12. Main directions of change and types of risk related to mBank Group’s activities

12.1. Main directions of change in the risk management area

mBank Group manages risks on the basis of regulatory requirements and best market practice, by developing risk management strategies, policies and guidelines.

Risk management roles and responsibilities in mBank Group are organised around the three lines of defence model:

  1. The first line of defence consists of business segments (Business) Lines whose task is to take risk aspects into consideration when making business decisions.
  2. The second line of defence, Risk, provides the methodological framework and is responsible for making risk decisions at the request of Business and for measuring, limiting, monitoring and reporting of risks taken by the Group. Risk provides an independent oversight of the first line of defence.
  3. The third line of defence is Internal Audit, ensuring independent assessment of Business and Risk.

Risk responsibilities are based on the following pillars of organisational management:

  • Client-Centric Approach – understanding the needs of the Risk area clients.
  • One Risk – integrated approach to risk management.
  • Risk v. Return Rate – supporting business segments in the decision-making process and defining the Bank’s risk appetite on the basis of long-term relationship between risk and rate of return.

A new initiative of the Risk Area was added in 2013 and consequently developed throughout 2014 to the One Bank Strategy: “Approach to Risk Management”. It includes a range of projects grouped in five themes:

  • Strengthening the business-risk dialogue.
  • Review of risk appetite definitions.
  • Improvement of the credit process.
  • Improvement of Risk employee competences.
  • Simplification and integration of the risk IT structure.

Risk is the key partner to business segments and the Management Board in creating lasting value for the Bank and ensuring a long term balance between the expected rate of return for investors and the safety of the Bank. These strategic objectives require an integrated approach to risk, capital, financing and profitability management.

As a consequence of the foregoing, the Risk Management Strategy was updated and the Risk Appetite programme was implemented in 2014.

As part of the programme, risk appetite was defined with the participation of the Bank’s business units, managers and the Management Board, and it was documented by amending the Strategy, while comprehensive strategic risk limiting rules as well as actual limits were put in place.

Furthermore, the Bank updated the retail and corporate credit risk management strategy, as well as market risk, liquidity risk and operational risk management strategy in 2014.

Moreover, work was underway in 2014 to implement the comprehensive reputation risk management strategy approved by the Bank’s Management Board in December.

In 2014, the Bank implemented the Risk Management Effectiveness Self-Assessment process aimed to identify the key risks embedded in processes executed at the Bank and to assess their effective management. Self-Assessment results are used to take measures necessary to optimise and facilitate the Bank’s operational risk management system. The implementation of the Self-Assessment was divided into two stages. The first stage was implemented in H1 2014 and its results were approved by the Bank’s Management Board in September 2014. The second stage will be finalised by the end of June 2015.

In support of business projects, Risk took part in activities related to the implementation of the Orange Finance platform in order to ensure the implementation of the adequate credit policy and credit process. Risk continued its co-operation with mBank Hipoteczny in order to transfer mortgage-backed exposures to mBank Hipoteczny in the covered bond issue project (pooling). A new credit process is under implementation in Corporate Banking aiming to significantly enhance its effectiveness. The full path of credit process for large corporate clients was also reorganised ensuring 15 day SLA for complex cases. The decision-making matrix was also changed in a way significantly increasing the decision-making of the Bank’s authorities.

The IAAA (Information As An Asset) Project is implemented in the Bank. It aims at the reconstruction and integration of environments and methods of data management in the Bank. Risk area, as one of the leaders of this initiative, shapes actively the designed solutions and at the same time carries out work related to the adjustment of risk architecture in terms of optimal use of the project’s products.

Basel III regulatory standards

The new rules on prudential requirements for banks set out in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV) on access to the activity of banks and the prudential supervision, implementing provisions of Basel III, are effective in the European Union as of January 1, 2014. The amendments introduced under Basel III include:

  • stricter capital requirements including a universal definition and components of the bank’s capital as well as implementation of capital ratio specified in relation to the funds of the highest quality,
  • introduction of own funds requirement associated with credit valuation adjustment,
  • implementation of financial leverage ratio,
  • introduction of additional capital buffers, including a capital conservation buffer, a countercyclical buffer, a global systemically important financial institutions buffer and systemic risk buffer,
  • liquidity requirements, measured by the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).

The regulatory amendments are mainly designed to protect the capital of banks against adverse effects of financial crises.

The new provisions of CRD IV must be implemented in a national legislation, while CRR takes effect as of January 1, 2014 without harmonisation with national laws.

