since 31 March 2014 (as a result of change of calculation methodology since end of March 2014).

The long-term coverage ratios (M3, M4) are characterized by high stability on safe level, above minimum established by regulatory authority equals 1. In particular, M3 oscillated between 4.61 and 6.05 in 2014, whereas M4 between 1.19 and 1.33. The LCR measure remained on safe level, significantly exceeds 100%.

Funding sources

The strategic assumptions concerning the diversification of funding sources and profitable structure of the balance sheet are reflected in the financial plan of mBank Group defined by selected measures, e.g. L/D ratio (Loans to Deposits). The Bank measures a specific relation of loans to deposits in order to maintain a stable structure of its balance sheet. In 2014, L/D ratio improved from 110.6% to 103%. The Stable Funding Position Ratio (SFPR) is calculated from 2014. As of end of 2014 this ratio was equal 103.8%. The Bank aims at building a stable deposit base by offering to clients deposit and investment products, regular and specific-purpose savings offerings, as well as operating deposits of the subsidiaries. Means acquired from the Bank’s clients constitute the major funding source for the business activity. The second largest funding source is the portfolio of long-term loans from banks (with maturities over 1 year), in particular from Commerzbank (Note 28). The loans together with subordinated loans (Note 31) are the core funding source for the portfolio of mortgage loans in CHF. According to the suspension of granting new mortgage loans in CHF, Bank’s receivables in this currency have been decreasing successively along with credit repayments. The funds obtained from the repayment of the said loans are used to reduce the Bank's debt in CHF owed mBank's main shareholder. In 2014, the debt to Commerzbank A.G. was reduced by CHF 850 million.

Moreover, in order to acquire funding (also in foreign currencies) the Bank uses mid-term and long-term instruments, including credit line facilities within Commerzbank Group and on the international market (debts from EBI) as well as FX swap and CIRS transactions. In 2014, under the Euro Medium Term Note Program (EMTN), the Bank acquired new funds amounted to PLN 1 billion.

When making funding-related decisions, in order to match the term structure of its funding sources with the structure of long-term assets, the Bank takes into consideration the supervisory liquidity measures and limits, as well as the internal liquidity risk limits.

mBank Group

Liquidity risk in mBank Group is generated mainly by mBank’s items. Nevertheless, liquidity risk level in mBank Group subsidiaries, where liquidity risk was deemed significant, is also a subject to monitoring. In subsidiaries generating the greatest liquidity risk (mHipoteczny, mLeasing and mDom Maklerski) the Bank monitors the level of liquidity risk on a daily basis. The data provided by these companies allow for reporting contractual cash-flow mismatch as well as calculation of a realistic cash-flows mismatch based of ANL model and modelling assumptions for selected products according to risk profiles, funding possibilities and products specificity of the subsidiary. The levels of realistic, cumulative cash-flow mismatch in mBank Group presented in the following table:

 
Value of realistic, cumulative gap of cash flows misfit (in PLN million)
Time range 31.12.2014 31.12.2013
up to 3 working days 8 329 7 296
up to 7 calendar days 8 329 7 722
up to 15 calendar days 8 893 7 348
up to 1 month 12 589 7 754
up to 2 months 14 125 8 050
up to 3 months 14 969 7 109
up to 4 months 15 336 7 148
up to 5 months 15 539 7 235
up to 6 months 15 901 7 004
up to 7 months 15 520 6 034
up to 8 months 15 819 6 167
up to 9 months 15 684 6 114
up to 10 months 12 505 6 134
up to 11 months 12 424 6 040
up to 12 months 12 717 6 110
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In other subsidiaries, due to lower total assets and simpler amounts products, the process is carried out on a monthly basis and is based on aggregated information about mismatch of cash-flows in contractual terms, delivered by these subsidiaries to Financial Markets Risk Department.

 

3.10.1  Cash flows from transactions in non-derivative financial instruments

The table below shows cash flows the Group is required to settle, resulting from financial liabilities. The cash flows have been presented as at the year-end date, categorised by the remaining contractual maturities. The amounts denominated in foreign currencies were converted to Polish zloty at the average rate of exchange announced by the National Bank of Poland at the year-end date. The amounts disclosed in maturity dates analysis are undiscounted contractual cash flows.

Liabilities (by contractual maturity dates) as at 31.12.2014

 
  Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total
Amounts due to the Central Bank - - - - - -
Amounts due to other banks 2 157 014 20 941 3 028 226 8 467 080 12 423 13 685 684
Amounts due to customers 57 838 987 7 595 466 3 475 053 2 444 201 2 401 412 73 755 119
Debt securities in issue 397 577 69 873 2 756 909 4 897 972 3 046 975 11 169 306
Subordinated liabilities
896 043 7 675 62 494 2 247 576 1 507 545 4 721 333
Technical-insurance provisions 17 074 38 865 60 647 12 752 5 749 135 087
Other liabilities 934 160 37 438 188 628 6 961 5 749 1 172 936
Total liabilities 62 240 855 7 770 258 9 571 957 18 076 542 6 979 853 104 639 465
Assets (by remaining contractual maturity dates)
Total assets 16 277 193 5 301 846 17 202 800 47 581 194 41 644 406 128 007 439
Net liquidity gap  (45 963 662)  (2 468 412) 7 630 843 29 504 652 34 664 553 23 367 974
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Liabilities (by contractual maturity dates) as at 31.12.2013

