12.2.1. Credit risk

The Bank organises credit risk management processes in line with the principles and requirements set out in the resolutions and recommendations of PFSA and CRR/CRD IV, which address issues related to credit risk management, in particular Recommendation S.

Credit risk management tools

Credit risk inherent in financing of mBank Group clients is assessed based on shared statistical models developed for the AIRB approach (Advanced Internal Rating-Based) and uniform tools, and is based on common definitions of terms and parameters used in the credit risk management and rating process. mBank ensures their cohesion at Group level.

The Group uses different models for particular client segments. The rules governing the clear assignment of clients to a system are defined in the Group’s internal regulations.

mBank and the Group subsidiaries in their credit risk management process use the core risk measures defined under the AIRB approach:

  • PD – Probability of Default (%)
  • LGD – Loss Given Default (%)
  • EAD – Exposure at Default (amount)
  • EL – Expected Loss (amount), as well as related measures including:
  • RD – Risk Density, which is defined as EL to EAD (%)
  • LAD - Loss at Default, where PD=100% (amount).

In the decision-making process, for reporting and communication with business units, PD and EL are expressed in the language of rating classes whose definitions (Masterscale) are uniform across the Commerzbank Group.

In its credit risk management process, the Bank also attaches great importance to the assessment of unexpected loss risk. Capital required to cover unexpected loss is estimated at a confidence level of 99.91%. For this purpose, the Bank uses the following measure:

  • RWA – Risk Weighted Assets used under the AIRB approach to calculate regulatory capital required to cover credit risk (unexpected loss)

In managing mortgage-secured credit exposures for different types of real estate and also for different products, the Group uses the LtV ratio – Loan to Value, i.e., the loan amount to the market (or mortgage banking) value of the real estate which secures the loan.

Thanks to its simplicity, this measure is broadly used in communication with clients and in the construction of price matrices for credit products.

Stress testing is an additional tool of credit risk assessment which supplements VaR measurement of credit risk. Stress testing of the economic capital required to cover credit risk is measured quarterly.

Stress tests of credit risk are two-dimensional, analysed separately and jointly:

  • The analysis of sensitivity of ECVaR model indications to assumptions concerning credit exposures (e.g. correlation) – i.e. parametric tests.
  • The analysis of extreme credit losses on the assumption of an unfavourable macroeconomic situation – i.e. macroeconomic tests in which an econometrical model forecasts values of input parameters for the economic capital model (PD, LGD) based on assumptions of the Chief Economist about macro parameters in the case of the negative economic scenario. The risk parameters developed according to the above scenario form the basis for calculating economic capital both before and after the assumptions of parametric tests are taken into account.

In addition to the tools listed above, which are applied both in corporate and in retail credit risk measurement, the Group uses tools specific to these areas.

For corporate credit risk, the Group estimates maximum exposure to a client / group of related clients using the following credit risk mitigating measures:

  • MBPZO – Maximum Safe Total Exposure, which defines the maximum level of financial debt of an entity from financial institutions calculated under the Bank’s methodology, approved by mBank’s competent decision-making body.
  • LG – General Limit, which defines the level of credit risk financial exposure to a client / group of related clients acceptable to the Group, approved by mBank’s competent decision-making body. LG includes a structured limit and products granted outside the structured limit, including exposures of both mBank and the Group’s companies.

To minimise credit risk, the Group uses a broad range of collateral for credit products, also necessary to actively manage the capital requirement. In their assessment of the quality of risk products, mBank and mLeasing use the MRV ratio – Most Realistic Value, which reflects the worst-case scenario of debt enforcement through forced sale of collateral.

In addition, the decision-making process and the assessment of profitability per client in the CRM system use the RAROC ratio – Return on Risk Adjusted Capital, or return on the capital invested in risk products.