Adaptation works in order to meet new regulatory standards in mBank Group are described in the IFRS Consolidated Financial Statements 2014 of mBank S.A. Group.

12.2. Main risks of mBank Group’s business

The Management Board of mBank takes measures necessary to ensure that mBank manages all significant risks arising from the implementation of the adopted business strategy.

Within the Group’s risk inventory process implemented under the principles of ICAAP (Internal Capital Adequacy Assessment Process), the following risks were identified in the operations of the Group in 2014:

12-risks

The Bank monitors all the aforementioned risks within ICAAP. Due to the specificity and characteristics of the portfolio, the section presents the rules of monitoring credit risk, operational risk, liquidity risk, market risk of the trading book as well as interest rate risk of the banking book in mBank Group using risk measures applied by mBank and taking into account differences in the profile and scale of business of the Group.

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%

prev next

mBank organises liquidity risk management processes in line with the principles and requirements defined in PFSA Resolution No. 258/2011 of 4 October 2011, PFSA Resolution No. 386/2008 of 17 December 2008 on establishing liquidity measures binding on banks, and best practice, in particular PFSA recommendations on liquidity risk management (Recommendation P).

Tools and measures

In its operations, mBank is exposed to liquidity risk, i.e., the risk of being unable to honour its payment obligations, arising from the Bank’s balance-sheet and off-balance-sheet positions, on terms advantageous to the Bank and at a reasonable price.

In terms of its sources, liquidity risk may result from internal factors (reputation risk resulting for instance in excessive withdrawal of cash by Bank clients, materialisation of credit risk) and external factors (turbulences and crises on the financial markets, country risk, turbulences in the operation of clearing systems).

For this purpose, the Bank has defined a set of liquidity risk measures and a system of limits and warning thresholds which protect the Bank’s liquidity in the event of unfavourable internal or external conditions. Independent measurement, monitoring and controlling of liquidity risk is performed daily by the Financial Markets Risk Department. The main measures used in liquidity risk management of the Bank include ANL (Available Net Liquidity), the regulatory measures (M1, M2, M3, M4), and LCR and NSFR for analysis only. ANL reflects the projected future cash flow gap of assets, liabilities and off-balance-sheet commitments of the Bank, which represents potential risk of being unable to meet liabilities within a specific time horizon and under a certain scenario. ANL cash flow projections are based on crisis scenarios which include excessive withdrawal of cash by the Bank’s clients and being unable to liquidate some assets due to an external crisis.

In 2014, mBank continued to harmonise with the CRR requirements for LCR and NSFR liquidity measures. The implementation work was completed when the LCR/NSFR calculation methodology was approved by the Financial Markets Risk Committee in March 2014. Since 31 March 2014, LCR has been calculated according to CRR and reported to the National Bank of Poland.

Strategy

The liquidity strategy is pursued by active management of the balance sheet structure and future cash flows as well as maintenance of liquidity reserves adequate to liquidity needs depending on the activity of the Bank and the current market situation as well as funding needs of the Group subsidiaries.

The Bank manages liquidity risk at two levels: strategic (within committees of the Bank) and operational (Treasury Department).

Liquidity risk limiting covers supervisory and internal measures.

The first category includes four liquidity measures determined by the Polish Financial Supervision Authority: M1, M2, M3 and M4, as well as liquidity measures required by the CRD IV/CRR: LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio).

The liquidity risk internal limit system is based mainly on defining acceptable gaps for ANL tenors in specific time horizons and for different liquidity risk profiles (for all currencies in aggregate converted to PLN) and for specific foreign currencies.

The Bank has introduced a centralized approach to the Group’s funding management in order to increase the efficiency of liquidity resources used. According to its principles, the mBank Hipoteczny acquires additional financing on the market by issuance of mortgage bonds and from mBank, while mLeasing and other subsidiaries acquire almost entire financing from mBank. Financing of subsidiaries is done via the Treasury Department.

Centralized approach to the financing of the Group subsidiaries enables to ensure better timely matching of the funding and the uniform treatment of particular subsidiaries within the unified system of transactional rates.

Measuring mBank’s liquidity risk

The liquidity of mBank remained safe in 2014, as reflected in the high surplus of liquid assets over short-term liabilities in the ANL tenors and in the regulatory measures.

The table below presents the ANL gap for tenors up to 1M and 1Y in 2014 as well as the regulatory measures M1, M2 and LCR:

 

 

Measure*

2014

31.12.2014

average

max

min

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%

(*) – ANL and M1 are shown in PLN million. M2  is a relative measure presented as decimals.