 
  Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total
Amounts due to the Central Bank - - - - - -
Amounts due to other banks 4 931 691 2 266 838 1 455 441 11 199 914 17 175 19 871 059
Amounts due to customers 52 817 585 4 155 216 3 726 858 1 078 814 2 127 598 63 906 071
Debt securities in issue 92 576 87 594 550 798 4 706 992 212 733 5 650 693
Subordinated liabilities 28 676 33 369 50 624 2 251 561 1 773 562 4 137 792
Technical-insurance provisions 20 219 21 340 34 098 8 833 2 678 87 168
Other liabilities 810 702 21 666 182 192 6 542 10 155 1 031 257
Total liabilities 58 701 449 6 586 023 6 000 011 19 252 656 4 143 901 94 684 040
Assets (by remaining contractual maturity dates)
Total assets 15 389 793 4 015 967 13 149 705 43 696 476 41 309 574 117 561 515
Net liquidity gap  (43 311 656)  (2 570 056) 7 149 694 24 443 820 37 165 673 22 877 475
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The assets which ensure the payment of all the liabilities and lending commitments comprise cash in hand, cash at the Central Bank, cash in transit and treasury bonds and other eligible bonds; amounts due from banks; loans and advances to customers.

In the normal course of business, some of the loans granted to customers with the contractual repayment date falling due within the year, will be prolonged. Moreover, a part of debt securities, were pledged as collateral for liabilities. The Group could ensure cash for unexpected net outflows by selling securities and availing itself of other sources of financing, such as the market of securities secured with assets.

 

3.10.2. Cash flows from derivatives

Derivative financial instruments settled in net amounts

Derivative financial instruments settled in net amounts by the Group comprise:

  • Futures,
  • Forward Rate Agreements (FRA),
  • Options,
  • Warrants,
  • Interest rate swaps (IRS),
  • Cross currency interest rate swaps (CIRS),
  • Security forwards.

The table below shows derivative financial liabilities of the Group, which valuation as of end of 2014 was negative, grouped by appropriate remaining maturities as at the balance sheet date and are presented as contractual maturities apart from Other up to 1 month and Futures contracts which are presented as net present value (NPV). The amounts denominated in foreign currencies were converted to Polish zloty at the average rate of exchange announced by the National Bank of Poland at the balance sheet date.

The amounts disclosed in the table are discounted contractual outflows for transactions with negative valuations as at the end of 2014.

31.12.2014

 
Derivatives settled on a net basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total
Forward Rate Agreements (FRA) 20 938 29 491 66 344 13 027 - 129 800
Overnight Index Swaps (OIS) 1 605 347 7 587 - - 9 539
Interest Rate Swaps (IRS) 111 390 430 978 911 220 2 676 074 549 025 4 678 687
Cross Currency Interest Rate Swaps (CIRS) 11 028 884  (4 969) 4 757 - 11 700
Options 2 806  (1 014)  (10 521)  (14 553) 128  (23 154)
Futures contracts - 11 - - - 11
Other 147 - 5 944 - - 6 091
Total derivatives settled on a net basis 147 914 460 697 975 605 2 679 305 549 153 4 812 674
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31.12.2013

 
Derivatives settled on a net basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total
Forward Rate Agreements (FRA) 24 579 42 585 36 516 10 367 - 114 047
Overnight Index Swaps (OIS) 1 486 6 502 2 031 - - 10 019
Interest Rate Swaps (IRS) 118 711 238 008 485 753 1 056 215 229 328 2 128 015
Cross Currency Interest Rate Swaps (CIRS) 638 - - 18 122 - 18 760
Options 4 575 11 625 37 252 7 836 1 023 62 311
Futures contracts - 96 - - - 96
Other 67 21 - - - 88
Total derivatives settled on a net basis 150 056 298 837 561 552 1 092 540 230 351 2 333 336
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Derivative financial instruments settled in gross amounts

Derivative financial instruments settled in gross amounts by the Group comprise foreign exchange derivatives: currency forwards and currency swaps.

The table below shows derivative financial liabilities/assets of the Group, which will be settled on a gross basis, grouped by appropriate remaining maturities as at the Balance Sheet date. The amounts denominated in foreign currencies were converted to Polish zloty at the average rate of exchange announced by the National Bank of Poland at the balance sheet date.

31.12.2014

 
Derivatives settled on a gross basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total
Currency derivatives:
 - outflows 13 082 812 5 126 921 3 776 553 416 470 - 22 402 756
 - inflows 13 094 178 5 133 165 3 769 438 412 353 - 22 409 134
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31.12.2013

 
Derivatives settled on a gross basis Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total
Currency derivatives:
 - outflows 9 009 623 1 826 470 2 830 234 165 784 - 13 832 111
 - inflows 9 022 689 1 813 370 2 852 658 156 595 - 13 845 312
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The amounts disclosed in the table are undiscounted contractual outflows/inflows.

The amounts presented in the table above are nominal cash flows of currency derivatives, which have not been settled, while the Note 20 shows nominal values of all open derivative transactions.

Detailed data concerning liquidity risk related to off-balance sheet items are presented in the Note 36.