Retail credit risk measures are constructed to reflect the characteristics of this customer segment and, in the case of portfolio measures, the high granularity of the loan portfolio:

  • DtI – Debt-to-Income, i.e. monthly credit payments to the net income of a household, used for individual customers.
  • DPD – Days-Past-Due, a family of portfolio risk measures based on the number of days past due date (e.g. share of contracts which are from 31 to 90 days past due date in the total portfolio by number or by value).
  • Vintage ratios, which represent the quality of cohorts of loans disbursed within a certain time bracket (e.g. each quarter) at a different phase of their lifetime, based on DPD.
  • RC LLP – Risk Cost LLP, the cost of risk for a loan portfolio (segment), i.e. increment in loan loss provisions in relation to the performing loan portfolio balance.
  • Roll-rates, which measure the migration of contracts between days-past-due brackets (1-30, 31-60, 61-90 DPD, etc.).

Business and Risk Forum of mBank Group

In the credit risk management process, the Bank attaches high importance to the communication between the Risk and the business segments. In 2014 the Bank established the Business and Risk Forum which is a formal decision and communication platform for the risk management area and business lines of the Group.

The Business and Risk Forum is constituted by the following bodies:

  1. Retail Banking Risk Committee,
  2. Corporate and Investment Banking Risk Committee,
  3. Financial Markets Risk Committee.

The committees are composed of the representatives of business lines and respective risk management departments.

Each committee is responsible for the all types of risk generated by business activity of the given business line and performs the following tasks:

  • Discussing and taking decisions concerning:
    • introduction of new products/instruments,
    • rules for managing the risk of products/instruments offered or planned to be offered by business lines,
    • risk appetite of business lines, e.g. approval of risk limits imposed on business lines,
    • approval of the risk policies applicable to particular client segments,
    • client segments desired from the point of view of the expected risk portfolio structure,
    • priorities and directions of changes in the organisation of processes and risk assessment tools.
    • Mutual exchange of information about current and planned actions and projects, including sales plans and their implementation, sales campaigns, modifications to risk models, etc.
    • Monitoring of the following aspects on the basis of submitted reports and information:
      • quality and effectiveness of the risk-bearing portfolios held by business lines,
      • operational risk and other non-financial risk types,
      • quality of data used in risk management processes,
      • early symptoms of risk, and
      • agreeing on preventive or remedial measures.

Credit risk strategy – Corporate and Investment Banking

The Strategy of the Group’s corporate credit risk management is closely correlated with the “One Bank” Strategy and aims to improve co-operation in credit risk measurement and management as well as to safely define risk appetite. According to ICAAP assumptions, the Strategy is complemented by detailed credit policies and banking procedures both in mBank and the Group subsidiaries which generate credit risk and impact the quality of corporate credit risk management. The implementation of uniform risk measures and risk controlling processes at Group level takes into account the specificities of the Group entities. The Bank makes sure that the process does not affect client relations.

The diversified approach to corporate clients is tied to the client’s risk level as measured by PD and credit risk concentration measured with LaD of a client or group of related clients, taking into account the exposure of the Group subsidiaries.

The credit decision-making system is consistent with the Corporate Credit Risk Management Strategy and the approved principles of the Credit Risk Policy. The competent decision-making levels are defined in a decision-making matrix. On that basis, depending on the EL rating and the aggregate exposure of a client or group of related clients, the appropriate decision-making level responsible for the credit decision is assigned.

The Bank manages credit risk and the integrated operational process within the Group in a comprehensive manner. Risk management is supported by analyses of mBank Group credit portfolio structure and the resulting formal limits, guidelines and recommendations on the Group’s exposure to selected companies, sectors and geographic markets. In its current credit risk management and determination of concentration risk, mBank performs quarterly portfolio analyses using a Steering Matrix which incorporates PD rating and LAD.

In order to mitigate the risk of lending and guarantees, mBank Group classifies and monitors credit risk products. The Group uses write-offs and provisions under the International Financial Reporting Standards (IFRS). mBank also controls the credit portfolio on a quarterly basis including an analysis of the dynamics of change in the size and (sector) segmentation of the credit portfolio, client risk (PD rating), the quality of collateral against credit exposures, the scale of change in EL, Risk Density, and default exposures.