(**) – LCR statistics cover the period from March 31 2014 (the LCR calculation methodology was amended as of the end of March 2014).

prev next

The reported minimum ANL gap was a short-term observation resulting mainly from a sudden outflow of cash deposited by a financial client.

The long-term coverage measures (M3, M4) were stable and safe, above the minimum set by the regulator at 1. In particular, M3 ranged from 4.61 to 6.05 and M4 ranged from 1.19 to 1.33 in 2014. LCR remained safe, well above 100%.

Measuring the Group’s liquidity risk

The Group’s liquidity risk measurement includes mBank Hipoteczny, mLeasing and, as of August 1, 2014, also Dom Maklerski mBanku. mBank monitors liquidity risk of the subsidiaries in the ANL tenors so as to protect liquidity also at Group level in the event of adverse events (crises).

The Group’s liquidity was safe in 2014, as reflected in the high surplus of liquid assets over short-term liabilities in the ANL tenors calculated at Group level.

The table below presents the ANL gap for tenors up to 1M and 1Y at Group level:

 

 

PLN million

2014

31.12.2014

average

max

min

ANL 1M

12,783

7,967

14,457

1,492

ANL 1Y

12,717

9,109

14,918

4,701

prev next

12.2.2.Market risk

mBank organises market risk management processes in line with the principles and requirements set out in the resolutions and recommendations of PFSA which address issues related to market risk management, in particular Recommendations A and I.

Tools and measures

In its business, mBank is exposed to market risk, i.e., the risk of unfavourable changes in the present value of financial instruments in the Bank’s portfolios due to changes in market risk factors: interest rates, FX rates, prices of securities, the implied volatility of options, and credit spreads. The Bank identifies market risk related with positions of the trading book measured at fair value (using the direct measurement method or the model measurement method) which may materialise in the form of losses reflected in mBank’s financial performance. Moreover, the Bank attributes market risk to the banking book positions, regardless of the methods for calculating earnings generated from those positions used for the purpose of accounting reporting. In particular, in order to measure the interest rate risk of Retail and Corporate Banking products without a fixed interest revaluation date or with rates administered by the Bank, the Bank uses replicating portfolio models. In 2013, the Bank introduced the capital modelling concept, which is reflected in market risk measurement at the level of the Bank’s internal organisational structures. In 2014, the Bank modified the capital modelling concept by changing the investment time horizon from 3 years to 5 years and converting quarterly tranches to monthly tranches. Market risk measures of the interest positions of the banking book are calculated with the use of net present value (NPV) models. Market risk exposure is quantified by measurement of Value at Risk (VaR) and by use of stress tests.

Stress testing reflects the hypothetical change in the present valuation of mBank’s portfolios that would occur as a result of stress-test scenarios, i.e., specific stressed values of risk factors in a one-day time horizon.

Stress testing includes standard stress test was defined for standard risks: FX rates, interest rates, stock prices and their volatility, as well as a stress test including change of credit spreads. This addressed among others the requirement for stress tests to cover independent impact of underlying risk (spread between T-bond yields and IRS rates) to which the Bank is exposed by holding a portfolio of T-bonds.

Value at Risk measures the potential loss of market value (of a financial instrument, a portfolio, an institution) such that the probability of generating or exceeding it within a set time horizon is equal to the set tolerance (confidence) interval assuming an unchanged portfolio structure within a defined period of time. mBank calculates and limits one-day Value at Risk at a 97.5% confidence interval. In March 2014, a new risk factor was added to the VaR calculation: credit spread (credit spread for corporate and government bonds; for government bonds, the spread is measured as the difference between the rates of the zero-coupon bond curve and the swap curve), and the valuation methodology of floating-rate government bonds for risk measurement was modified in order to include the base risk effect between bond and swap curves in the valuation. As a result of the foregoing, some of the risk (previously presented as interest rate risk) related to the volatility of the spread between the curves is presented as of March under VaR CS (credit risk spread). The expected resulting increase of VaR is included in the market risk limits approved for 2014 for mBank and entities subject to market risk limits.

Market risk, in particular interest rate risk of the banking book, is also quantified by measurement of Earning at Risk (EaR) of the banking book.