In Corporate Banking, the Group avoids concentration in industries and sectors whose credit risk is considered excessively high. The acceptable risk level is defined taking into account market segmentation and sector concentration limits. In compliance with the PFSA’s Recommendation S, the Bank has identified a mortgage-secured credit exposure portfolio, not only in Retail Banking but also in Corporate Banking. mBank manages the mortgage-secured credit exposure portfolio risk with a focus on defining an optimised portfolio structure in terms of quality (rating), currencies, country regions, tenors, and types of properties. The main principles of mortgage-secured credit exposure risk management in Corporate and Investment Banking, the risk profile, the division of responsibilities, the rules of determining internal limits, and the rules of reporting are set out in the mBank Mortgage-Secured Credit Exposure Risk Management Policy.

Credit risk strategy – Retail Banking

Lending in Retail Banking is a key segment of the mBank Group’s business model, both in terms of the share in total assets and the contribution to its profits.

mBank’s retail credit offer covers a broad range of products financing the needs of individual customers (OF) and small companies (MF). The scope and construction of the offer derive from the One Bank Strategy, whereby credit products in combination with the state-of-the-art transactional platform, savings and insurance products address all financial needs of clients within the Group.

Apart from the Polish market, Retail Banking credit products are offered (since 2007) through the foreign branches (OZ) of mBank in the Czech Republic (CZ) and Slovakia (SK) in an online banking model similar to that operating in Poland (under the “mBank” brand) since 2000. The share of the foreign branches’ exposure portfolio was around 7% of the aggregate retail portfolio at the end of 2013 (by value). The Bank ensures the coherence of the credit risk management policy on all markets; any differences in specific rules or parameter values derive from the specificities of local markets or different goals of business strategies and are at each time subject to approval by the Retail Banking Risk Committee.

As credit exposures are highly granular (more than 1.9 million active loans), the Retail Banking credit risk management process is based on a portfolio approach. This is reflected in the statistical profile of risk rating models including the models which fulfil the regulatory requirements of the Advanced Internal Ratings-Based approach (AIRB). The AIRB parameters (PD, LGD and EL) are used widely in order to estimate credit requirements, to determine acceptance criteria and terms of transactions, and to report risks.

Furthermore, Retail Banking credit risk management has the following characteristics:

  • High standardisation and automation of the credit granting process, including decision-making, both in acquisition, post-sale services, and debt collection.
  • Low (as compared to Corporate Banking) discretionary competences in the decision-making process (e.g., no discretionary adjustment of clients’ ratings).
  • Alignment of decision-making endowment with mass acquisition, including automation of decision- making for selected transactions.
  • Extensive risk reporting system based on portfolio analysis of credit exposure quality, including vintage analysis and days-past-due analysis.

Under the portfolio approach, exposures are classified (separately for each market) as ML (mortgage- secured products) or NML (unsecured products or products with collateral other than mortgage). Furthermore, the segmentation includes products for individuals (ML OF, NML OF) and products for business clients (ML MF, NML MF). The segmentation serves two main functions:

  • Ensuring correct alignment of risk rating methods (models, procedures, required documentation) with the client’s risk profile, exposure and business requirements.
  • Defining homogeneous transaction sub-portfolios to enable adequate quantitative assessment of quality in the context of the generated income margin.

The main point of reference in the Retail Banking credit risk management process is risk appetite defined in correlation with the One Bank Strategy which provides for:

  • Optimisation of the balance-sheet structure in terms of profitability and financing by reducing the growth rate of credit portfolios with long tenors (and low margins) while supporting growth of short- term loans (with high margins).
  • Developing long-term financing of the Group with covered bonds issued against retail mortgage loans.

Taking into account the above assumptions, the general principle underlying the Group’s lending strategy is to address the offer to clients who have an established relationship with the Bank or to address it to new clients for whom the loan is a product initiating a long-term relationship of highly transactional nature. Consequently, goals of the Strategy, the Bank continues to focus its NML policies on lending to existing clients with a high creditworthiness while systematically growing the acquisition of external clients. As part of the development of the external customers’ segment the Bank has started a strategic cooperation with one of the largest telecommunications operators by developing joint Orange Finanse Project offering transactional and credit services to the retail customers. In order to reduce the risk related to accepting new customers, the Bank develops its credit policy using, among others, credit testing and is actively developing its fraud prevention system.