Organisational set up of the market risk management process

The main principle of organisation of the market risk management process stipulates separation between the market risk monitoring and control function and the functions related with opening and maintaining open market risk positions. The market risk monitoring and control functions are performed by the Financial Markets Risk Department (DRR) in the Risk Area of the Bank supervised by the Deputy President of the Management Board and Chief Risk Officer, whereas operational management of market risk positions takes place in the Financial Markets Department (DFM), the Brokerage House (BM) and the Treasury Department (DS) supervised by the Member of the Management Board of mBank responsible for the Financial Markets Area. BM is an organisational unit of mBank which was separated from the DFM structure and carries out its operations focusing on financial instruments traded on the Warsaw Stock Exchange (WSE). The Debt Origination Department (DCM) was separated from the organisation of DFM in 2014 and is responsible for debt origination and management of positions in non-Treasury securities on the banking book. In addition, investment positions sensitive to market risk factors (to prices of shares listed on the Warsaw Stock Exchange) are managed by the Structured and Mezzanine Finance Department (DFS). DCM and DFS are part of the Corporate and Investment Banking area.

In order to limit the level of exposure to market risk, the Bank’s Management Board (for the Bank portfolio) and the Financial Markets Risk Committee operating as part of the Risk and Business Forum  (for portfolios of business units) set binding VaR limits, stress test limits which are warning thresholds, as well as maturity gap limits which are warning thresholds.

Measuring mBank’s risk

Value at Risk

In 2014, the Bank’s market risk exposure, measured by Value at Risk (VaR, for one day holding period, at 97.5% confidence level), was moderate in relation to the VaR limits. The average utilisation of VaR limits for the portfolio of the Financial Markets Department (DFM), whose positions consist primarily of trading book portfolios, amounted to 33% (PLN 2.0 million), for the Brokerage Bureau (BM) 15% (PLN 0.34 million), and for the Treasury Department (DS), whose positions are classified solely in the banking book, 59% (PLN 26.1 million) for the positions without capital modelling, and 55% (PLN 23.9 million) for the positions with capital modelling. Value at Risk of the positions of the Debt Origination Department (DCM) was limited as of March 2014. The average utilisation of the limit was 9% (PLN 0.3 million). The average utilisation of the VaR limit for the positions of the Structured and Mezzanine Finance Department (DFS) in shares listed on the Warsaw Stock Exchange was 72% (PLN 6.4 million). In 2014, the VaR figures for the Bank’s portfolio were driven mainly by portfolios of instruments sensitive to interest rates – the banking book T-bonds portfolios managed by DS and the trading book portfolios and interest rate swap positions managed by DFM. The second major factor impacting the Bank’s risk profile was the DFS equities portfolio, where the PZU share price is a significant risk due to the maintained large position in the company by the Bank. The DFM portfolios of instruments sensitive to changes in exchange rates, such as FX futures and options, and the exposure of the BM portfolios to equity price risk and the risk of implied variability of options traded on the WSE had a relatively low impact on the Bank’s risk profile.

The tables below present VaR statistics in 2014 for the Bank’s portfolio.

mBank organises market risk management processes in line with the principles and requirements set out in the resolutions and recommendations of PFSA which address issues related to market risk management, in particular Recommendations A and I.

Tools and measures

In its business, mBank is exposed to market risk, i.e., the risk of unfavourable changes in the present value of financial instruments in the Bank’s portfolios due to changes in market risk factors: interest rates, FX rates, prices of securities, the implied volatility of options, and credit spreads. The Bank identifies market risk related with positions of the trading book measured at fair value (using the direct measurement method or the model measurement method) which may materialise in the form of losses reflected in mBank’s financial performance. Moreover, the Bank attributes market risk to the banking book positions, regardless of the methods for calculating earnings generated from those positions used for the purpose of accounting reporting. In particular, in order to measure the interest rate risk of Retail and Corporate Banking products without a fixed interest revaluation date or with rates administered by the Bank, the Bank uses replicating portfolio models. In 2013, the Bank introduced the capital modelling concept, which is reflected in market risk measurement at the level of the Bank’s internal organisational structures. In 2014, the Bank modified the capital modelling concept by changing the investment time horizon from 3 years to 5 years and converting quarterly tranches to monthly tranches. Market risk measures of the interest positions of the banking book are calculated with the use of net present value (NPV) models. Market risk exposure is quantified by measurement of Value at Risk (VaR) and by use of stress tests.

Stress testing reflects the hypothetical change in the present valuation of mBank’s portfolios that would occur as a result of stress-test scenarios, i.e., specific stressed values of risk factors in a one-day time horizon.

Stress testing includes standard stress test was defined for standard risks: FX rates, interest rates, stock prices and their volatility, as well as a stress test including change of credit spreads. This addressed among others the requirement for stress tests to cover independent impact of underlying risk (spread between T-bond yields and IRS rates) to which the Bank is exposed by holding a portfolio of T-bonds.