For long-term loans (ML segment of mortgage loans), the Bank maintains a conservative policy of borrower creditworthiness and credit rating to offset the higher probability of systemic risks materialising within the lifetime of a loan. In view of the current low interest rate environment, in its creditworthiness rating the Bank focuses among others on long-term interest rate estimates.

In retail mortgage lending, in order to mitigate the risk of impairment of mortgage collateral in relation to the value of credit exposure, the Bank addresses its credit offer mainly to clients who buy properties within large urban areas.

Starting from 2014, the Bank introduced modifications to the rules of mortgage lending (mainly to make them more restrictive) as stipulated in Recommendation S, including gradual reduction of the maximum LtV and the requirement of the compliance of the loan currency with the currency of the borrower’s income. For more information on Recommendation S, please see section 4.6. Changes in recommendations of the Polish Financial Supervision Authority (KNF) and legal acts concerning banks.

The modifications facilitate a programme of co-operation between mBank and mBank Hipoteczny which started in Q4 2013 and aims at sales of housing loans to retail clients. According to the plan’s assumptions, the retail mortgage loan portfolio of mBank Hipoteczny is financed with new issues of covered bonds.

In its credit risk management process, the Bank attaches great importance to communication between Risk and Retail Banking. The Retail Banking Risk Committee, established in 2010, is a platform of decision-making and dialogue between the two business lines. As of 2014, the Committee covers both credit risk and all secondary risks (reputation risk, legal risk, operational risk, data quality risk, etc.).

Quality of the loan portfolio

As at 31 December 2014 the share of impaired exposures in the total (gross) amount of loans and loans for any purpose granted to clients reached 6.4%. Provisions for loans increased from PLN 2,371.4 million at the end of December 2013 to PLN 2,790.8 million at the end of 2014, and the IBNI (Incurred But Not Identified) loss provision fell from PLN 256.6 million to PLN 242.4 million in the analysed period.

The level of coverage of impaired receivables with provisions rose from 47.8% at the end of 2013 to 51.9% at the end of 2014.

To assess impairment, the Bank applies credit risk parameters based on those derived from the A-IRB methodology.

The manner of identifying evidence of default is based on all available credit data of a given client and encompasses all his liabilities towards the Bank.

In 2014, the Group’s exposure rose by almost 10%, whereas in the case of the corporate portfolio nearly 70% of this growth was generated by subsidiaries. Excluding subsidiaries, the increase in exposure is attributable mainly to the K2 segment (13.8%). In the retail portfolio the growth of exposure resulted from the record high NML sales at PLN 4.4 bn (+17% YoY) and mortgage production at PLN 3.3 bn (+58% YoY).

The table below presents the quality of mBank Group’s credit portfolio as at the end of December 2014 compared to the end of December 2013.

 

 

Quality of mBank Group's Loan Portfolio

31.12.2014

31.12.2013

PLN M

PLN M

Loans and advances to customers (gross)

77,373.19

70,581.80

Not impaired

72,458.58

66,158.10

Impaired

4,914.61

4,423.70

Impaired as % of  gross exposure

6.35%

6.30%

 

Provisions for loans and advances to customers

2,790.84

2,371.40

Provisions for not impaired exposures

242.40

256.6

Provisions for impaired exposures

2,548.44

2,114.80

 

Coverage ratio impaired exposures

51.85%

47.80%

Coverage ratio for gross portfolio

3.61%

3.40%

 

Loans and advances to individuals (gross)

41,560.48

38,307.90

Not impaired

38,692.05

35,949.10

Impaired

2,868.42

2,358.80

Impaired as % of gross exposure

6.90%

6.20%

 

Loans and advances to corporate entities (gross)

32,841.05

29,475.30

Not impaired

30,794.86

27,410.40

Impaired

2,046.19

2,064.90

Impaired as % of gross exposure

6.23%

7.00%

 

Loans and advances - other customers (gross)

2,971.67

2,798.60

Not impaired

2,971.67

2,798.60

Impaired

Impaired as % of gross exposure

0.00%

0.00%

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