Value at Risk measures the potential loss of market value (of a financial instrument, a portfolio, an institution) such that the probability of generating or exceeding it within a set time horizon is equal to the set tolerance (confidence) interval assuming an unchanged portfolio structure within a defined period of time. mBank calculates and limits one-day Value at Risk at a 97.5% confidence interval. In March 2014, a new risk factor was added to the VaR calculation: credit spread (credit spread for corporate and government bonds; for government bonds, the spread is measured as the difference between the rates of the zero-coupon bond curve and the swap curve), and the valuation methodology of floating-rate government bonds for risk measurement was modified in order to include the base risk effect between bond and swap curves in the valuation. As a result of the foregoing, some of the risk (previously presented as interest rate risk) related to the volatility of the spread between the curves is presented as of March under VaR CS (credit risk spread). The expected resulting increase of VaR is included in the market risk limits approved for 2014 for mBank and entities subject to market risk limits.

Market risk, in particular interest rate risk of the banking book, is also quantified by measurement of Earning at Risk (EaR) of the banking book.

Organisational set up of the market risk management process

The main principle of organisation of the market risk management process stipulates separation between the market risk monitoring and control function and the functions related with opening and maintaining open market risk positions. The market risk monitoring and control functions are performed by the Financial Markets Risk Department (DRR) in the Risk Area of the Bank supervised by the Deputy President of the Management Board and Chief Risk Officer, whereas operational management of market risk positions takes place in the Financial Markets Department (DFM), the Brokerage House (BM) and the Treasury Department (DS) supervised by the Member of the Management Board of mBank responsible for the Financial Markets Area. BM is an organisational unit of mBank which was separated from the DFM structure and carries out its operations focusing on financial instruments traded on the Warsaw Stock Exchange (WSE). The Debt Origination Department (DCM) was separated from the organisation of DFM in 2014 and is responsible for debt origination and management of positions in non-Treasury securities on the banking book. In addition, investment positions sensitive to market risk factors (to prices of shares listed on the Warsaw Stock Exchange) are managed by the Structured and Mezzanine Finance Department (DFS). DCM and DFS are part of the Corporate and Investment Banking area.

In order to limit the level of exposure to market risk, the Bank’s Management Board (for the Bank portfolio) and the Financial Markets Risk Committee operating as part of the Risk and Business Forum  (for portfolios of business units) set binding VaR limits, stress test limits which are warning thresholds, as well as maturity gap limits which are warning thresholds.

Measuring mBank’s risk

Value at Risk

In 2014, the Bank’s market risk exposure, measured by Value at Risk (VaR, for one day holding period, at 97.5% confidence level), was moderate in relation to the VaR limits. The average utilisation of VaR limits for the portfolio of the Financial Markets Department (DFM), whose positions consist primarily of trading book portfolios, amounted to 33% (PLN 2.0 million), for the Brokerage Bureau (BM) 15% (PLN 0.34 million), and for the Treasury Department (DS), whose positions are classified solely in the banking book, 59% (PLN 26.1 million) for the positions without capital modelling, and 55% (PLN 23.9 million) for the positions with capital modelling. Value at Risk of the positions of the Debt Origination Department (DCM) was limited as of March 2014. The average utilisation of the limit was 9% (PLN 0.3 million). The average utilisation of the VaR limit for the positions of the Structured and Mezzanine Finance Department (DFS) in shares listed on the Warsaw Stock Exchange was 72% (PLN 6.4 million). In 2014, the VaR figures for the Bank’s portfolio were driven mainly by portfolios of instruments sensitive to interest rates – the banking book T-bonds portfolios managed by DS and the trading book portfolios and interest rate swap positions managed by DFM. The second major factor impacting the Bank’s risk profile was the DFS equities portfolio, where the PZU share price is a significant risk due to the maintained large position in the company by the Bank. The DFM portfolios of instruments sensitive to changes in exchange rates, such as FX futures and options, and the exposure of the BM portfolios to equity price risk and the risk of implied variability of options traded on the WSE had a relatively low impact on the Bank’s risk profile.

The tables below present VaR statistics in 2014 for the Bank’s portfolio.

 

 

PLN thousand

2014

2013

31.12.14

average

max

min

31.12.13

average

max

min

VaR IR

16,457

14,693

19,081

8,122

15,155

16,034

22,806

6,774

VaR FX

937

348

1,162

95

212

348

1,196

73

VaR EQ

6,243

6,507

7,647

5,836

7,268

5,659

7,451

4,551

VaR CS

25,142

27,245

31,279

25,049

VaR

33,393

29,448

36,453

15,968

16,910

17,622

23,556

10,840

VaR IR – interest rate risk

VaR FX - FX risk

VaR EQ – stock price risk

VaR CS – credit spread risk

prev next

Stress testing

The average utilisation of the stress test limits in 2014 is presented in the below table:

 

PLN million

2014

2013

31.12.2014

average

max

min

31.12.2013

average

max

min

Base stress test

93

85

130

44

52

70

109

46

CS stress test

705

699

760

634

643

851

1,104

621

Total stress test

798

784

888

684

694

921

1,198

689

prev next

In 2014, the average utilisation of the stress test limits in mBank was 50% (PLN 783.9 million). The average utilisation of the stress test limits in 2014 was 65% (PLN 618.9 million) for the portfolio held by DS without capital modelling and 59% (PLN 616.7 million) with capital modelling. The average utilisation of the limit was 30% (PLN 121.7 million) for the DFM portfolio, 7% (PLN 0.8 million) for the BM portfolio, 25% (PLN 15.5 million) for the DCM portfolio, and 65% (PLN 32.7 million) for the DFS portfolio. The main part of the presented stress test results is the value of stress tests for change of the credit spread of T-bond portfolios because the stress test scenarios assume on average a 100 bps increase of interest rates. 

Interest rate risk of the banking book

In 2014, the interest rate risk of the banking book as measured by EaR, i.e., potential decrease of interest income within 12 months assuming an unfavourable 100 bps change of market interest rates and based on a stable value of the portfolio over the period, was at the level of values presented in the below table:

 

 

 

PLN million

2014

2013

31.12.14

average

max

min

31.12.13

average

max

min

PLN

32.8

28.4

69.8

4.2

70.9

50.6

116.9

6.7

USD

1.0

1.4

4.0

0.2

1.0

1.2

2.3

0.1

EUR

4.5

6.6

12.6

1.4

7.2

6.5

10.0

1.8

CHF

13.3

0.8

15.7

0.0

0.5

0.4

0.6

0.2

CZK

2.3

4.2

8.5

2.2

4.6

5.6

7.4

3.0

prev next

Measuring the Group’s market risk

The main source of the Group’s market risk are the positions of the Bank. The table below presents the statistics of Value at Risk measures (for one day holding period, at 97.5% confidence level) of the mBank Group in 2014 for those subsidiaries of the Group where market risk positions were identified (i.e., the portfolios of mBank, mBank Hipoteczny, mLeasing, Dom Maklerski mBanku) and broken down by Value at Risk for the main risks: the interest rate risk (VaR IR), the foreign exchange risk (VaR FX), the equity price/index risk (VaR EQ), the credit risk spread risk (VaR CS). The table below presents VaR as at the end of 2014.

 

 

 

PLN thousand

mBank Group

mBank

mBH

mLeasing

DM mBanku

VaR IR

15,119

14,693

75

436

8

VaR FX

357

348

26

108

20

VaR EQ

6,540

6,507

0

0

137

VaR CS

27,245

27,245

0

0

0

VaR średni

29,678

29,448

86

418

134

VaR max

36,718

36,453

251

627

171

VaR min

16,183

15,968

45

308

71

VaR

33,513

33,393

53

424

112

prev next

For comparison, Value at Risk at mBank Group level was PLN 17,152 thousand at the end of 2013 including PLN 16,910 thousand for mBank, PLN 64 thousand for mBank Hipoteczny, PLN 615 thousand for mLeasing, and PLN 108 thousand for DM mBank.

12.2.3.Liquidity risk

mBank organises liquidity risk management processes in line with the principles and requirements defined in PFSA Resolution No. 258/2011 of 4 October 2011, PFSA Resolution No. 386/2008 of 17 December 2008 on establishing liquidity measures binding on banks, and best practice, in particular PFSA recommendations on liquidity risk management (Recommendation P).

Tools and measures

In its operations, mBank is exposed to liquidity risk, i.e., the risk of being unable to honour its payment obligations, arising from the Bank’s balance-sheet and off-balance-sheet positions, on terms advantageous to the Bank and at a reasonable price.

In terms of its sources, liquidity risk may result from internal factors (reputation risk resulting for instance in excessive withdrawal of cash by Bank clients, materialisation of credit risk) and external factors (turbulences and crises on the financial markets, country risk, turbulences in the operation of clearing systems).

For this purpose, the Bank has defined a set of liquidity risk measures and a system of limits and warning thresholds which protect the Bank’s liquidity in the event of unfavourable internal or external conditions. Independent measurement, monitoring and controlling of liquidity risk is performed daily by the Financial Markets Risk Department. The main measures used in liquidity risk management of the Bank include ANL (Available Net Liquidity), the regulatory measures (M1, M2, M3, M4), and LCR and NSFR for analysis only. ANL reflects the projected future cash flow gap of assets, liabilities and off-balance-sheet commitments of the Bank, which represents potential risk of being unable to meet liabilities within a specific time horizon and under a certain scenario. ANL cash flow projections are based on crisis scenarios which include excessive withdrawal of cash by the Bank’s clients and being unable to liquidate some assets due to an external crisis.

In 2014, mBank continued to harmonise with the CRR requirements for LCR and NSFR liquidity measures. The implementation work was completed when the LCR/NSFR calculation methodology was approved by the Financial Markets Risk Committee in March 2014. Since 31 March 2014, LCR has been calculated according to CRR and reported to the National Bank of Poland.

Strategy

The liquidity strategy is pursued by active management of the balance sheet structure and future cash flows as well as maintenance of liquidity reserves adequate to liquidity needs depending on the activity of the Bank and the current market situation as well as funding needs of the Group subsidiaries.

The Bank manages liquidity risk at two levels: strategic (within committees of the Bank) and operational (Treasury Department).

Liquidity risk limiting covers supervisory and internal measures.

The first category includes four liquidity measures determined by the Polish Financial Supervision Authority: M1, M2, M3 and M4, as well as liquidity measures required by the CRD IV/CRR: LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio).

The liquidity risk internal limit system is based mainly on defining acceptable gaps for ANL tenors in specific time horizons and for different liquidity risk profiles (for all currencies in aggregate converted to PLN) and for specific foreign currencies.

The Bank has introduced a centralized approach to the Group’s funding management in order to increase the efficiency of liquidity resources used. According to its principles, the mBank Hipoteczny acquires additional financing on the market by issuance of mortgage bonds and from mBank, while mLeasing and other subsidiaries acquire almost entire financing from mBank. Financing of subsidiaries is done via the Treasury Department.

Centralized approach to the financing of the Group subsidiaries enables to ensure better timely matching of the funding and the uniform treatment of particular subsidiaries within the unified system of transactional rates.

Measuring mBank’s liquidity risk

The liquidity of mBank remained safe in 2014, as reflected in the high surplus of liquid assets over short-term liabilities in the ANL tenors and in the regulatory measures.

The table below presents the ANL gap for tenors up to 1M and 1Y in 2014 as well as the regulatory measures M1, M2 and LCR:

 

 

Measure*

2014

31.12.2014

average

max

min

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%

(*) – ANL and M1 are shown in PLN million. M2  is a relative measure presented as decimals.

(**) – LCR statistics cover the period from March 31 2014 (the LCR calculation methodology was amended as of the end of March 2014).

prev next

The reported minimum ANL gap was a short-term observation resulting mainly from a sudden outflow of cash deposited by a financial client.

The long-term coverage measures (M3, M4) were stable and safe, above the minimum set by the regulator at 1. In particular, M3 ranged from 4.61 to 6.05 and M4 ranged from 1.19 to 1.33 in 2014. LCR remained safe, well above 100%.

Measuring the Group’s liquidity risk

The Group’s liquidity risk measurement includes mBank Hipoteczny, mLeasing and, as of August 1, 2014, also Dom Maklerski mBanku. mBank monitors liquidity risk of the subsidiaries in the ANL tenors so as to protect liquidity also at Group level in the event of adverse events (crises).

The Group’s liquidity was safe in 2014, as reflected in the high surplus of liquid assets over short-term liabilities in the ANL tenors calculated at Group level.

The table below presents the ANL gap for tenors up to 1M and 1Y at Group level:

 

 

PLN million

2014

31.12.2014

average

max

min

ANL 1M

12,783

7,967

14,457

1,492

ANL 1Y

12,717

9,109

14,918

4,701

prev next

12.2.4.Operational risk

mBank organises the operational risk management process taking into account the regulatory requirements. PFSA resolutions and recommendations (including Recommendation M in particular) constitute a starting point for developing the framework of the operational risk control and management system in mBank Group.  

The Bank understands operational risk as the possibility of incurring a loss arising from inadequate or defective internal processes, systems, errors or actions taken by the Bank’s employee or from external events. Additionally, operational risk includes legal risk.

The operational risk control and management system, with its classification of roles and responsibilities, forms an organisational basis and the necessary structures in order to enable expedient and effective control and management of operational risk at every level of mBank’s organisational hierarchy. The structure of operational risk control and management covers in particular the role of the Management Board of the Bank, the Business and Risk Forum, the Chief Risk Officer, the Integrated Risk and Capital Management Department, and the tasks assigned to persons managing operational risk in particular organisational units and business areas of the Bank. The operational risk control and management process at mBank is developed and co-ordinated by the central operational risk control function while operational risk management takes place in every organisational unit of the Bank and in every subsidiary of mBank Group. It consists in identifying and monitoring operational risk and taking actions aimed to avoid, mitigate or transfer operational risk.

The entire operational risk control process is supervised by the Supervisory Board of the Bank through the Risk Committee of the Supervisory Board. 

12.3. Capital adequacy

Maintaining an adequate level of capital is one of the main tasks of managing the balance sheet of a bank. The Management Board of mBank ensures consistency of the capital and risk management process by means of a system of strategies, policies, procedures and limits for the management of particular risks which constitute the ICAAP architecture. Furthermore, in line with the Capital Management Policy applicable at mBank, mBank maintains an optimum level and structure of own funds, guaranteeing maintenance of the capital adequacy ratio at a level higher than the statutory minimum, at the same time covering all significant risks identified in  the Bank’s operations. mBank’s capital targets are being set based on the regulatory requirements and simulated capital needs to cover unfavourable changes in the external environment and within the Bank.

The Capital Management Policy at mBank is based on two main pillars:

  • Maintenance of an optimal level and structure of own funds, with the use of available methods
    and means (retained net profit, issue of shares, subordinated loans, etc.).
  • Effective use of the existing capital by applying a system of capital utilisation measures resulting in reduction of the activity that is not generating the expected return and development of products with lower capital absorption.

The capital ratios of mBank Group in H1 2014 were driven by the following factors:

  • addition of PLN 500 million to own funds: it is the Group’s subordinated debt resulting from the issue of subordinated bonds (nominal value of PLN 500 million, maturity in 2023) approved by the PFSA on February 14, 2014;
  • increase in the Group’s consolidated own funds as a result of a decision of the General Meeting on the division of 2013 net profit;
  • expansion of the application of the internal rating-based method to cover the calculation of the credit risk and counterparty credit risk requirement following the approval of the PFSA and BaFin in H1 2014:
    • exposures of the subsidiary mLeasing to companies and retail exposures;
    • exposures of the Bank under specialised lending in the scope of income-generating real properties (IRB slotting approach);
    • exposures of mBank Hipoteczny under specialised lending in the scope of income-generating real properties for additional sub-portfolios (IRB slotting approach);
    • implementation of modifications to the calculation of capital requirements and the calculation of own funds of the Group following the entry into force of the provisions of Regulation No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, as amended (CRR).

In H2 2014 the capital ratios of mBank Group were driven by the following factors:

  • increase in the Group’s consolidated own funds following the approval of the PFSA for the Bank’s application for addition of a part of the 2014 net profit amounting to PLN 224.3 million;
  • expansion of the application of the internal rating-based method to cover the calculation of the credit risk and counterparty credit risk requirement on account of retail non-mortgage-backed exposures following the approval of the PFSA and BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht, Federal Financial Supervisory Authority) in H2 2014.

Additionally, in the capital adequacy assessment process the following factors are taken into consideration:

Capital buffers

In mBank, risk appetite covers all significant risks and key risk concentrations embedded in its business strategy by setting appropriate capital buffers for risk resulting from potential materialization of selected risk factors related to existing portfolios and planned business as well as addresses expected new regulatory requirements and potential negative macroeconomic changes.

Stress tests

The integrated stress tests are conducted assuming scenario of unfavourable economic conditions that may adversely affect the Bank's financial situation in at least a full 2 year time horizon (for liquidity risk in 1 year horizon). The risk scenario, ie. the most plausible (in at least a full 2 year time horizon) scenario of negative deviations from the base scenario, expressed in terms of macroeconomic and financial ratios is common for all risk types and is aligned with the corresponding scenario accepted at the consolidating entity group level.

Additionally, once a year, the Bank carries out supplementary stress tests using much more severe risk scenarios and/or events. The Group and the Bank carries out so called reverse stress tests, the goal of which is to identify events potentially leading to unviability of the Group and the Bank.

The Group and the Bank take part in regulatory stress tests conducted annually by the PFSA, in order to determine the impact of assumed macroeconomic stress scenarios on the Group’s balance sheet and P&L as well as on external supervisory norms.

Extended information on the rules of determining risk appetite taking into consideration capital buffers and stress tests is included in the IFRS Consolidated Financial Statements 2014 of mBank S.A. Group.